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Initiating Coverage June 27, 2017

Member of the Canadian Investor Protection Fund

A Recreational Revolution Starts A Year From Now?


Will Canadians Get High On Returns Or Low On Supply?
Neal Gilmer, MBA | 416-507-2759| ngilmer@haywood.com

Aphria Inc. (APH-T, $5.42, BUY, $8.25 Target, Risk: High)


CanniMed Therapeutics Inc. (CMED-T, $8.00, BUY, $13.00 Target, Risk: High)
Harvest One Capital Inc. (HVST-V, $0.50, BUY, $1.60 Target, Risk: Very High)
WeedMD Inc. (WMD-V, $0.79, BUY, $2.00 Target, Risk: Very High)

If Justin Trudeau and the Canadian Liberal Government have their way, Canada will be the first country in the G7 to legalize
cannabis for recreational adult-use in one years time. It has been just over 20 months since the Liberals were elected with one
of its campaign promises to legalize access to cannabis. A lot has transpired to-date with much more expected over the next
twelve months. Some of the key decisions such as distribution method in each province, tax rates and retail selling prices along
with clear regulations on branding and packaging remain outstanding and could prove to be future catalysts (positive or
negative) for the sector.

A lot has changed since the Liberal election. An industry which had great growth prospects for the medical market alone was
struggling to raise capital to fund expansion and its operations in 2015 prior to the election. Following the initial interest in the
sector back in 2014, sentiment had waned through much of 2015 as share prices of those publicly traded at the time declined
due to lack of interest. As we got closer to election day, October 19, 2015, things started to pickup and following the Liberal
election, interest in the sector increased again.

We believe that we are still in the early stages of the evolution of the cannabis sector. The primary focus to this point has been
on capacity, and many LPs have raised significant capital with the primary purpose of expanding production capacity to have
supply for the market. We expect that to continue to be the case over the near-term as we believe that there will be a supply
shortage at the start of a recreational market despite both the licensed producers goal to scale up production and Health Canada
accelerating and streamlining the regulations and license application and approval process.

As we progress over the next year towards the Liberal appointed milestone, we expect even more attention to be placed on the
sector, not just by investors, but by the media, politicians, other countries around the world and at neighborhood backyard
barbeques. We believe that the transition towards a legal framework will gradually reduce the stigmatism associated with
cannabis use, it will drive further investment and formulation of alternative consumption methods than the negative harmful
process of smoking.

Following the current focus on production expansion and scale of supply, we believe that other aspects of the industry will
continue to emerge from quality assurance and testing, to extraction methodologies, development on the international
landscape and other niche areas of the cannabis landscape. With this report we are initiating our coverage of the rapidly
changing cannabis sector in Canada, with four licensed producers in Canada.

Please see pages 77 - 79 for Analyst Certification, Rating Structure, Legal Disclaimers, and Notes.
Special Sits: Cannabis Sector 6/27/17

Canadian Marijuana Sector


With this report we are launching coverage of the Canadian cannabis sector, outlining our current
views on the industry overall and at the same time launching coverage of four distinct opportunities
within that sector. We believe that the Canadian cannabis landscape will provide significant
opportunity for investors as the industry continues to evolve and mature. The initial focus on the
sector has been on the production landscape and the LPs across the country. We believe the supply
chain for the medical market and the likely recreational market will continue to be a focus for investors
and create opportunities going forward. It is clear that Health Canada has accelerated their review and
approval process as seen with its recent approval rate.

From our perspective, the collection of the Canadian LPs have largely traded as a group based on the
sentiment within the sector. Of course there are exceptions but we are looking at the group as a whole
based on broader market sentiment. We continue to look for the opportunity that companies within
the sector begin to trade on individual catalyst basis, operational metrics or announcements. With our
first four companies under coverage we have considered four companies with different approaches or
offerings in the market that we believe have the opportunity to differentiate themselves within the
market place.

The Canadian cannabis industry remains in the early innings as the entire landscape and ecosystem
evolves. While our early focus at Haywood is the Canadian LP landscape, we highlight that there will
be many other emerging areas of the cannabis sector as a whole, from extraction specific technologies,
testing and quality assurance, technology platforms, international opportunities among others that
could prove interesting.

We remain very positive on the sector overall. We continue to see opportunities for the prudent
investor that can set aside those that are trying to leverage the enthusiasm in the sector. At the end
of the day, we remain focused on opportunities that have a good strategic direction / opportunity,
management with a good track record, effective business management and niche market
opportunities.

Share price performance


Shares of LPs in Canada have been under pressure since mid-April with an average decline among
those LPs listed at the time of 27%. In our view a couple of things contributed to this downward
momentum in the sector, however we believe that the momentum could turn over the course of the
summer.

Neal Gilmer, MBA ngilmer@haywood.com Page 2


Special Sits: Cannabis Sector 6/27/17

Figure 1: Share price performance


% chg since % chg 1
Company Ticker Price Cannabis Act % chg YTD year
Aphria TSX:APH $5.44 -25% 6% 260%
Aurora Cannabis Inc. TSXV:ACB $2.17 -23% -9% 352%
Beleave Inc. CNSX:BE $1.31 -47% -9% 198%
CanniMed Therapeutics Inc. TSX:CMED $8.00 -34% -28% NA
Canopy Growth Corporation TSX:WEED $8.46 -15% -10% 217%
Cronos Group Inc. TSXV:MJN $1.73 -45% 12% 724%
Emblem Corp. TSXV:EMC $1.63 -43% -62% NA
Emerald Health Therapeutics, Inc. TSXV:EMH $1.18 -27% -12% 556%
The Hydropothecary Corporation TSXV:THCX $1.58 -32% NA NA
iAnthus Capital Holdings, Inc. CNSX:IAN $2.99 11% 28% NA
OrganiGram Holdings Inc. TSXV:OGI $2.24 -21% -18% 122%
Supreme Pharmaceuticals Inc. TSXV:FIRE $1.29 -25% -18% 269%

Average -27% -11% 337%


Source: Capital IQ

First, the Cannabis Act as presented on April 13th lacked the specifics we believe the market was
looking for. Essentially the act outline that the Federal government was responsible for regulating the
supply chain, the broad parameters the provinces must adhere to and decisions with respect to
advertising, marketing and packaging, let alone taxes. None of it was addressed in the Cannabis Act
and most was deferred to the provinces, so for those investors looking for clarity heading into 2018,
there was little provided than that was already speculated previously.

Combine that with a significant influx of LPs going public in the second quarter and the result is what
we would refer to as investor fatigue. With the amount of financings in the quarter, the most that we
have been able to track to date, it is no surprise that investors took a pause and more accurately
reduced exposure to the industry.

Figure 2: Capital raised by quarter in the cannabis sector


450.0

400.0

350.0

300.0

250.0
C$(M)

200.0

150.0

100.0

50.0

0.0
Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17

Source: Bloomberg, Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 3


Special Sits: Cannabis Sector 6/27/17

Approach to valuation
It has long been discussed how to appropriately value Canadian cannabis stocks. The industry started
in 2014 with the very first listed LP, at the time named Tweed, now Canopy Growth Company
(TSX:WEED, not rated). Over the course of the past few years we have seen various different valuation
approaches used. At first it was EV/Sales, given many of the first LPs had little idea (and still may not)
as to when they may be EBITDA positive. Another metric that was used was EV/LC (Enterprise Value /
Licensed Capacity). This was an attempt to ascribe a value to a license and appropriately reflect the
size of the license.

As the industry has evolved there has also been a transition of valuation metrics, albeit not drastic
changes. The initial EV/Sales metric has moved to EV/EBITDA and the EV/LC metric has migrated
towards EV/FC (Enterprise Value / Funded Capacity). In our view the transition from EV/Sales to
EV/EBITDA is a natural one. In any other high growth industry (eg. Technology start-up companies)
initial metrics are based off EV/Sales as a way to compare relative companies against each other. Its
a form of relative valuation as you often cant compare to companies outside a new market niche or
segment as the market opportunity or growth rates may differ. As an industry matures it is natural to
expect positive earnings and a transition towards an earnings based metric. Our view on EV/FC is
somewhat mixed, given the subjective nature of funded capacity. We believe there are numerous
variables in this interpretation and it makes it very challenging to ascertain what a particular
companys funded capacity is. Whether it be a particular management teams assumption of capex
costs, to working capital needed to scale production, to cost over-runs and estimating operating cash
flow burn. However we do believe it is a useful metric to consider overall along with other
considerations.

We believe that an EV/EBITDA approach is the most appropriate but acknowledge the inherent
assumptions. For such a high growth industry we believe it necessary to consider forward valuations
at what is expected to be run rate capacity and earnings. In our view we have not seen an industry
with the potential growth rate as the cannabis industry in recent times. We do not believe that
valuations are overstretched, perhaps in certain circumstances, but in general we believe the Canadian
cannabis industry is equivalent to the end of prohibition.

While we view EV/EBITDA as a good approach in comparing companies on similar assumptions it is not
our only consideration. We also consider management track record, either within the industry or
previously, expected and past cost structure towards consideration of EBITDA margins. We must also
consider strategic partnerships, market opportunities, both domestically and internationally as well as
various other qualitative metrics that can influence our outlook an a companys opportunity. At the
current time, we are using EV/EBITDA as our primary valuation methodology with consideration of the
other less tangible items to influence our multiple used. Later in this report we outline out valuation
multiples on an EV/EBITDA basis at what we consider run rate metrics for each company.

Neal Gilmer, MBA ngilmer@haywood.com Page 4


Special Sits: Cannabis Sector 6/27/17

Figure 3: Select comparables in the cannabis sector


Capital Structure EV/Revenue EV/EBITDA Capacity EV/Capacity
Mkt Cap Cash Debt EV FY2017 FY2018 FY2019 FY2020 FY2017 FY2018 FY2019 FY2020 Current Funded Current Funded
Company Ticker Price (C$M) (C$M) (C$M) (C$M) (x) (x) (x) (x) (x) (x) (x) (x) (kg) (kg) ($/g) ($/g)
Aphria TSX:APH $5.52 747.7 122.0 8.8 634.5 31.5x 16.3x 4.7x -- 161.6x 52.0x 11.6x -- 6,000 75,000 $106 $8
Aurora Cannabis Inc. TSXV:ACB $2.18 781.6 113.0 18.8 687.4 28.5x 5.3x 2.6x -- 555.4x 14.9x 6.1x -- 7,500 50,000 $92 $14
Beleave Inc. CNSX:BE $1.36 39.6 1.8 0.0 37.7 -- 7.5x -- -- -- -- -- -- 750 1,000 $50 $38
CanniMed Therapeutics Inc. TSX:CMED $8.25 184.8 59.0 18.0 143.7 8.5x 3.7x 1.9x 1.2x -- 12.4x 4.2x 2.3x 7,000 12,000 $21 $12
Canopy Growth Corporation TSX:WEED $8.46 1,354.8 92.5 7.2 1,269.5 30.4x 10.3x 4.2x 2.9x -- 65.1x 24.5x 15.9x 31,600 66,000 $40 $19
Cronos Group Inc. TSXV:MJN $1.74 230.8 15.2 4.0 219.6 28.3x 4.5x 1.5x 0.6x -- 18.3x 4.8x 1.7x 2,620 10,000 $84 $22
Emblem Corp. TSXV:EMC $1.65 141.8 36.5 5.3 110.7 18.0x 3.8x 1.7x -- -- 15.7x 4.5x -- 1,200 20,000 $92 $6
Emerald Health Therapeutics, Inc. TSXV:EMH $1.21 111.7 14.8 0.0 96.9 138.5x 17.9x -- -- -- -- -- -- 500 10,000 $194 $10
Harvest One Cannabis Inc. TSXV:HVST $0.55 49.0 0.2 11.2 60.0 -- -- -- -- -- -- -- -- 1,000 8,500 $60 $7
The Hydropothecary Corporation TSXV:THCX $1.45 76.4 17.1 3.0 62.2 16.4x 4.6x 2.1x 0.8x -- 47.7x 10.7x 2.9x 3,600 12,000 $17 $5
Invictus MD Strategies Corp. TSXV:IMH $1.35 106.6 3.5 2.1 106.9 -- -- -- -- -- -- -- -- -- --
Maricann Group Inc. CNSX:MARI $1.53 111.0 16.5 64.2 158.7 26.4x 4.1x -- -- -- -- -- -- 1,000 20,000 $159 $8
MedReleaf Corp. TSX:LEAF $8.40 759.1 25.5 9.1 742.8 18.5x 10.7x 4.5x 3.3x 56.7x 33.7x 11.8x 8.6x
OrganiGram Holdings Inc. TSXV:OGI $2.24 232.4 55.6 3.6 180.5 19.8x 4.7x 1.8x 1.0x -- 16.0x 5.3x 2.6x 2,700 25,000 $67 $7
Supreme Pharmaceuticals Inc. TSXV:FIRE $1.38 257.2 67.3 39.6 229.6 -- 10.2x 2.2x 1.4x -- 98.0x 7.2x 3.4x 100 40,000 $2,296 $6
WeedMD Inc. TSXV:WMD $0.84 35.5 5.2 7.2 37.5 62.4x 2.2x -- -- -- -- -- -- 1,500 2,500 $25 $15

Source: Capital IQ consensus estimates for EV/Revenue and EV/EBITDA, Haywood Securities estimates capacity and EV/ Capacity

Canadian Medical Marijuana Historical Overview


Canada introduced new medical marijuana regulations in June 2013 that came into effect in April 2014.
What was originally called the Marihuana for Medical Purposes Regulations (MMPR), the purpose was
to regulate the production, distribution and use of medical marijuana. The MMPR replaced the
previous legislation, Marihuana Medical Access Regulations (MMAR), that had been in effect since July
of 2001.

The MMPR was introduced in response to concerns that the previous legislation was open to abuse.
At the time Health Canada stated that the regulations will provide access to quality-controlled
marihuana for medical purposes, produced under secure and sanitary conditions, to those Canadians
who need it, while strengthening the safety of Canadian communities. In addition, the new regulations
will also enable more choices of marihuana strains and licensed, commercial suppliers. Essentially
Health Canada created a framework for a commercial industry responsible for the production and
distribution of marijuana grown under secure and sanitary conditions.

The implementation of the MMPR was met with a constitutional challenge with respect to the rights
to grow medical marijuana under a personal cultivation license that was part of the MMAR program.
In what was known as The Allard Case those patients that held a personal cultivation license prior to
March 24, 2014 were allowed to continue to do so while the courts heard the arguments surrounding
the constitutional challenge.

On February 24, 2016 the courts ruled that the MMPR was constitutionally invalid as it violated the
patients section 7 Charter rights by restricting their access to medical cannabis. As a result, the court
declared that the MMPR was invalid, however it gave the government six months to introduce new
medical cannabis regulations.

The government drafted and released new regulations and on August 11, 2016 under the Access to
Cannabis for Medical Purposes Regulations, known as ACMPR. The ACMPR became effective August
24th, 2016 and is what continues to be in effect today.

Under the ACMPR patients are able to produce a limited amount of cannabis for their own medical
purposes or designate someone to produce it for them. Patients also have the ability to purchase from
the Licensed Producers. Those patients who wish to produce cannabis for their own purposes will need
to obtain a prescription from a doctor and register with Health Canada before being eligible to do so.

Neal Gilmer, MBA ngilmer@haywood.com Page 5


Special Sits: Cannabis Sector 6/27/17

Health Canada has outlined limitations for patients growing cannabis at home. First a designated
grower can only grow for themselves and one other person, limiting the total at 2. This in effect
restricts the quantity that can be grown at a particular location. The amount that can be grown is
determined by a formula that takes into account the individuals daily dose and the average yield per
plant. The grower will need to disclose with Health Canada whether it will be indoor vs. outdoor which
in turn will determine the number of plants that would be allowed, based on the prescription dose by
the doctor. An individual has the right to possess the lesser of 30 day supply and 150 grams of dried
marijuana or equivalent amount in another form. Lastly, a designated person to grow must submit a
document issued by a Canadian police force proving the person has not been convicted for a
designated drug offence within the previous 10 years.

Of note in the regulations is that Licensed Producers will be the sole legal supply for starting materials
for those patients that wish to grow at home. Once an individual has obtained a prescription and
registered with Health Canada they will be able to obtain starting materials (seeds or plants) for
production.

Licensed producers

Since the start of the MMPR and subsequent ACMPR there has been significant interest in companies
looking to become what Health Canada refers to as Licensed Producers (LPs). As of the last available
data provided by Health Canada for the end of May 25th 2017 there have been 1,665 applications
received. Currently, there are 50 licensed producers in Canada. Of the applications received, 858 were
incomplete or returned, 265 refused, 69 withdrawn and 428 with an in-progress status. Figure 4 below
shows the break down of applications.

Figure 4: Summary of Licensed Producer Applications

3%
16%

51% 26%

4%

Refused In progress Withdrawn Incomplete / returned Licenses granted

Source: Health Canada data, Haywood Securities Inc.

Ontario is the province with the most LPs in Canada. Figure 5 provides an overview of the number of
LPs by province. We believe that a number of these incumbent LPs have a significant advantage going
forward with first mover advantage. These LPs have had an opportunity to establish and refine their
standard operating procedures, learn from the challenges of growing cannabis at scale and many of
them have raised significant capital to fund expansion plans for the upcoming recreational market.

Neal Gilmer, MBA ngilmer@haywood.com Page 6


Special Sits: Cannabis Sector 6/27/17

Figure 5: Current Approved Licensed Producers by Province

Province or Territory Number of licences


Nova Scotia 0
New Brunswick 1
Prince Edward Island 1
Newfoundland and Labrador 0
Quebec 1
Ontario 27
Manitoba 2
Saskatchewan 3
Alberta 3
British Columbia 12
Yukon 0
Northwest Territories 0
Nunavut 0
Canada (total) 50
Source: Health Canada

When Health Canada first introduced the MMPR it provided projections for patient growth and size of
the potential market out 10 years from its implementation. Health Canada estimated that by 2024
there would be close to 450,000 registered patients and estimated the market size at approximately
$1.3 billion. However the patient growth rate has exceeded those projections by Health Canada and
with the latest data through to the end of March 2017 it looks as though Health Canadas projections
were conservative.

Neal Gilmer, MBA ngilmer@haywood.com Page 7


Special Sits: Cannabis Sector 6/27/17

Figure 6: Total number of patients registered at end of quarter

180,000
167,754

160,000

140,000
129,876

120,000

98,460
100,000

80,000 75,166

60,000 53,649

39,668
40,000
30,537
23,930
18,512
20,000 15,545
12,409
7,914

0
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Source: Health Canada, Haywood Securities Inc.

Medical Marijuana Market Opportunity


The Canadian medical marijuana market growth rate under ACMPR has exceeded the rate Health
Canada had initially projected so far. Initially Health Canada projected the market to reach
approximately 450,000 patients and total market size of $1.4B by 2024. Figure 7 shows the Health
Canada projected data based on a starting patient population of approximately 37,000, representing
those that had registered in the MMAR program by the end of 2013. It is worth pointing out that it
was not expected that everyone that was registered in the MMAR would necessarily convert due to
the personal production licenses. But to imply a starting point that roughly equates to the original
projections of Health Canada of a CAGR of approximately 28% over the 10 year time horizon with a
CAGR of 35% in the first 5 years.

Neal Gilmer, MBA ngilmer@haywood.com Page 8


Special Sits: Cannabis Sector 6/27/17

Figure 7: Patient registration projections versus current actual data

500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Health Canada Projection Health Canada Actual

Source: Health Canada, Haywood Securities Inc.

As is evident in the above chart, the data for the end of 2016 is materially above the projected patient
registrations. If the current growth rate were to continue it is safe to assume the Canadian medical
Marijuana market will reach Health Canadas projects well in advance of 2024.

Under the previous MMAR regulatory environment in Canada we estimate the CAGR was
approximately 48% from 2002-2013. Looking at other jurisdictions such as California, that has had a
medical marijuana market since 1996 with a similar sized population as Canada, and it had a CAGR of
49% between 1996 and 2013 based on data from ArcView. We do not expect Canadas registered
patients to grow at the same pace on a sustained basis. We do believe that we will continue to see
significant growth in the near-term with more moderate growth following the introduction of legalized
recreation use.

We also look at the percentage of the population that registers as medical marijuana users in other
jurisdictions. In California, medical marijuana patients represent approximately 1.9% of the
population. In Colorado, where there is a legal recreational market, the percent of the population that
represents medical users is also close to 2%. We would expect something similar in Canada once the
industry reaches a mature state. With Canadas current population of approximately 35.8 million, that
would imply approximately 715,000 medical marijuana patients.

As a result, we forecast the medical marijuana market in Canada to exceed the initial Health Canada
projections. We expect continued strong growth through the balance of 2017 reaching 200,000
patients at the end of the year. This represents Y/Y growth of 55% which is well below that we have
seen recently. We believe 2018 will be an interesting year with the introduction of recreational
marijuana. As a result, we forecast more muted growth of 35% to be conservative as we see how the
market absorbs recreational use.

Neal Gilmer, MBA ngilmer@haywood.com Page 9


Special Sits: Cannabis Sector 6/27/17

Figure 8: Estimated number of medical cannabis patients in Canada

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0
2016 2017 2018 2019 2020 2021 2022 2023 2024

Haywood Securities estimate

Source: Health Canada, Haywood Securities Inc. estimates

By 2024 we forecast that there will be close to 625,000 registered medical marijuana patients in
Canada. That would equate to approximately 1.7% of the current Canadian population, below the close
to 2% level we have seen in other jurisdictions in the U.S.

Health Canada has provided data on actual marijuana sold to patients since the beginning of the
MMPR/ACMPR, including kilogram equivalent of oils since it was introduced to the market. As can be
seen in Figure 9, cannabis sold to patients, both dried marijuana and cannabis oil was almost 12,000
kgs in the first quarter of 2017. There has been a significant increase throughout 2016, particularly as
more oil was available.

Figure 9: Cannabis sold to patients

14,000

12,000

10,000

8,000
Kgs

6,000

4,000

2,000

Dried Marijuana sold (kg) Cannabis oil sold (kg)

Source: Health Canada, Haywood Securities

Neal Gilmer, MBA ngilmer@haywood.com Page 10


Special Sits: Cannabis Sector 6/27/17

We highlight that cannabis oils were 49% of the total product sold in Q1/17, similar to the penetration
of extracts/oils in other markets. We expect the oils, or derivative products (eg. Capsules), to continue
to gain traction in the medical market. First, we believe doctors are more comfortable prescribing a
medication that does not require patients to smoke or inhale. In addition, oils/extracts provide the
doctor to more accurately prescribe certain dosage levels and make it easier for the patients to take
their medicine.

When Health Canada first provided its projections for the industry, it was based on patients requiring
1.5 grams per day, a figure that was obtained from Israels medical marijuana program. However,
actual figures to date have been below this figure, with the most recent data provided by Health
Canada indicating approximately 0.8 grams / day. We note however the that veterans that use medical
marijuana are heavy users that were in the range of 5-10 grams / day. However Veterans affairs has
since capped the daily amount that veterans will be reimbursed for at 3 grams per day. Going forward,
we believe that 0.8 grams per day is a more realistic measure for the Canadian medical marijuana
market.

Our estimate for the size of the medical marijuana market in terms of annual kilograms of product is
based upon our patient population estimate and the grams per day usage rate. We have used 0.8
grams per patient per day based on the most recent data from Health Canada. Our calculation results
in approximately 58,000 kgs required to supply the market in 2017, rising to 180,000 kgs in 2024.
Figure 10 below outlines our estimates for the annual kilograms of cannabis required to satisfy the
medical market in Canada.

Figure 10: Estimated annual kg required for medical market

200,000

180,000

160,000

140,000

120,000
Kgs

100,000

80,000

60,000

40,000

20,000

0
2017 2018 2019 2020 2021 2022 2023 2024
Source: Haywood Securities estimates

The value of the medical market we believe could reach $1.2 billion by 2024. To estimate the total size
of the market we assume pricing of $7.50. We recognize that there a number of factors that could
influence the market. The wholesale market on the medical side has historically been between $4-5
per gram. Going forward this could become a significant influence on the overall size of the market if
and when pharmacy distribution begins, as many LPs would only be receiving wholesale pricing.
However, offsetting that is the future cannabis formulations that we believe will come to the market
Neal Gilmer, MBA ngilmer@haywood.com Page 11
Special Sits: Cannabis Sector 6/27/17

and command higher pricing than dried bud. We have already seen that with cannabis oils, and we
now have seen the release of capsules or gel caps in the market. We also expect other products to be
developed as more capital is invested into alternative formulations. Overall, on that basis we use a
current average price of $7.50 in estimating the value of the medical cannabis market.

Legalization of recreational market in Canada


With the majority Liberal government elected on October 19, 2015 the concept of legal cannabis in
Canada became much more of a potential reality. On April 20, 2016 the government announced its
intention to introduce legislation for legal use of cannabis in Canada by the spring of 2017. On April
13, 2017 the Liberal government introduced Bill C-45 known as the Cannabis Act.

Cannabis Act
The Cannabis Act is now with the Standing Committee on Health (HESA) after having passed in the
House of Commons on the second reading. The bill passed by a vote of 200 to 76. HESA is expected to
have hearings on the bill in September. We dont expect a lot of information to be released on the
federal basis as Parliament takes its summer recess.

A number of the provinces have started the process towards a recreational market, commencing with
consultations and discussions on the framework. Various different constituents have been vocal about
what the best distribution model may be in a given province. In our view, the provincial distribution
model and further visibility of the provinces being in a position to be ready by next summer could
prove to be one of the upcoming catalysts for the sector. It is important to remember that the Federal
government has been clear on its view that it will allow the existing mail-order system that is in place
for medical cannabis to be used for the recreational market, if a province has not yet implemented its
distribution channel.

Estimating the size of the recreational market


Estimating the size of the current recreational cannabis market presents challenges based on the fact
that the current black market is illegal and there is no definitive source. Various politicians or
industry estimates refer to the market opportunity for cannabis between $5-7 billion, with total
market size including ancillary products and services at more than $20 billion.

In order to try and estimate the size of the recreational market opportunity in Canada we believe the
Stats Canada survey data and the Canadian Tobacco Alcohol and Drugs (CTADS) survey in 2015
provides a good proxy on consumption in Canada as a starting point. The CTADS was conducted from
February 2015 through December 2015 with 15,154 respondents across 10 provinces and represented
a weighted total of 29.7 million Canadians.

According to the CTADS, cannabis was the most used illicit drug with use by 12% or 3.6 million
Canadians. This was an increase from the 2013 survey that reported 11% or 3.1 million Canadians had
used cannabis in the past year. Of note within the survey is that 24% of those that used it in the past
year did so for medical purposes. In addition, 72% or 2.6 million people had used it in the past 3 months
and 33% or 840,000 reported consuming cannabis on a daily or almost daily basis.

We draw two conclusions from the CTADS. Firstly, the increase in use from 11% to 12% between 2013
and 2015 suggests that the market is expanding and we believe that usage rates will continue to
expand as the stigma around cannabis use eases within a legal framework. We expect that acceptance
of use will increase once the market become legal and people become less concerned about using an
illicit drug. Second, it is clear there is a significant portion of those who use it do so somewhat regularly
given that 2.6 million people had used it over the course of the past 3 months. In our view, this implies
somewhat regular consumption and not just people casually using it once or twice a year.

Neal Gilmer, MBA ngilmer@haywood.com Page 12


Special Sits: Cannabis Sector 6/27/17

Data from other jurisdictions that already have a legal adult-use market supports the Canadian survey
data. Survey data from the US suggest that 13% of the US population use cannabis. Furthermore,
Alaska, Colorado, Washington and Oregon all have more than 19% of their population having used
cannabis in the past year.

Extrapolating the data from the Parliamentary Budget Office report on the legalization of cannabis, we
estimate that the average cannabis user consumes approximately 100 grams per year. This ranges
from daily users that use 1.6g per use day to 0.2g for those users consuming once in a year.

In Figure 11 we estimate that number of recreational cannabis users and the associated quantity of
cannabis needed to supply the Canadian market. Our estimates are based on the above data from the
various sources starting with the population of Canadians over the age of 18. We assume that 12% will
be the percentage using cannabis as per the Stats Canada survey and we project that will increase as
acceptance of its use increases and the market matures over the next 5-7 years. We highlight the U.S.
states with a legal recreational use market where usage rates are closer to 20%. It is also our opinion
that a greater number of Canadians consume cannabis currently than that indicated by the survey. We
believe that not all those surveyed may have been forthcoming with their responses given that it
currently illegal.

Figure 11: Estimated recreational market size


2018E 2019E 2020E 2021E 2022E 2023E 2024E
Canadian population over 18 29,391 29,685 29,982 30,282 30,584 30,890 31,199
% of population using cannabis 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% 15.0%
Estimated number of cannabis users 3,527 3,711 3,898 4,088 4,282 4,479 4,680
Grams per user 100 100 100 105 105 110 110
Total Kg required 352,692 371,061 389,763 429,241 449,591 492,699 514,786
Wholesale price assumption $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
Wholesale Market Size ($/M) 1,763 1,855 1,949 2,146 2,248 2,463 2,574
Retail Price $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00
Retail Market Size ($/M) 3,174 3,340 3,508 3,863 4,046 4,434 4,633

Source: Haywood Securities estimates

We believe that this is a very conservative estimate for a couple of reasons. According to the report
released by the Parliamentary Budget Office, it projects that the quantity of cannabis that Canadians
will consume in 2018 is 655,000 kg, with a range as low as 378,000 kg and 1,017,000 kg. The report
cites two reasons for the wide range of its estimates that we believe are real factors that bias
consumption well above our estimates in figure 11. The PBO suggests that the uncertainty in the data
is due to the under-reporting of the survey data and the increase in use element. We have noted the
increase in use element above, and stress our belief that more Canadians will consume cannabis within
a legal framework. The PBO estimates that Canadians will consume 734,000kg by 2021.

It is our view that the Canadian landscape will not be in a position to supply even our conservative
estimates for the recreational market in 2018. We believe that there will be limited supply for the
market until 2020 when more production has come on-line and producers have had an opportunity to
scale production and inventories. We believe that realistically the recreational market is close to the
PBO estimate of 600,000 kg of cannabis consumption annually.

Neal Gilmer, MBA ngilmer@haywood.com Page 13


Special Sits: Cannabis Sector 6/27/17

Figure 12: Estimated Kilograms of Cannabis to support recreational market

600,000

500,000

400,000
Kgs

300,000

200,000

100,000

0
2018E 2019E 2020E 2021E 2022E 2023E 2024E

Source: Haywood Securities estimates

Short Term Supply Constraints May Lead to Over-supply in long run


Health Canada has accelerated the pace of approvals over the past few months through a concerted
effort to bring more supply on-line. There are now 48 licensed producers in Canada with many more
application in the queue. We believe that while the market will be under-supplied for the first couple
of years of a recreational program, that it will eventually turn to an over-supplied market. With 48 LPs
across the country both public and private it is challenging to get a good gauge on current total supply
capacity. However it is important to note that the currently medical market remains supply
constrained. In speaking to various industry sources there continues to be a strong level of demand
for wholesale product from certain LPs and fairly tight pricing.

We estimate that the current LP landscape has approximately 100,000 kg of capacity across the various
LPs. However, we do not believe that all are currently able to produce at those levels and actual
production is probably closer to 80,000 kg as production cycles ramp up and some LPs improve their
growing practices. We believe that by the end of 2017 that actual production capacity will be near
100,000 kg. Figure 13 provides our estimates of available production capacity from most of public
companies that have disclosed expansion plans and estimated timelines. We do however adjust based
on whether we estimate any actual product being available for sale in the calendar year.

Neal Gilmer, MBA ngilmer@haywood.com Page 14


Special Sits: Cannabis Sector 6/27/17

Figure 13: Estimated cannabis production capacity

600,000

500,000

400,000
Kgs

300,000

200,000

100,000

0
2017 2018 2019

Source: Company reports, Haywood Securities estimates

What is Cannabis?
Cannabis is a complex drug that is made up of many different cannabinoids as well as other
compounds. There are hundreds of varieties of cannabis that exist, each with different characteristics
such as shape, color, height, smell, etc. Cannabis is usually recognized as one of two main types: Sativa,
which originated in the Western hemisphere and is typically tall with few widely-spaced branches and
long thin leaves; and Indica, which originated in Central and South Asia, and is typically shorter and
bushier with broad leaves. There are also hybrid strains that are a cross of the two. Aside from the
different appearance, the more important difference are the effects each can have on the body. Sativa
based strains are known to have more uplifting and cerebral focused creative effects that more
typically provide relief of depression, ADD, fatigue and mood disorders. Indica strains typically have
more sedating, full-body relaxing effects and is associated with addressing anxiety, insomnia, pain and
muscle spasms.

Neal Gilmer, MBA ngilmer@haywood.com Page 15


Special Sits: Cannabis Sector 6/27/17

Figure 14: Characteristics of Sativa versus Indica

Source: Cresco Labs

Cannabinoids are considered to be the main therapeutic components of the plant. The specific mix of
cannabinoids in a cannabis flower influences the plants medicinal properties. The most well-known
cannabinoid is delta-9-tetrahydrocannabinol, more commonly known as THC. This is the compound
that has psychoactive effects, though it is also responsible for medicinal effects including reduction of
nausea, vomiting, pain and muscle spasms, and improvement of sleep and appetite.

The second cannabinoid that receives a lot of focus is cannabidiol, or CBD, that does not have the
psychoactive effects that THC does. CBD is known to be effective in easing the symptoms of various
conditions such as arthritis, diabetes, PTSD, anxiety disorder, and spasms. In the past, most marijuana
has been bred for high ratios of THC as people tended to focus on it as a psychoactive drug. More
recently, interest in high-CBD strains has increased and more focus is being paid to growing for CBD
extraction, including hemp based CBD extractions.

Neal Gilmer, MBA ngilmer@haywood.com Page 16


Special Sits: Cannabis Sector 6/27/17

Aphria Inc. (APH-T, $5.42)


Rating BUY
Target Price $8.25
Return 52%
Overall Risk Rating High Source: Aphria Inc.

A Market Leader With Low Cost of Production


Company Profile Event We are initiating coverage on Aphria with a Buy rating and $8.25 target price.
Website www.aphria.com
We believe Aphria is well positioned to drive solid earnings in the current medical
CEO Vic Neufeld
About the Company Aphria is a licensed cannabis sector as well as the proposed legal recreational market, currently expected
producer under the ACMPR with to be implemented by July 2018.
greenhouse operations in Leamington
Ontario. The company has current capacity Significant growth expected The medical cannabis market in Canada continues
of 8,000kg with expansion plans towards to grow at 30% Q/Q based on patients registered in the program with the most
75,000kg per year.. recent data for the end of March. Aphria should generate significant growth over
Company Data
the next year with its Part II expansion recently approved, the Company can now
52-Week High/Low $8.77/$1.47 produce up to 8,000 kg per year.
YTD Performance 7%
Dividend Yield N/A Part IV expansion will make Aphria one of Canadas largest producers Aphria has
Shares O/S 138.5M (basic)/ embarked on an aggressive growth strategy with its Part III and IV expansions
146.6M (F/D) currently underway. Upon completion, Aphria will have production capacity of
Market Capitalization $801M
75,000 kg by 2019, putting it in a position to be one of the largest producers and
Cash $166M
Debt $8.2M able to serve both the medical community and the recreational market.
Enterprise Value $643M
Daily Volume 1,717,957 Low cost of production drives solid EBITDA - Aphria has demonstrated its ability
Currency C$ unless noted to generate solid EBITDA having been one of the first of the publicly traded LPs to
report positive quarterly EBITDA. Aphrias low cost of greenhouse production will
become even more meaningful as the industry evolves and matures and
Haywood Estimates production catches up with demand. As we expect the industry to migrate towards
FYE May-31
a wholesale pricing model, ensuring a low cost of production will be best
2017E 2018E
Revenue C$M 20.0 41.3
positioned to minimize the margin compression.
EBITDA C$M 4.6 13.1
EPS C$ 0.05 0.05 F2017 results expected in next couple of weeks Aphria is expected to report its
Fiscal year end May 31 results in July. We forecast revenues of $20 M and EBITDA
of $4.6 M. The Companys quarterly revenue will show minimal growth as the
Company was operating at capacity while it awaited Health Canadas approval for
its Part II expansion. For F2018, we project revenues to more than double with
margin expansion driving EBITDA of $13.1M.

Price Performance Valuation We value Aphria on an 11x EV/EBITDA multiple on our F2020 EBTIDA
estimate that adds the current value of its investments and then discounts at 20% to
F2018.

Risk Aphria faces overall risk due to the reliance on its facility. The company
operates at a single location that is undergoing a multiphase expansion. As a result the
Company is reliant on that facility alone for its revenues and earnings.

Source: Capital IQ and Haywood Securities

Neal Gilmer, MBA ngilmer@haywood.com Page 17


Special Sits: Cannabis Sector 6/27/17

Target Price, C$ $8.25 Shares O/S, million 138.0


Aphria Inc. (APH-T) Current Price, C$ $5.42 Shares F/D, million 146.0
Rating: BUY Return, % 52% Market Capitalization, C$M $712.4
Target Price: C$ 52-Week High / Low, C$ $8.77 / $1.47 Company CEO Vic Neufeld
Metric: EV/EBITDA Daily Volume (100-day avg) 1,717,957 Company Web Site www.aphria.com

Balance Sheet and Capitalization FQ3/17 Peer-Group Comparables


C$M 2017E 2018E 2017E 2018E
Market Capitalization $ 712.41 Share Price EV/Rev EV/Rev EV/EBITDA EV/EBITDA
Current Cash $ 128.57 Aurora Cannabis Inc. C$2.17 28.9x 5.4x 561.3x 15.0x
Working Capital $ 167.36 CanniMed Therapeutics Inc. C$8.00 8.3x 3.6x -- 12.1x
Total Debt $ 7.94 Canopy Growth Corporation C$8.46 31.4x 10.7x -- 67.3x
Enterprise Value (EV) $ 592 Cronos Group Inc. C$1.73 28.3x 4.5x -- 18.3x
Emblem Corp. C$1.63 17.5x 3.7x -- --
Financial Forecast OrganiGram Holdings Inc. C$2.24 19.7x 4.7x -- 15.9x
2017E 2018E 2019E Supreme Pharmaceuticals Inc. C$1.29 -- 10.2x -- 98.0x
Kg of cannabis sold 2,547 6,160 25,000
Avg. Selling Price per gram $7.84 $6.71 $6.31 Group Average 22.3x 6.1x 561.3x 37.8x
Revenue $20.0 $41.3 $157.8 Group Average (excluding high/low) 23.6x 5.7x NA 29.1x
Production Costs $4.4 $11.0 $34.4 Aphria C$5.44 29.6x 14.3x 132.3x 45.2x
Gross Profit $15.6 $30.3 $123.4
Gross Margin 78% 73% 78%
Operating Expenses $14 $21 $67 Major Shareholders
Adj EBITDA $4.5 $13.1 $60.2 O/S (millions) O/S (%)
Income before taxes $7 $9 $57 Cervini, John 9.5 7%
Taxes $0 $2 $15 Cacciavillani, Cole 8.5 6%
Net income $6.9 $7.0 $41.9 MM Asset Management Inc 3.1 2%
Shares o/s 124.1 138.5 138.5 Manulife Asset Management 1.3 1%
Shares o/s 134.1 146.6 146.6 Neufeld, Victor 0.8 1%
1832 Asset Management L.P. 0.2 0%
EPS $0.05 $0.05 $0.29 Total 23.4 17%

Valuation Ratios Recent Financings


2017E 2018E 2019E May-17 $75M bought deal @ $6.50 per share
EV / Revenue 29.6x 14.3x 3.8x Feb-17 $50M bought deal @ $6.00 per share
EV / EBITDA 132.3x 45.2x 9.8x Nov-16 $35M bought deal @ $4.00 per share
Aug-16 $34.5M bought deal @$2.00 per share
Growth Analysis
Revenue 137% 106% 282%
EBITDA nmf 192% 360% Recreational Cannabis (kg)
Net Income nmf 1% 497%
40,000
Margin Analysis 35,000
Gross Margin 78% 73% 78% 30,000
EBITDA 22% 32% 38% 25,000
Net Income 35% 17% 27% 20,000
15,000
Medical Cannabis (kg) 10,000
5,000
25,000
0
20,000 F2017E F2018E F2019E F2020E

15,000
Kgs

10,000

5,000

0
F2017E F2018E F2019E F2020E

Source: Capital IQ, Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 18


Special Sits: Cannabis Sector 6/27/17

Investment Thesis
We have highlighted our outlook for the Canadian cannabis industry and believe that we are still in
the early stages of a significant growth industry. The current medical cannabis market is growing at
30%+ Q/Q and we dont believe there will be slow down in the near term. We expect that the cannabis
industry is well positioned for material growth over the course of the next few years, initially driven
through the medical demand and then through the recreational adult use market.

We believe that Aphria has established itself as one of the leaders in the industry on many fronts.
While it was the 14th licensed producer in Canada, it has been at the forefront of various industry
accomplishments, in our view. The Company has been successful at scaling up its production
capabilities, capturing market share and generating positive EBITDA.

In our view, one of Aphrias advantages is a management team that has significant experience in
greenhouse growing. Between the Companys Co-Founders they collectively have over 55 years of
experience. Aphrias CEOs experience in the pharma industry, with over 20 years of experience where
he grew Jamieson Laboratories from $20 million in sales to over $250 million during his tenure should
prove beneficial to the penetration of the medical market. We believe that the management team has
the experience necessary to grow high quality product cost effectively and also the experience to
penetrate and establish market share.

We believe that Aphria is well positioned for another year of strong growth after having been limited
in its sales as it awaited Health Canada approval on its Part II expansion. With that now approved and
the Company growing towards capacity of 8,000 kg per year, we project significant increase in product
sold beginning in its fiscal Q2 onwards.

Neal Gilmer, MBA ngilmer@haywood.com Page 19


Special Sits: Cannabis Sector 6/27/17

Company Background
Corporate History and Listing
Aphria is one of the earlier licensed producers, having received its license to cultivate and sell medical
marijuana under the MMPR on November 26, 2014. Following the award of its license the Company
completed its qualifying transaction in conjunction with a private placement that raised the Company
$12.6 million.

Co-Founders Cole Cacciavillani and John Cervini began growing marijuana under the old MMAR
regulations in 2012 in order to gain experience in growing marijuana. Aphrias co-founders have
significant growing experience with over 40 years combined growing various different plants in a
greenhouse setting. This early experience and experimentation of growing marijuana under the
MMAR provided the Company with many of its processes and operating procedures that it leverages
today.

Figure 1: Corporate milestones


Aug-14 Cultivation license granted
Nov-14 Sales licence received
Dec-14 Qualifying transaction complete and shares begin
trading on TSX-V
Mar-15 Board approval for 2 phase expansion
Mar-15 Announces wholesale shipping license to sell MMJ
to other LP's
Jul-15 R&D and Oil extraction build out
Nov-15 Equity financing for gross proceeds of $11.5M
Dec-15 Crosses break-even threshold and positive EBITDA
for November quarter
Jan-16 Acquires CannWay Pharmaceuticals
Feb-16 Health Canada approves Part I capacity expansion

Apr-16 Reaches agreement to acquire 36 acres of land from


CF Greenhouses bringing potential capacity to 1
million square feet
Aug-16 Health Canada approves production and sale of oil
extracts
Aug-16 Agreement to acquire additional 11 acres of
greenhouses on adjacent lot
Sep-16 Licensing agreement with Tokyo Smoke
Oct-16 IP transfer agreement and investment in
Copperstate
Dec-16 Acquires additional 200 acres of vacant land
Feb-17 Graduates to the TSX
Apr-17 Announces US expansion strategy with lead
investment in Liberty Health Sciences
Source: Company reports, Haywood Securities

Neal Gilmer, MBA ngilmer@haywood.com Page 20


Special Sits: Cannabis Sector 6/27/17

Production Facilities
Aphria operates in Leamington Ontario with greenhouse growing space of 107,000 sq ft along with
supporting infrastructure of approximately 35,000 sq ft. The Company completed its Part II expansion
at the end of 2016 and recently received approval from Health Canada to begin using the expanded
facilities, commencing in May 2017. Prior to approval from Health Canada, Aphria was operating at
capacity, which was approximately 2,500 kg annually. The $10M Part II expansion more than triples its
production capacity to 8,000kg annually.

Figure 2: Aphrias Part II Production Space

Source: Haywood Securities

Aphria originally leased the greenhouse facilities from CF Greenhouses, however the Company
acquired the property and associated infrastructure for $6.1 million on June 30, 2016. Following the
completion of the acquisition, Aphria owned 360,000 sq ft of greenhouse production space on 36
acres.

On August 19, 2016 Aphria announced that it had entered into an agreement to acquire 11 acres of
additional greenhouse property next to its existing facility from DiNiro Farms Inc for $2M in cash. The
property purchased had approximately 350,000 sq ft of existing greenhouse that has subsequently
been demolished.

Neal Gilmer, MBA ngilmer@haywood.com Page 21


Special Sits: Cannabis Sector 6/27/17

Figure 3: Aphrias Equipment infrastructure

Source: Haywood Securities

Aphria acquired an additional 200 acres of full serviced vacant land for a total cost of $6.24 million that
closed on January 31, 2017. The land is not adjacent to the Companys existing property and therefore
will require a new site license from Health Canada.

Expansion Opportunities Significant Growth Underway


As mentioned previously, the Company recently completed its Part II expansion to bring total annual
capacity to 8,000kg at a cost of approximately $8 million with a further $2 million invested in office
and supporting infrastructure. Aphria is currently in process of two further expansions that will bring
its annual production capacity to approximately 75,000kg.

The Companys Part III expansion is currently underway with an estimated capital cost of $24.5 million.
Aphrias Board of Directors approved the expansion in September of last year with expected
completion in the Fall of 2017. The project will add 200,000 square feet of state of the art greenhouses,
built to Leamington standards. It will also include 55,000 square feet of infrastructure space, four
additional Level 9 vaults as well as automation for both the greenhouses and processing areas. As a
result, Aphria will add approximately 14,000kg of annual capacity, bringing total annual production
capacity to 22,000kg.

Aphrias Part IV expansion is also in progress with a capital cost of approximately $137 million. The
board approved the project in January 2017 and is expected to complete in mid-2018. The scope of
Part IV includes the addition of 700,000 square feet of state-of-the-art greenhouses built to the current
Leamington standard that will bring total greenhouse growing space to 1,000,000 square feet. In
addition it will add 230,000 square feet of infrastructure space that will include a 15 MW power co-
generation facility that will provide supplemental power to the greenhouse facility. Part IV will also
add 10 additional Level 9 vaults as well as further automation of greenhouse and warehouse facilities.

Neal Gilmer, MBA ngilmer@haywood.com Page 22


Special Sits: Cannabis Sector 6/27/17

Figure 4: Aphrias Expansion Plans


Part II Part III Part IV
Project Cost $10,000,000 $24,500,000 $137,000,000
Incremental greenhouse growing (sq ft) 57,000 200,000 700,000
Cumulative greenhouse growing (sq ft) 107,000 301,000 1,001,000
Cost per sq ft greenhouse $55 $55 $50
Incremental infrastructure (sq ft) 22,000 55,000 202,250
Cumulative infrastructure (sq ft) 35,043 90,043 292,293
Cost per sq ft infrastructure $312 $245 $504
Incremental production capacity (kg) 5,500 14,000 53,000
Cumulative production capacity (kg) 8,000 22,000 75,000
Estimated completion date Complete Fall 2017 Summer 2018
Source: Company reports, Haywood Securities

Product Offering
Dried Cannabis
Aphria has a broad product offering with various strains that encompass the full spectrum from high
CBD to high THC. Typical pricing ranges from $7.20-8.20 per gram with premium or high demand
strains priced at a premium.

Figure 5: Dried Cannabis product

Source: Haywood Securities

Oils
Aphria received its license to sell oils on August 17, 2016 and subsequently began to sell oils. Currently
the Company has capacity to produce up to 1,200 bottles with 60mL per bottle per day. Aphrias
equivalency factor is that every 6mL of cannabis oil is equivalent to 1g of dried cannabis. As a result,
full daily production of cannabis oil would consume approximately 12kg of dried cannabis. Aphrias
cannabis oil is priced on average of $99 per bottle, or on a dried equivalent basis of $9.90 per gram.

Neal Gilmer, MBA ngilmer@haywood.com Page 23


Special Sits: Cannabis Sector 6/27/17

Figure 6: Aphrias oil bottling

Source: Haywood Securities

Strategic Partnerships and Investments


Aphria has been active with various strategic investments, providing it exposure and opportunity
within the cannabis landscape. Last fall the Company announced a partnership with Tokyo Smoke, a
premium lifestyle cannabis brand. Under the partnership Aphria will sell Tokyo Smoke branded
cannabis to medical cannabis patients in Canada. We believe this will also prove strategic in the
recreational market as strong brand awareness will be one of the drivers of market penetration. With
this agreement in place and brand awareness in advance should help adoption.

The Company also announced an agreement with MassRoots, one of the largest technology platforms
for the cannabis industry. Under the agreement, MassRoots will build awareness of the Aphria brand
in exchange for a fee for each patient referral. Aphria also made a small investment in MassRoots as a
part of the agreement.

In April, Aphria and Tetra Bio-Pharma announced plans for joint distribution of medical cannabis in the
maritime provinces and Quebec. Under the terms of the agreement Aphria will supply dried medical
cannabis and Tetra will package the product using its process developed for its clinical drug trial for
PPP001. This will be done under the CDSA dealers license that Tetra has at its New Brunswick facility.
We believe that this is a good strategic partnership and investment that Aphria has made in Tetra and
could help its distribution on Canadas East coast.

Neal Gilmer, MBA ngilmer@haywood.com Page 24


Special Sits: Cannabis Sector 6/27/17

U.S. Investments
Aphria first invested in the US under an IP transfer agreement with Copperstate Farms. Copperstate
purchased a 40 acre high tech greenhouse facility in Arizona and is one of the largest medical cannabis
facilities in Arizona. Aprhia made a cashless investment for 5% entitling it to 5% of the free cash flow.
Aphria also invested in Copperstate Farms Investors LLC and recently invested a further US$3M to
bring Aprhias total investment in Copperstate Farms Investors LLC to 18.5%.

In early April Aphria announced its U.S. expansion strategy with a lead investment in an entity to be
named Liberty Health Sciences that will operate in the U.S. under the brand Aphria USA. The initial $25
million investment will acquire the assets of Chesnut Hill Tree Farm LLC, a licensed holder in the state
of Florida authorized to dispense low THC medical cannabis to patients. As a part of the agreement,
Aphria will license its brand to Liberty for a 3% perpetual royalty on sales of cannabis and related
products. In addition, Aphria is also licensing its intellectual property of its greenhouse growing
capabilities.

Model Assumptions and Estimates


Revenues
Aphria reported cannabis sales totaling 653kg in its most recent quarter ending February 2017, its
fiscal 3rd quarter. This represented just 2% Q/Q growth as the Company was operating at capacity
while it waited for Health Canadas approval for its Part II expansion. Current quarter sales, ending
August 2017 will continue to show limited growth due to the timing of Aphria receiving approval from
Health Canada on its Part II expansion. Essentially, the Company is operating and selling at its capacity,
with the new production capacity being available for sale in mid-August.

With Part II ramping into full production, Aphria will have a significant increase in capacity in F2018.
We believe the Aphria will resume with its patient on-boarding that will drive strong growth in 2018.
We also expect management will consider selling wholesale product again given the current demand
in the market place.

Figure 7: Estimated medical cannabis sales (kg)

25,000

20,000

15,000

10,000

5,000

0
F2017E F2018E F2019E F2020E

Source: Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 25


Special Sits: Cannabis Sector 6/27/17

Aphrias average sales prices for the most recent quarter ending February 2017 (Q2/F17) was $7.85,
comprised of both dried bud sales and oil sales. The Company disclosed that its oil sales increased to
approximately 26% in the quarter, up from 10% in the prior quarter. We model dried bud sales at
$7/gram declining towards $5/gram as we believe the Company will wholesale more product in the
medical market in F2018 and beyond. Aphrias current oil sales price is approximately $10 per gram
equivalent, which we also expect to decline towards $9 per gram equivalent in 2018. We believe that
the medical market will continue to migrate towards a greater percentage of sales in the form of oils
and/or other derivative products. We model 35% of medical sales in F2018 as oils, increasing to 40%
in F2019 and 45% in F2020.

We believe that Aphria will be an active player in the recreational market. The company has disclosed
its significant expansion plans and also has the balance sheet in place to complete the expansion. We
believe that Aphria, along with some of the other market leaders are best positioned to be the initial
suppliers to the market for its inception in mid-2018, with an estimated 7,000kg in its Fiscal 2019,
essentially the first year of expected legal adult-use. We project that to grow to 33,500 kg in F2020.

Figure 8: Recreational Cannabis sales (kg)

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
F2017E F2018E F2019E F2020E
Source: Haywood Securities estimates

We have a declining average sales price in our model for Aphria to account for what we expect to be
wholesale medical sales by the Company, as well as wholesale pricing in the recreational market. This
is slightly offset by an increasing percentage of sales of oils/derivative products that command a higher
price. Our average sales price in F2018 is $6.71, declining to $6.31 in F2019 and $5.76 in F2020.

Costs of Goods Low cost of Production


From our perspective one of the more challenging financial items in the industry to date is cost of
goods sold. It becomes convoluted with the IFRS treatment of biological assets and it appears to us
that the various LPs seem to handle and report it differently. We would prefer standards to emerge
as is done in the mining industry to make this metric more easily comparable across LPs. We believe
an all-in COGS and a cash-cost COGS are relevant metrics to try and company within the industry.
For the purposes of our model, we forecast an all-in cost per gram basis and will adjust our numbers
after the Company reports to eliminate the noise from any IFRS treatment.

Neal Gilmer, MBA ngilmer@haywood.com Page 26


Special Sits: Cannabis Sector 6/27/17

We believe that Aphria is one of the lowest cost producers and is well positioned to continue to be
going forward. In Q2/F17 they reported their lowest all-in cost per gram of production of $1.79 as they
reached maximum capacity at its current facility. That increased with its most recent reported Q3/F17
as the Company scaled up headcount and other expenses associated with Part II expansion. We expect
similar costs in fiscal Q4 before a drop in costs in F2018 as economies of scale take effect. We forecast
even further reduction in costs following the completion of Part III and IV as the Company realizes
even further economies of scale and the benefits of various automation implemented as part of those
expansion plans.

On a consolidated basis for both medical and recreation, we forecast Aprhia to generate significant
growth in total product volume with declining average sales price that reflects more wholesale pricing
offset slightly by oil/derivative products commanding higher prices compared to dried flower. We also
forecast declining costs as efficiencies are gained through both economies of scale and automation. A
summary of our estimates for total cannabis, average price per gram and average cost per gram of
production are included in Figure 9.

Figure 9: Aphria operating statistics


Operating Stats (FYE May-31) 2017E 2018E 2019E 2020E
Total Cannabis (kg) 2547 6,160 25,000 55,500
Price Per Gram 7.84 6.71 6.31 5.76
COGS ($/g) (all-in basis) 1.89 1.79 1.38 1.20

Source: Haywood Securities estimates

Opex
Aphia has been prudent since inception with regards to operating costs, keeping costs contained and
allowing it to become one of the first LPs with positive EBITDA achieved in late 2015. This not only
highlights the low cost of production, but also managements approach to running the business in a
cost effective manner. A summary of our estimates is included in Figure 10.

Figure 10: Summary of estimates

(FYE May 31) F2017E F2018E F2019E F2020E


Revenue ($M) $20.0 $41.3 $157.8 $319.6
Gross Profit ($M) $15.6 $30.3 $123.4 $253.0
Gross Margin % 78.0% 73.3% 78.2% 79.2%
EBITDA ($M) $4.5 $13.1 $60.2 $119.8
EBITDA margin % 22.4% 31.7% 38.1% 37.5%
Net Income ($M) $0.6 $6.8 $41.7 $85.7
EPS $0.00 $0.05 $0.28 $0.59
Source: Haywood Securities estimates

Valuation
As we commented earlier in our report, our primary valuation metric is EV/EBITDA on a steady state
or potential run rate basis. We believe that attempts to capture the market opportunity and earnings
potential given the high growth rate expected in the industry overall. For Aphria, we forecast them to
be close to their run-rate capacity with our F2020 estimates. We note however that our F2020 is not
full capacity for Aprhia with our forecast of approximately 55,500 kg that year versus the 75,000 kg
expected capacity. We have done this to be slightly conservative given the uncertainty around forward

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pricing and other unknowns. Figure 11 below shows the build up or our target price. We use an 11x
EV/EBITDA multiple on our F2020 EBTIDA estimate that adds the current value of its investments and
then discounts at 20% to F2018.

Figure 11: Target price


EBITDA $119.8
Target EV/EBITDA Multiple 11.0
Implied EV $1,317.5
Net Debt ($108.6)
Implied Equity Value $1,426.2
Implied Equity Value discounted + Investments $1,195.32
Shares Outstanding 146.6
Implied Share Price Target $8.15
Source: Haywood Securities estimates

In Figure 12 below we provide scenarios of various potential target prices using different EBITDA
margins and different multiples based on Aphria operating at full capacity with $5.00 wholesale price
assumption.

Figure 12: Scenario analysis

EBITDA Margin
EV/EBITDA Target

$ 9.67 25% 30% 35% 40% 45%


8.0 $5.82 $6.85 $7.88 $8.90 $9.93
9.0 $6.46 $7.62 $8.78 $9.93 $11.09
10.0 $7.11 $8.39 $9.67 $10.96 $12.24
11.0 $7.75 $9.16 $10.57 $11.99 $13.40
12.0 $8.39 $9.93 $11.47 $13.01 $14.55
Source: Haywood Securities estimates

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Appendix A - Management

Vic Neufeld President & CEO & Chairman of the Board

Vic Neufeld is the President and Chief Executive Officer of Aphria. Mr. Neufeld is the former CEO
of Jamieson Laboratories (Jamieson) Canadas 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 as CEO of Jamieson. During his tenure with Jamieson, the Company went from $20 million
in annual sales to over $250 million and expanded the Companys distribution network to over 40
countries, building Jamieson to a globally recognized brand name. Mr. Neufeld, a native of
Leamington, Ontario, earned a Bachelors degree in Economics from Western University, Honours
degree in business from the University of Windsor and an MBA from the University of Windsor.
Mr. Neufeld is also a CPA.

Cole Cacciavillani Co-Founder, Vice-President Growing Operations & Director

Cole Cacciavillani, Aphrias co-founder, is an industrial engineer with 35 years of experience in the
agricultural and greenhouse industry. Cole has accumulated expertise of how to best utilize
natures light and proprietary growing techniques and technologies to create competitive, safe
and cost effective products. Mr. Cacciavillani sits on a number of charitable and associative boards
including serving as: past Chairman of the Board for Leamington Memorial District Hospital as well
as serving on the Hospitals Foundation Board. Cole was a founding chair of The Ontario
Greenhouse Alliance; serves on the board of The Agricultural Institute of Ontario, Police Services
Board, F.V. Energy Co-op, and the Leamington Economic Development Committee. Currently he
serves as Co-Chair of Fundraising for the Erie Shores Campus Hospice. Mr. Cacciavillanis
dedication to his community has received much recognition, including: the Queen Elizabeth II
Diamond Jubilee Medal, which is awarded to honour significant contributions and achievements
by Canadians. Ontarios greenhouse industry recognized Mr. Cacciavillanis leadership and vision
as the founding Chair of the industry organization with its first service award. Recently, Mr.
Cacciavillani was awarded the St. Clair alumni distinction award based on the success he pursued
within the community.

John Cervini Co-Founder, Vice-President Infrastructure & Technology & Director

John Cervini, Aphrias co-founder, comes from fourth generation growers in southwestern Ontario
with hydroponic agricultural experience. Together with his father and brother, Mr. Cervini helped
established Lakeside Produce, a leader of North America sales and marketing companies selling
fresh produce from Canada to multinational retailers throughout North America. Mr. Cervini has
significant experience in greenhouse growing technology and has also overseen greenhouse
expansions to California and Mexico. Mr. Cervinis focus on improved efficiencies, healthier quality
and the latest research studies helped him create an industry leading food safety program. Mr.
Cervini understands the need and importance of product safety, product traceability and
standardized industry procedures. Mr. Cervini is the founding chair of the Ontario Greenhouse
Marketing Association remains involved in the industry as part of the Ontario Greenhouse
Vegetable Growers Association.

Carl Merton - Chief Financial Officer

Carl Merton has over 20 years of financial and business experience, having spent almost 12 years
combined with Ernst & Young LLP and KPMG LLP prior to serving as Vice-President, Special Projects
at Atlas Tube Canada ULC, Chief Financial Officer of Reko International Group Inc. (TSXV: REK) and

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Chief Financial Officer of Aphria Inc. Mr. Merton is a Chartered Professional Accountant, Chartered
Accountant and is a Fellow of the Canadian Institute of Chartered Business Valuators (the
CICBV). As the Chief Financial Officer of Aphria, Mr. Merton is responsible for leading strategic
discussions, acquisitions and divestitures, budgeting, financing, financial reporting and internal
controls. Mr. Merton holds a B.Comm. Hon. in Sports Administration from Laurentian University.
He has served as a past Chair of both the CICBV and the International Association of Professional
Business Valuators, he is a director and Chair of the Audit Committee of Motor City Community
Credit Union and is a member of the Board of Directors of Tetra Bio-Pharma Inc.

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Appendix B Independent Directors

Dennis Staudt

Dennis Staudt, Director, has over 35 years experience providing business advice to private
companies in Southwestern Ontario, having spent most of his career with
PricewaterhouseCoopers LLP (PwC), including 22 years as a partner in the Audit and Assurance
Group. Prior to being admitted to partnership, Mr. Staudt spent almost two years with PwC
Germany in their Duesseldorf office. Following his retirement from PwC in 2012, Mr. Staudt
continues to provide business advisory services to a number of private companies, primarily in the
manufacturing and greenhouse sectors. He is also Vice-President of Staudt Farms Limited, a family
owned farming operation in Leamington, Ontario. Mr. Staudt graduated from the University of
Windsor in 1977 with a Bachelor of Commerce Degree. He obtained his Chartered Accountant
(Ontario) designation in 1979 and his Certified Public Accountant (Illinois) designation in 1999. Mr.
Staudt is also Advisory Board Member at the University of Windsor Centre for Executive and
Professional Education. Mr. Staudt is Past Chair of the Leamington District Memorial Hospital
Foundation, the Art Gallery of Windsor and the Art Gallery of Windsor Foundation. He also
previously served on the Board of Governors of the University of Windsor and taught as a Sessional
Lecturer in Accounting.

Dr. Philip Waddington

Dr. Philip Waddington, Director, a trained naturopathic physician, has experience in regulating
natural health products. From January 2000 to August 2008 Dr. Waddington served as the
inaugural Director General of the Natural Health Products Directorate (NHPD) of Health Canada.
Under his leadership, a new regulatory framework was defined, developed and implemented in
Canada. Dr. Waddington received his training from the Canadian College of Naturopathic
Medicine. He holds an MBA from the Richard Ivey School of Business at the University of Western
Ontario and a B.Sc. Hon. in Biology from Queens University. He currently works as a consultant;
helping companies deal with any regulatory, NHPD or government strategy issues.

Robert Kozlov

Robert Kozlov, Director, is a senior partner at the law firm Norton Rose Fulbright Canada LLP where
he practices corporate - commercial law, with a particular focus on private mergers and
acquisitions, strategic alliances, and major commercial contracts, including those involving the
supply, distribution and franchising of products and services, and the protection and licensing of
intellectual property rights. He has experience advising clients on a wide array of commercial
arrangements, including the drafting and negotiation of licensing, distribution, supply, franchise
and development, joint-venture, sponsorship, co-promotion, advertising and marketing (including
promotional contests), and services agreements for Canadian-based clients respecting their local
operations, including in regard to their dealings with the Ministry of Health (Ontario), as well as
their international expansion and distribution of products in multiple foreign jurisdictions. He also
advises foreign companies in regard to their business operations in Canada, from initial set-up to
compliance with local registration and regulatory requirements. As a registered trade-mark agent,
Mr. Kozlov has acted for Canadian and foreign companies in protecting and enforcing their
intellectual property rights, including providing validity opinions and pursuing action against
infringers.

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Arlene Dickinson

Arlene Dickinson, director, owner and CEO of Venture Communications, a company she grew from
a small, local firm to one of the largest independent agencies in Canada, is also the CEO of District
Ventures and Youinc.com. Companies all aimed at helping market, fund and grow entrepreneurs
and entrepreneurial companies. She is a two times best-selling author, accomplished speaker and
is best known to Canadians as one of the venture capitalists on the award-winning CBC series
Dragons Den. Arlenes leadership has been recognized with honours including Canadas Most
Powerful Women Top 100, the Pinnacle Award for Entrepreneurial Excellence, as well as PROFIT
and Chatelaines Top 100 Women Business Owners and, is a Marketing Hall of Legends inductee.
She is an Honorary Captain of the Royal Canadian Navy and the recipient of honorary degrees from
Mount Saint Vincent University, Saint Marys University and the Northern Alberta Institute of
Technology. Arlene is also the proud recipient of The Queen Elizabeth II Diamond Jubilee Medal.

Risks

Significant Investment Risks


The investment to which this report relates carries various risks which are reflected in our Overall Risk
Rating. We consider the following to be the most significant of these investment risks:

Reliance on License Aphria is reliant on its license from Health Canada to grow, cultivate and
process cannabis flower and oils and sell it to registered patients. Any change to the overall
framework and regulations could be positive or negative to Aphrias business opportunities both
in Canada and internationally.

Facility risk Aphria is dependent on its facility infrastructure to grow, cultivate and process
cannabis for eventual use by patients across Canada. Anything that may impact the facilities that
it operates would impact its ability to grow and sell to its patient base.

Competition The medical cannabis market in Canada has strong competition that are all
pursuing the medical patient within Canada as well as the potential recreational user. As Health
Canada continues to approve and expand the number of licensed producers it could increase
competition within the industry.

Execution Risk Aphria needs to execute on its oil extraction lab as well as its new growing facility.
As is inherent in any expansion or capital improvement project it is susceptible to execution risk
to complete on time and on budget.

For further information on our Risk Rating please visit: http://haywood.com/what-we-


offer/research/research-policy

Neal Gilmer, MBA ngilmer@haywood.com Page 32


Special Sits: Cannabis Sector 6/27/17

CanniMed (CMED-T, $8.00)


Rating BUY
Target Price $13.00
Return 63% Source: CanniMed
Overall Risk Rating High
A Medical Focus Should Provide Stability from Fluctuations of Rec Market
Company Profile Event We are initiating coverage on CanniMed with a Buy rating and target price of
Website www.cannimed.com
$13.00. We believe that CanniMed is well positioned in the fast growing medical
CEO Brent Zettl
About the Company CanniMed is a cannabis market, primarily in Canada but the Company is also establishing itself within
licensed producer under the ACMPR with international markets as well.
annual production capacity of 7,000 kg at its
Saskatchewan based facility.. Continued strong growth The most recent data from Health Canada
demonstrate that the medical cannabis market continues to experience strong
Company Data growth. Registered patients were up almost 30% Q/Q to the end of March,
52-Week High/Low $13.35/$7.32 consistent with prior quarterly growth. The industrys growth rate is exceeding
Dividend Yield NA
Health Canadas original projections and is expected to continue it strong growth.
Shares O/S 22.6M (basic)/
22.8M (F/D)
Focused offering on the medical market CanniMed is focused on the medical
Market Capitalization $181M
Cash $59M market with its go to market strategy of physician education and significant
Debt $17.7M investments into alternative delivery formats. The Company has established its
Enterprise Value $147.7M dried product offering based on content levels of THC/CBD, rather than street
Daily Volume 75,222 names. In addition, CanniMed was one of the earlier LPs to receive the license to
Currency C$ unless noted sell cannabis oils as a preferred consumption method over smoking by doctors. The
Company also has its gelcap product offering that should be released in the near-
term while it has also signed an agreement to develop a dissolvable thin wafer.
Haywood Estimates
FYE Oct-31 Pharmacy agreement in-place CanniMed has signed an agreement with
2017E 2018E
PharmaChoice such that CanniMed will be responsible for delivering education
Revenue C$M 15.9 35.2
EBITDA C$M 0.5 7.9 programs to PharmaChoice pharmacists across Canada. In addition, the two
EPS C$ (0.31) 0.26 companies intend to enter a definitive agreement for the distribution of medical
cannabis through PharmaChoice pharmacies once the first province passes
legislation to allow for distribution. We believe that pharmacies will become a
viable distribution method for medical cannabis products as the provinces and
Health Canada continue to evolve the distribution model. This agreement puts
CanniMed in a favourable position to capitalize on that distribution channel.

Price Performance Valuation We value CanniMed on a EV/EBITDA multiple of 10x based on its fully
financed expansion plans, its strong history of growing execution and its current focus
on the medical side and optionality on alternative delivery formats. We have
discounted the future value by 20% to reflect the value forward one year from now
Risk CanniMed faces risk with respect to its oil extraction expansion that could limit
its oil production capacity. The Company also faces risk on the production grow
chamber expansion that could affect our forward estimates.

Source: Capital IQ and Haywood Securities

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Special Sits: Cannabis Sector 6/27/17

Target Price, C$ $13.00 Shares O/S, million 22.6


CanniMed Therapeutics Inc. Current Price, C$ $8.00 Shares F/D, million 22.7
Rating: BUY Return, % 63% Market Capitalization, C$M $181.9
Target Price: C$ 52-Week High / Low, C$ $13.35 / $7.32 Company CEO Brent Zettl
Metric: EV/EBITDA Daily Volume (100-day avg) 75,222 Company Web Site www.cannimed.com

Balance Sheet and Capitalization FQ2/17 Peer-Group Comparables


C$M 2017E 2018E 2017E 2018E
Market Capitalization $ 181.88 Share Price EV/Rev EV/Rev EV/EBITDA EV/EBITDA
Current Cash $ 59.05 Aphria C$5.44 31.7x 16.4x 163.0x 52.4x
Working Capital $ 66.07 Aurora Cannabis Inc. C$2.17 28.9x 5.4x 561.3x 15.0x
Total Debt $ 17.69 Canopy Growth Corporation C$8.46 31.4x 10.7x -- 67.3x
Enterprise Value (EV) $ 141 Cronos Group Inc. C$1.73 28.3x 4.5x -- 18.3x
Emblem Corp. C$1.63 17.5x 3.7x -- --
Financial Forecast FYE Oct-31 OrganiGram Holdings Inc. C$2.24 19.7x 4.7x -- 15.9x
2017E 2018E 2019E Supreme Pharmaceuticals Inc. C$1.29 -- 10.2x -- 98.0x
Kg of cannabis sold 1,624 3,850 8,700
Avg. Selling Price per gram $9.71 $9.13 $7.89 Group Average 26.2x 7.9x 362.1x 44.5x
Revenue $15.9 $35.2 $68.6 Group Average (excluding high/low) 27.1x 7.1x NA 38.5x
Production Costs $5.6 $9.3 $18.2 CanniMed C$8.00 8.8x 4.0x 256.1x 17.8x
Gross Profit $10.3 $25.9 $50.4
Gross Margin 65% 74% 73%
Operating Expenses $12 $18 $27 Major Shareholders
Adj EBITDA $0.5 $7.9 $23.2 O/S (millions) O/S (%)
Income before taxes ($7) $8 $23 Westcap Management Ltd. 4.0 18%
Taxes $0 $2 $6 PFM Capital, Inc. 2.4 11%
Net income ($7.1) $5.8 $17.2 Zettl, Brent 1.0 4%
Shares o/s 22.6 22.6 22.6 Quantico Capital Corp. 0.6 3%
Shares o/s 22.7 22.7 22.7 Ching, Donald R. 0.3 1%
Matco Financial Inc. 0.1 1%
EPS ($0.31) $0.26 $0.75 Total 8.4 37%

Valuation Ratios Medical Cannabis (kg)


2017E 2018E 2019E
EV / Revenue 8.8x 4.0x 2.0x 14,000
EV / EBITDA 256.1x 17.8x 6.1x 12,000
10,000
Growth Analysis 8,000
Kgs

Revenue 62% 121% 95%


6,000
EBITDA nmf nmf 193%
4,000
Net Income nmf nmf 193%
2,000

Margin Analysis 0
F2017E F2018E F2019E F2020E
Gross Margin 65% 74% 73%
EBITDA 3% 22% 34%
Net Income nmf 17% 25%

Source: Capital IQ, Haywood Securities estimates

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Special Sits: Cannabis Sector 6/27/17

Investment Thesis

CanniMed has the longest track record for cultivating cannabis in Canada. The Company was the sole
supplier of medical cannabis under the previous MMAR program and was the first company to be
awared an LP license under the MMPR (now ACMPR) regulations. The company produces cannabis in
a 97,000 square foot facility in Saskatchewan.

We are positive on CanniMeds opportunity as a medical focused supplier to the Canadian cannabis
market as well as various international opportunities. The Company has a strong track record of
cultivating cannabis at its GMP compliant facility and has also shown leadership in diversifying its
product offering and distribution opportunities.

We believe that CanniMed will be successful in driving strong patient adoption rates and sales growth,
particularly through its cannabis oils offering and soon to the market gelcaps. We believe that these
segments of the market will continue to show significant growth, over and above that of the dried
flower. The Company has done an excellent job of positioning its product offering geared towards the
understanding of physicians and has a strong physician education program.

The Company has recently sold its cannabis oils into the Cayman Islands and Australia and has
subsequently received a large follow on order from Australia. The Company also has a distribution
agreement in the EU.

CanniMed is undertaking two significant expansions with the funds raised as a part of its IPO late in
2016. The Company is constructing a state-of-the-art $10.5 million oil extraction lab that will materially
expand its production capabilities of higher value medical cannabis products. In addition, the Company
is also expanding its production capacity, adding a further 5,000 kg capacity that should bring the
Companys total capacity to 12,000 kg by H1/19. The Company still has significant space left on its 100
acre property that has the potential for further expansion as the market evolves and further
opportunities arise.

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Special Sits: Cannabis Sector 6/27/17

Company Overview

CanniMed is essentially the first licensed producer in Canada, having been the sole supplier of medical
cannabis to Health Canada under the MMAR program that was established in 2001. The Companys
origins date back to 1988 when it was founded as a R&D company examining the growth of fruit and
medicinal plants in an underground controlled environment. The Company initiated the research in an
underground mine in Manitoba that was part of a Hudson Bay Mining retired underground mine.

As a result, CMEDs current subsidiary Prairie Plant Systems began its operations producing medical
cannabis underground from 2004 through until 2009. At that time, the Company had completed the
construction of an indoor facility in Saskatoon Saskatchewan that was designed and built to emulate
the underground growing conditions. The Companys initial 35,000 square foot facility had
approximate annual capacity of 2,800kg.

As sole supplier to the Health Canada under the MMAR CMED was the first LP with a license for both
cultivation and sales under the MMPR at the time, now the ACMPR. Following the court induced
change in Health Canadas allowed cannabis products available for sale, CMED was quick to respond
with its oil extraction production and sales license. The Company received its oil sales license in January
2016, one of the earlier LPs to be granted the license and fits well with its medical first strategy.

IPO
CanniMed completed its IPO in late December 2016, through which it raised $69 million in gross
proceeds and was the second LP in Canada to trade on the TSX. With its full license for both dried and
oil production and sales, as well as its dealers license that qualifies the Company to export product to
other countries, it provided an attractive medical cannabis focused opportunity for investors.

Facility Overview
CanniMeds Saskatoon facility is comprised of a 97,000 square foot production facility and a 96,000
square foot support infrastructure building. Within its production space, the Company has 30
individual grow chambers with a total annual capacity of 7,000 kg. CanniMed constructed its original
35,000 square foot facility between 2009 and 2011. The Company completed an expansion in 2016
that added a new state-of-the-art 62,000 square foot building.

The facility is compliant with current Good Manufacturing Practices (GMP), the same standards
and procedures that pharmaceutical companies must adhere to in North America. Management
highlights that its GMP compliant process that includes 281 points of quality control provide it with a
unique advantage within the industry. CMED does not use any pesticides or herbicides and relies on
its extensive experience gained growing medical cannabis over the past 15 years.

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Special Sits: Cannabis Sector 6/27/17

Figure 1: CanniMeds Facility

Source: Company reports

Following the reports earlier in the year with respect to the use of pesticides by some LPs, CanniMed
commissioned an independent laboratory analysis of its products to test for 56 known pesticides and
fungicides in February. The Company engaged Anandia Labs to test four lots of its proprietary strains
and each were awarded a clean certificate of analysis.

Figure 2: CanniMed cannabis drying

Source: Company reports

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CanniMeds approach to market is through a physician education approach. The Companys has a sales
staff that engages with physicians to provide education on the benefits of medical cannabis and the
CanniMed product offering. In the Companys most recent results, the number of prescribing
physicians was up 61% in H1/F17 versus H1/F16.

Product Offering
CanniMed produces and sells seven strains of dried cannabis. Consistent with its pharmaceutical
approach the Company packages its dried cannabis is containers that are compliant with ACMPR, the
FDR and the Canadian Standards Association (CSA) and are branded similar to other pharmaceutical
products. The dried cannabis is sold to patients in 10g increments of milled cannabis.

Figure 3: CanniMeds dried cannabis product packaging

Source: Company reports

Given the Companys physician and pharmaceutical approach the Company does not market its
products using street names and instead identifies its products based on the percentages of THC and
CBD it contains. This is done in an effort to better enable physicians to understand dosing and
standardize treatments for patients.

Figure 4: CanniMeds dried cannabis product portfolio

Source: Company reports

CanniMed also provides patients with three different varieties of cannabis oils. The Company was one
of the earlier LPs to receive its oil sales license from Health Canada in January 2016. CanniMed sells
oils in 60 ml increments, produced only from the cannabis flowers. The Company produces the oils
using a food-grade alcohol that is pumped through the cannabis flower, extracting the THC and CBD,
among other items. Afterwards, the alcohol and excess water evaporates and the result is a cannabis
resin.

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Special Sits: Cannabis Sector 6/27/17

Figure 5: CanniMeds oil bottling process

Source: Company reports

Figure 6: CanniMeds oil product offering

Source: Company reports

CanniMed is also developing cannabis oil gelcaps with 10 mg total phytocannabinoid dosages of its
current cannabis oil product offering. We believe that as the medical cannabis industry continues to
evolve, alternative delivery forms such as gelcaps will not only be well received by the physician
community but also the patient. It provides a much easier ability to titrate and dose the medication
and for physicians to monitor the effect it has on treating various conditions. CanniMed expects the
gelcaps to be available in the next couple of months following approval from Health Canada. We
believe that gelcaps will command a price premium to that of oils providing better margin
opportunities.

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Special Sits: Cannabis Sector 6/27/17

Figure 7: CanniMeds capsules

Source: Company reports

Facility Expansion Plan


CanniMed identified two key areas of expansion for its Saskatchewan facility as a part of its use of
proceeds from its IPO. The Company plans to spend approximately $21 million on a new 62,000 square
foot bio-secure production and processing facility. The Company is currently in the design stage with
construction expected to commence later this year. Once complete, this will add 5,000 kg of capacity,
bringing CMEDs total capacity to 12,000 kg annually.

The Company has also announced that it intends to allocate approximately $10.5 million towards the
design and construction of a new cannabinoid processing facility. The new facility is expected to take
20 months to complete and is anticipated to have capacity of 12 million 60 ml bottles of CanniMed oil
per year.

Figure 8: CanniMed Use of proceeds

Cannabis growth facility $21,000,000


Cannabis oils facility $10,500,000
Additional equipment $5,000,000
SubTerra expansion $6,000,000
Clinical trials $3,000,000
Working capital and general corporate purposes $17,000,000
Total use of proceeds $62,500,000
Source: Company reports

Licensed Orally Disolvable Wafer Technology


Earlier this year CanniMed entered into a contract to license CTTs Orally Dissolvable Thin Film Wafer
(ODF) technology. Based on the agreement, CanniMed licensed six patents related to the cannabinoid
and opioid delivery for pain management in Canada. ODF is a proprietary drug delivery mechanism
that dissolves rapidly in the mouth allowing the active ingredient to be absorbed quickly. We believe
this further emphasizes CanniMeds current focus on the medical cannabis opportunity and has the
potential to further diversify its product offering of value added products that carry higher price points
that will also be in demand by both prescribing physicians and patients. CanniMed paid US$40,000 up
front for the rights and will pay a further US$935,000 following approval from Health Canada. CTT will
also receive a royalty of 5% of gross sales.

Neal Gilmer, MBA ngilmer@haywood.com Page 40


Special Sits: Cannabis Sector 6/27/17

PharmaChoice LOI Positions CanniMed for Pharmacy Distribution


At the beginning of March 2017 CanniMed and PharmaChoice signed a letter of intent to collaborate
on pharmacist education and for the distribution, sale and marketing of medical cannabis products. As
a result of the agreement, CanniMed will be responsible for delivering education programs to
PharmaChoice pharmacists across Canada. In addition, the two companies intend to enter a definitive
agreement for the distribution of medical cannabis through PharmaChoice pharmacies once the first
province passes legislation to allow for distribution. We believe that pharmacies will become a viable
distribution method for medical cannabis products as the provinces and Health Canada continue to
evolve the distribution model. This agreement puts CanniMed in a favourable position to capitalize on
that distribution channel and we would expect that management is working with other pharmacy
chains to further expand its options.

International Exports Underway


In late March CanniMed announced that it had received two Health Canada issued export permits for
medical cannabis oils. At the same time, the Company announced that it had received initial purchase
orders from both Australia and the Cayman Islands for pharmacy dispensing. The permits included all
three of CanniMeds cannabis oil products with initial shipments of 60 bottles and 260 bottles to
Australia and Cayman Islands respectively. About six weeks later the Company announced that it had
received a follow-on order from Australia for a further 6,000 bottles of its oil, to be shipped by the end
of September 2017. In addition, the Company has signed an LOI with Creso Pharm Ltd. such that Creso
will market CanniMeds products to European governments and industry participants. The Company
has yet to announce any definitive agreements but this could help further diversify and expand
CanniMeds market presence.

Actively involved in medical cannabis research


CanniMed is actively involved in research to demonstrate the efficacy of medical cannabis in treating
various conditions. The Company is involved in clinical trials that have ongoing studies for patients
with osteoarthritis of the knee, Tourettes Syndrome and juvenile epilepsy. CanniMed has invested
over $1M into the CAPRI Trial, a phase IIA clinical trial looking into treatment of osteoarthritis of the
knee. The trial is being conducted with researchers at both McGill University Health Centre and
Dalhousie University and is expected to complete in November 2017.

U.S. Opportunity
CanniMeds subsidiary SubTerra operates a facility located in White Pine Michigan comprised of
approximately 35,000 square feet of office space including 19,000 square feet of biosecure growth
chambers under construction within a 35 square mile underground footprint. Management estimates
that the facility could be developed to support over 50,000 kg of cannabis growing capacity annually.

CanniMed has currently applied to the state of Michigan for a research license for the production of
medical cannabis and is also applying to the DEA for a license to supply medical cannabis to third
parties for clinical research purposes. In our view the real opportunity with its U.S. facility is if the DEA
reclassifies cannabis from a schedule I drug to a schedule II drug. Essentially we believe that the U.S.
opportunity is a call option that could provide significant optionality if and when there is progress on
a more lenient stance on cannabis at the Federal level of government.

Neal Gilmer, MBA ngilmer@haywood.com Page 41


Special Sits: Cannabis Sector 6/27/17

Model Assumptions and Estimates

Revenues
CanniMed currently has approximately 7,000 kg of annual production capacity, however about 40% of
that will be offline over the next few months as the Company completes upgrades on the original grow
chambers. The Companys most recent quarter of 373 kg sold implies an annual sales rate of
approximately 1,500 kg. We expect that number to grow materially over the next year, similar to the
industry growth rates of 20-30% Q/Q as the Company executes on its strategy both domestically in
Canada as well as internationally.

Figure 9: Estimated medical cannabis sales (kg)

14,000

12,000

10,000

8,000
Kgs

6,000

4,000

2,000

0
F2017E F2018E F2019E F2020E

Source: Haywood Securities estimates

We expect sales of cannabis oils and soon to be released capsules to continue to increase as a
proportion of total sales, allowing CanniMed to realize solid average prices prior to declines in dried
flower pricing. We also expect the cost per gram of production to decline modestly as the Company
expands production and overhead costs are absorbed with higher volume of product sold.

CanniMed is targeting having its grow expansion done by the end of 2018 and we expect modest
contribution from that new facility in Fiscal 2019, with the Company operating at close to its full
capacity serving the medical market in Fiscal 2020. With the Companys cost structure nearing $2.00
per gram we project EBITDA margins of 22.5% in F2018, rising to 33.8% in F2019. A summary of our
estimates is included in Figure 10.

Neal Gilmer, MBA ngilmer@haywood.com Page 42


Special Sits: Cannabis Sector 6/27/17

Figure 10: Summary of estimates

FYE (Oct-31) F2017E F2018E F2019E


Revenue ($M) $15.9 $35.2 $68.6
Gross Profit ($M) $10.3 $25.9 $50.4
Gross Margin % 64.7% 73.5% 73.5%
EBITDA ($M) $0.5 $7.9 $23.2
EBITDA margin % nmf 22.5% 33.8%
Net Income ($M) ($7.1) $5.8 $17.2
EPS ($0.31) $0.26 $0.75
Source: Haywood Securities estimates

Valuation
We value CanniMed based on a EV/EBITDA multiple of 10x based on its fully financed expansion plans,
its strong history of growing execution and its current focus on the medical side and optionality on
alternative delivery formats. We have discounted the future value by 20% to reflect the value forward
one year from now.

Figure 11: Target price valuation on F2020

EBITDA $33.2
Target EV/EBITDA Multiple 10.0
Implied EV $332.3
Net Debt ($31.7)
Implied Equity Value $364.0
Implied Equity Value discounted + Investments
$291.22
Shares Outstanding 22.7
Implied Share Price Target $12.81
Source: Haywood Securities estimates

In Figure 12 below we provide scenarios of various potential target prices using different EBITDA
margins and different multiples based on CanniMed operating at full capacity based and using a $6.00
price per gram based on the Companys focus on alternative delivery formats that carry a higher price
point.

Figure 12: Scenario analysis

EBITDA Margin
$ 11.55 25% 30% 35% 40% 45%
EV/EBITDA Target

8.0 $6.00 $7.48 $8.96 $10.44 $11.92


9.0 $6.93 $8.59 $10.26 $11.92 $13.59
10.0 $7.85 $9.70 $11.55 $13.40 $15.25
11.0 $8.78 $10.81 $12.85 $14.88 $16.92
12.0 $9.70 $11.92 $14.14 $16.36 $18.58
Source: Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 43


Special Sits: Cannabis Sector 6/27/17

Appendix A Management

Brent Zettl President, CEO & Director

Mr. Zettl co-founded the Company in 1988. In 1991, Brent became President and CEO of the
Company and, in 1992, led the development of the Companys first biosecure underground growth
chamber in Flin Flon, Manitoba. In February 2003, he founded SubTerra (and the Companys
second biosecure underground growth chamber) at White Pine, Michigan and, in 2004, acquired
the 35 square mile mine site for biopharmaceutical production. Under his leadership, both PPS
and CanniMed became the first two Licensed Producers under the MMPR in 2013. In 2016, CMED
was awarded one of the first licenses for the production and sale of medical cannabis oils. Brent
contributes to the community through his involvement as director of the Canadian Environmental
Technology Advancement Corporation West, Chair of Harvest Community Inc., a non-profit
assisting people with intellectual disabilities, and past Chair of Ag-West Bio Inc., an organization
supporting growth in the agricultural biotechnology industry. In 2014, Brent was awarded the
Ernst and Young Entrepreneur of the Year Award for the Prairies Business-to-Consumer category.
In December 2013, he was a Special Advisor to Michigan Legislature in respect of Senate Bill 660,
which created a new pharmaceutical grade cannabis program to operate in conjunction with
the States existing medical cannabis program. Brent received a Bachelor of Science & Agriculture
degree with distinction from the University of Saskatchewan.

John L. Knowles CFO and Director

Mr. Knowles has over 30 years of experience in Canadian and international resource companies
including several years in Ghana, West Africa. From 2007 to 2016, he was President and CEO of
LiCo Energy Metals Inc. (formerly Wildcat Exploration Ltd.), a mineral exploration company. He
has served as a senior officer of several publicly listed companies, including Aur Resources Inc.,
where he was Executive Vice President and CFO, and Hudbay Minerals Inc., where he was Vice
President and CFO. Mr. Knowles has been a Director of Roxgold Inc. since September 2012 and
was previously on the boards of Hudbay Minerals Inc. from March 2009 to May 2015 and LiCo
Energy Metals Inc. from June 2007 to September 2016, Augyva Mining Resources Inc. from August
2011 to April 2013 and Tanzania Minerals Corp. from March 2011 to April 2013. He is a Chartered
Professional Accountant and holds a Bachelor of Commerce from Queens University.

Larry Holbrook - Chief Research Officer

Dr. Holbrook is a senior research scientist and currently Chief Research Officer of the Company,
with expertise in cellular and basic molecular biology experimentation and more than 35 years of
experience in research and application related to the genetic modification of crop plants with
diverse agricultural biotechnology experience in both government and industry. His extensive
plant research includes tissue culture, plant breeding, genetic transformation, microscopy,
phytohormone and senescence biochemistry. Dr. Holbrook was an associate adjunct professor at
the University of Calgary, Department of Biological Sciences from 1997 to 2003 and has authored
or co-authored nearly 40 publications, reviews or invited papers in international journals and
books. His experience includes leadership roles in four agricultural biotechnology start-up
companies in Canada and as a committee member on a North American industry group, BIO, he
assisted in developing industry points to consider in white paper proposals for producing
plantmade pharmaceuticals (PMPs). He has worked in the medical marijuana field for the past 13
years at the Company leading research developments plus associations with clinical studies
initiatives and the QA/QC department functions. Dr. Holbrook holds B.Sc., M.Sc. and a Ph.D. in
Neuropharmacology and Developmental Biology from the University of Toronto and postdoctoral
research at the UCLA School of Medicine, Brain Research Institute..

Neal Gilmer, MBA ngilmer@haywood.com Page 44


Special Sits: Cannabis Sector 6/27/17

Gulwant Bajwa Business Development and Regulatory Affairs

Mr. Bajwa joined the Company in December 2015 as Manager, Government Relations and
International Business Development. Prior to joining the Company, he was employed with Health
Canada as a Senior Program Manager in the former Bureau of Medical Cannabis between January
2011 and September 2014, where he managed the Production and Authorizations and Licensing
Divisions. Gulwant was responsible for streamlining the operations of these divisions to restore
service standards. Gulwant was awarded the Queens Diamond Jubilee Medal, Deputy Minister
Award for Creativity and Innovation and two Assistant Deputy Minister Awards for his
achievements working in these divisions. Gulwant also worked between 2003 and 2010 as a Policy
Analyst in the Intellectual Property and Technology Transfer Office of Health Canada. Before
joining the federal public service, Gulwant worked in the private sector, with his last position being
Director of Operations at JDS Uniphase Corporation between 1998 and 2003. Gulwant holds a
Bachelors degree in Social Sciences with specialization in Public Policy and Public Management
and Political Science from University of Ottawa and is currently working towards completing his
Masters of Business Administration.

Neal Gilmer, MBA ngilmer@haywood.com Page 45


Special Sits: Cannabis Sector 6/27/17

Appendix B Independent Directors

Donald Ching

Mr. Ching has been a retired businessman since December 2007 and currently serves as a Director
of Golden Opportunities Fund Inc. He was President and CEO of Areva Resources Canada Inc., one
of the worlds leading uranium exploration, mining and milling companies, from 2005 to 2007, and
President and CEO of Saskatchewan Telecommunications Holding Corporation (SaskTel) from
1996 to 2004. Prior to this, Mr. Ching practiced law in Saskatoon, Saskatchewan for 16 years with
the former firm Walker, Romanow and Ching.

Doug Banzet

Mr. Banzet is the CFO and Director of Golden Opportunities Fund Inc. and Chief Operating Officer
and Director of Westcap Management Ltd. From March 1993 to June 1995, Mr. Banzet was an
independent management consultant to a variety of small and medium-sized Saskatchewan
businesses. Prior to March 1993, he held various senior management positions with several of
large Canadian trust companies. Mr. Banzet has over 40 years of experience in the financial service
and asset management fields. His experience includes investment valuations of both private and
public businesses, feasibility analysis, risk assessment, commercial loan financing, administration,
budgeting, planning and management of large commercial loan portfolios. Mr. Banzet also serves
as a Director of a number of private Canadian companies involved in life sciences, oil and gas
exploration, biotech, value added processing, health care and service industries

Rob Duguid

Mr. Duguid is a partner in PFM Capital entities and holds positions of Vice-President, Investments
and CFO for the general partner of Prairie Ventures Fund Limited Partnership. He is the Vice
President, CFO and Corporate Secretary of SaskWorks Venture Fund Inc., a Director of
StorageVault Canada Inc., Vice President Investments, Corporate Secretary and CFO of
Saskatchewan Entrepreneurial Fund and of the general partner of Apex Investment Fund.

Marianne Greer

Marianne Greer, Ph.D., is an independent pharmacist consultant. Since graduating with a Bachelor
of Science in Pharmacy in 1975, she has practiced the profession in the hospital, community,
academic and pharmaceutical industry settings. Dr. Greer served as the Director of the
Saskatchewan Drug Research Institute, an affiliate of the University of Saskatchewan, where she
led a team dedicated to facilitating pharmaceutical research in the province. Her pharmaceutical
industry experience was as a Director of Global Health Economics, employed by three major
international pharmaceutical companies.

Richard Hoyt
Mr. Hoyt is the Vice President of Business Development and Licensing at Mallinckrodt PLC, a
leading provider of controlled substances and specialty pharmaceuticals. During his 40-year career
at Mallinckrodt PLC, in addition to his current role, Mr. Hoyt has also served as Vice President of
Asset and Portfolio Management, Vice President and General Manager of New Products and
Technology and Vice President of Active Pharmaceutical Ingredient Commercial Operations. His
professional experiences include corporate strategy, financial and strategic assessment of
acquisition opportunities, leadership of research and development and commercial management.
Outside of his role at Mallinckrodt PLC, Mr. Hoyt serves on a number of community boards and
was a Director of the Biotechnology Research and Development Corporation.
Neal Gilmer, MBA ngilmer@haywood.com Page 46
Special Sits: Cannabis Sector 6/27/17

Dwayne L. Lashyn

Mr. Lashyn has been a Managing Director and Vice President of Quantico Capital Corp., a private
investment company, from June 1992 to date. Prior to that, Mr. Dwayne Lashyn, a Chartered
Professional Accountant, held positions with large public accounting firms with responsibilities in
the audit, tax, receivership and valuation areas. Mr. Lashyn has over 25 years of experience in
public and private debt and equity markets as well as principal investments in real estate and
associated activities. His experience includes the areas of asset management, business valuations,
corporate reorganizations and mergers, debt and equity structuring, property acquisitions,
dispositions and management as well as personal and corporate tax. Mr. Lashyn also serves and
has served on a number of not-for-profit boards and private boards and committees in the real
estate, biotech and oil and gas exploration industries.

Dr. Bruce F. Mackler

Dr. Bruce Mackler is an investor in biomedical ventures and consultant in FDA, USDA and EPA
regulatory processes. He has been in management and Board positions in several Biomedical
Companies. Previously, Dr. Mackler, who holds a M.S., and Ph.D. in Microbiology/Immunology,
held academic research positions and over 100 publications, before becoming an attorney
practicing in the US regulatory processes and was Chairman of the Regulatory Practices at an
international law firm before retiring. He has been a successful entrepreneur starting several
pharmaceutical companies and raising funds and continues on the boards of several biomedical
companies. Dr. Mackler continues to meet with US, Canadian and European regulatory authorities
to navigate new products through the regulatory processes. Dr. Mackler is currently on the
National Heart, Blood and Lung Institutes Small Business Innovation Research and Small Business
Technology Transfer review committee, which enables small businesses to engage in research and
development on innovative and commercially promising products.

Dr. Brandon J. Price

Dr. Price has more than 30 years of experience in the biopharmaceutical industry. Recently, he co-
founded Biogenin, a Mexican company that licenses, develops and registers human and veterinary
products for Latin American markets. He is also the Ben J. Rogers Chair in Entrepreneurism of the
College of Business at Lamar University (Beaumont, Texas). Dr. Price has been CEO of five
biotechnology start-ups and has held senior management positions at Cardinal Health and Ortho
Diagnostic Systems (a Johnson & Johnson company). He has served as Board Chair of the Virginia
Biotechnology Association and Marylands counterpart, MdBIO. He currently sits on the board of
directors of four companies and chairs the Advisory Board for the Professional Science
Management Program in Bioinformatics at Virginia Commonwealth University (Richmond,
Virginia). He holds the B.S. and Ph.D. degrees in Biophysics from the University of Michigan in Ann
Arbor and is the author of more than 50 articles in the scientific and business literature. Dr. Price
served as CEO of GalenBio, Inc. from 2007 to 2012 and was a principle at Falcon Ridge Associates,
Inc. from 2005 to 2013. He has been President and Director of Biogenin SAPI de CV since 2012 and
has and has been a Director and Executive Vice president of Nascent Biotech, Inc. since 2014.

Neal Gilmer, MBA ngilmer@haywood.com Page 47


Special Sits: Cannabis Sector 6/27/17

Risks

Significant Investment Risks


The investment to which this report relates carries various risks which are reflected in our Overall Risk
Rating. We consider the following to be the most significant of these investment risks:

Reliance on License CanniMed is reliant on its license from Health Canada to grow, cultivate and
process cannabis flower and oils and sell it to registered patients. Any change to the overall
framework and regulations could be positive or negative to CanniMeds business opportunities
both in Canada and internationally.

Facility risk CanniMed is dependent on its facility infrastructure to grow, cultivate and process
cannabis for eventual use by patients across Canada. Anything that may impact the facilities that
it operates would impact its ability to grow and sell to its patient base.

Competition The medical cannabis market in Canada has strong competition that are all
pursuing the medical patient within Canada. As Health Canada continues to approve and expand
the number of licensed producers it could increase competition within the industry.

Execution Risk CanniMed needs to execute on its oil extraction lab as well as its new growing
facility. As is inherent in any expansion or capital improvement project it is susceptible to
execution risk to complete on time and on budget.

For further information on our Risk Rating please visit: http://haywood.com/what-we-


offer/research/research-policy

Neal Gilmer, MBA ngilmer@haywood.com Page 48


Special Sits: Cannabis Sector 6/27/17

Harvest One (HVST-V, $0.50)


Rating BUY
Target Price $1.60
Return 296%
Overall Risk Rating Very High Source: Harvest One

A Two Pronged Approach International Medical with Canadian Rec Focus


Company Profile Event We are initiating coverage on Harvest One with a Buy rating and target price
Website www.harvestone.com
of $1.60. We believe that Harvest One provides a unique investment opportunity with
CEO Andreas Gedeon
About the Company Harvest One is a both a licensed producer of cannabis in Canada and an emerging medical focused
cannabis company with its United subsidiary Satipharm with a CBD offering in Europe and Australia.
Greeneries subsidiary operating a licensed
producer under the ACMPR and its medical Ramping up capacity Harvest Ones subsidiary, United Greeneries, is ramping up
subsidiary Satipharm targeting the medical production at its Duncan B.C. based facility. The Company has current capacity of
cannabis market in Europe and approximately 1,000 kg and is well on its way to scaling up to full production. The
internationally.. Company has completed two harvests earlier this year and is awaiting its license
to sell cannabis from Health Canada, which we believe could be a near-term event
Company Data
52-Week High/Low $1.04/$0.50 and potential catalyst.

Dividend Yield NA Expansion Plans underway United Greeneries has a three phase expansion plan to
Shares O/S 89.0M (basic)/ take production towards 50,000 kg per year. The first phase is in progress and
105.8M (F/D) expected to complete late 2017 or early 2018 in our view. This will add a further
Market Capitalization $57.1M 7,500 kg of annual capacity through hybrid greenhouse that the Company plans to
Cash $19.5M construct. This should position the Company favourably for the upcoming
Debt $1.4M
recreational market that is expected to commence in mid-2018.
Enterprise Value $39.0M
Daily Volume xx
Medical CBD offering could provide optionality Satipharm is Harvest Ones
Currency C$ unless noted
Switzerland based medical cannabis subsidiary that sells CBD pills in Europe and
Australia at the current time. We believe that this division of the Company could
Haywood Estimates turn out to be a call option as we believe at the current valuation that most
FYE Jun-30 investors have not factored this into their outlook. Given it is a new product in a
2018E 2019E new market it is very difficult to gain confidence of its potential market share.
Revenue C$M 4.6 39.7 However the CBD market is projected to grow by 700% by 2020 and Satipharms
EBITDA C$M (4.7) 7.6 GelPell has an opportunity to capture a share of that market.
EPS C$ (0.05) 0.05
Attractive valuation with majority holder Harvest One currently trades at a
market cap of $X and an EV of $X M. In our opinion since trading commenced in
late April there has been a general downward momentum across the cannabis
space as a whole but we feel that when the market turns again, HVST has the
potential to re-rate significantly and trade more in-line with some of its peers. MMJ
Phytotech (ASX:MMJ, not rated) is a majority shareholder with 53.3 M shares or
Price Performance approximately 53% on a fully diluted basis.

Valuation We value Harvest One based on an 7x EV/EBITDA multiple. We have


used a lower multiple to reflect some of the execution risk in the story with respect to
the construction build out and potential future financing required for Phase II
expansion and beyond. We have also used a lower multiple due to what we consider a
holding company discount, with MMJ Phytotech owning 53.3M shares outstanding.
Risks Harvest One is subject to execution risk on its facility expansion plan and
uncertainty regarding the eventual market size and/or opportunity for its GelPell.
Source: Capital IQ and Haywood Securities

Neal Gilmer, MBA ngilmer@haywood.com Page 49


Special Sits: Cannabis Sector 6/27/17

Target Price, C$ $1.60 Shares O/S, million 89.1


Harvest One Capital Inc. Current Price, C$ $0.50 Shares F/D, million 105.8
Rating: BUY Return, % 223% Market Capitalization, C$M $52.3
52-Week High / Low, C$ $1.04 / $0.50 Company CEO Andreas Gedeon
Metric: EV/EBITDA Daily Volume (100-day avg) 297,176 Company Web Site www.harvestone.com

Balance Sheet and Capitalization FQ3/17 Peer-Group Comparables


C$M 2017E 2018E 2017E 2018E
Market Capitalization $ 52.35 Share Price EV/Rev EV/Rev EV/EBITDA EV/EBITDA
Current Cash $ 21.47 Aphria C$5.44 31.7x 16.4x 163.0x 52.4x
Working Capital $ 21.23 Aurora Cannabis Inc. C$2.17 28.9x 5.4x 561.3x 15.0x
Total Debt $ 1.50 Canopy Growth Corporation C$8.46 31.4x 10.7x -- 67.3x
Enterprise Value (EV) $ 32 Cronos Group Inc. C$1.73 28.3x 4.5x -- 18.3x
Emblem Corp. C$1.63 17.5x 3.7x -- --
Financial Forecast (FYE Jun-30) OrganiGram Holdings Inc. C$2.24 19.7x 4.7x -- 15.9x
2018E 2019E 2020E Supreme Pharmaceuticals Inc. C$1.29 -- 10.2x -- 98.0x
Kg of cannabis sold 700 6,150 14,000
Avg. Selling Price per gram $5.00 $5.80 $6.01 Group Average 26.2x 7.9x 362.1x 44.5x
Revenue $4.6 $39.7 $94.1 Group Average (excluding high/low) 27.1x 7.1x NA 38.5x
Production Costs $2.1 $13.0 $24.3 Harvest One C$0.50 7.0x 0.8x 6.9x 4.3x
Gross Profit $2.5 $26.7 $69.9
Gross Margin 55% 67% 74% Major Shareholders
Operating Expenses $7 $20 $42 O/S (millions) O/S (%)
Adj EBITDA ($4.7) $7.6 $29.7 MMJ Phytotech Limited 53.3 60%
Income before taxes ($5) $6 $28 Vantage Asset Management 9.2 10%
Taxes $0 $0 $7 Chopra, Anne Bhanu 0.3 0%
Net income ($5.0) $6.1 $20.5 Total 62.9 70%
Shares o/s 89.1 102.4 102.4
Shares o/s 105.8 119.1 119.1 Medical Cannabis - Satipharm ($M)

EPS ($0.05) $0.05 $0.17 12


10
Valuation Ratios
2017E 2018E 2019E 8
C$(M)
EV / Revenue 7.0x 0.8x 0.3x 6
EV / EBITDA - 4.3x 1.1x 4
2
Growth Analysis
Revenue nmf 762% 137% 0
EBITDA nmf nmf 112% F2018E F2019E F2020E
Net Income nmf nmf nmf

Margin Analysis Recreational Cannabis (kg)


Gross Margin 55% 67% 74%
EBITDA nmf 19% 32% 16,000
Net Income nmf 15% 22% 14,000
12,000
10,000
Kgs

8,000
6,000
4,000
2,000
0
F2018E F2019E F2020E

Source: Capital IQ, Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 50


Special Sits: Cannabis Sector 6/27/17

Investment Thesis

Harvest One is pursuing both the medical and recreational cannabis market through its two
subsidiaries, United Greeneries and Satipharm. United Greeneries has its license to cultivate under the
ACMPR and we believe that it will be granted its license to sell in the near-term, providing an upcoming
catalyst for investors. United Greeneries is Harvest Ones horticultural arm and recreational brand.
The Companys Satipharm subsidiary is focused on the development and manufacturing of cannabis
health products and is Harvest Ones medical brand. We believe Harvest One provides a unique
opportunity as a Canadian LP focused on the recreational market as well as a medical brand in the CBD
market.

United Greeneries is well positioned to expand production with a fully financed expansion plan that
will bring the Companys capacity to 8,500 kg before the recreational market is expected to become
legal. The Company currently has close to 1,000 kg of current capacity having received its license to
cultivate approximately one year ago. We believe that Harvest One could receive its sales license from
Health Canada in the near-term after it completed two harvests earlier this year.

We believe that the Satipharm business provides significant optionality within the medical market.
According to a report in the Hemp Business Journal, the CBD market is projected to grow by 700% by
2020. In our view investors have ascribed minimal value to this aspect of the business given that it is a
relatively new product in an unproven market so far. However we believe that the market has
significant growth opportunity and should the Company be successful at capturing market share that
the Satipharm business could contribute in a meaningful way over the next few years.

We believe that Harvest One presents good value at the current level with a fully financed expansion
plan, future expansion opportunities to bring production capacity towards 50,000 kg and a medical
brand that has the potential to capture the growing CBD market.

Neal Gilmer, MBA ngilmer@haywood.com Page 51


Special Sits: Cannabis Sector 6/27/17

Company Overview

Harvest One is the result of a share exchange agreement that resulted in Harvest One acquiring United
Greeneries Holdings Ltd. And Satipharm AG from MMJ PhytoTech Limited. Harvest One intends to
supply the Canadian and International cannabis markets through the two operating brands it acquired.

United Greeneries is a Canadian ACMPR licensed producer and will be focused primarily on the
recreational market in Canada. The Companys Duncan B.C. facility currently has its cultivation license
and expects its distribution license in Q2/17. It also owns a facility in Lucky Lake, Saskatchewan that is
currently in the ACMPR security clearance stage.

Satipharm is an international medical cannabis brand that is focused on the development and
manufacturing of cannabis based products and will serve as Harvest Ones medical and health brand.
Satipharm is based in Cham Switzerland with a focus on legally accessible cannabidiol (CBD). Satipharm
currently has the worldwide exclusive rights to the Gelpell Microgel for all cannabis applications.

Qualifying Transaction
Harvest One acquired United Greeneries and Satipharm pursuant to a share exchange agreement with
MMJ PhytoTech Limited. As a part of the agreement, Harvest One issued 53,333,333 post
consolidation shares at an ascribed price of $0.75 to MMJ PhytoTech. In addition, Harvest One paid
$2M in cash bringing the total purchase price to approximately $42M.

Facility Overview
United Greeneries has two growing facilities currently, a licensed producer in Duncan B.C. and an
applicant in the ACMPR located in Lucky Lake Saskatchewan.

The Duncan facility is approximately 16,000 square feet, with approximately 10,000 square feet of
cultivation area. The facility includes a level 8 security vault as well as a full in-house QA/QC laboratory.
United Greeneries recently acquired the facility for a cash purchase price of $2.8M. The facility is
adjacent to 13 acres of land. The acquisition was the first step in the Company executing on its Phase
1 expansion plans. Health Canada granted United Greeneries a license to cultivate on June 30, 2016.

Neal Gilmer, MBA ngilmer@haywood.com Page 52


Special Sits: Cannabis Sector 6/27/17

Figure 1: United Greeneries Duncan Facility

Source: Company reports

Subsequent to receiving its license to cultivate, United Greeneries worked with Health Canada for
approval to import 1kg of cannabis seeds. The Company received approval from Health Canada and
the Canadian Food Inspection Agency on November 28, 2016. This allowed United Greeneries to begin
cultivation activities at the Duncan facility in December of 2016. There has been a lot of discussion
within the industry about the lack of starting materials for new licensed producers. Under Health
Canadas regulations only those LPs that had their license prior to March 31, 2014 were able to bring
starting genetics into their facility. This has given many of those LPs a first mover advantage and has
forced LPs to source genetics from other LPs, often limiting the strain selection and quality of initial
crops. We believe this was an important accomplishment for United Greeneries that provides them
with 33 strains.

Neal Gilmer, MBA ngilmer@haywood.com Page 53


Special Sits: Cannabis Sector 6/27/17

Figure 2: United Greeneries automated fertilizer system

Source: Company reports

The current Duncan facility has annual capacity of approximately 1,000kg of dried flower. The
Company began cultivation in mid-December 2016 and has completed two harvest to date. United
Greeneries is now working with Health Canada to receive its distribution license, which we expect
could be granted in the near-term and has the potential to be a catalyst for the Companys valuation.
Management has indicated that it may consider selling its initial product into the wholesale market
rather than develop a costly patient acquisition strategy for the medical market. We believe this would
be a prudent strategy for the Company to recognize some near-term revenues without having to
deploy significant costs to develop its sales force.

Duncan Facility Expansion Plan


Management currently anticipates a three phase greenhouse expansion for the Duncan facility that
should bring total capacity towards 50,000kg annually when complete. At the current time, the capex
estimate for all three phases is $51.5M. Initial estimate for completion of all three phases is end of
2019. Figure 3 outlines the Companys three phase expansion.

Neal Gilmer, MBA ngilmer@haywood.com Page 54


Special Sits: Cannabis Sector 6/27/17

Figure 3: Aerial view of United Greeneries expansion plans

Source: Company reports

Phase 1 of the expansion is expected to add approximately 7,500 kg of capacity annually. United
Greeneries is planning to build state-of-the-art greenhouses with supplemental lighting to enhance
crop yields. The first phase is expected to not only add 3 acres of greenhouse growing infrastructure,
but also 2 acres of office infrastructure and parking as well as supporting technical infrastructure for
the entire three phase expansion. Estimated capex for the facility is $9M and is fully funded through
its recent financing. Harvest One expects to complete the first phase in approximately 12 months, with
original expectations for the end of 2017, however more realistic to assume late Q1/18 in our view.

The second phase of the expansion is expected to take another 12 months to complete with target
completion by the end of 2018. This phase will add a further 7 acres of greenhouse production and
add 17,500 kg of capacity at an estimated capex of $17.5M.

Phase III is projected to be completed by the end of 2019, again with an estimated 12 months to
completion. Management plans to add a further 10 acres of greenhouse production with an estimated
capex of $25M.

Figure 4: Details of three phase expansion


Expected Cost Additional Production Expected
Phase ($M) Capacity (kg/y) Gross Area (acres) Completion
I $9.0 7,500 3 H1/18
II $17.5 17,500 7 YE18
III $25.0 25,000 10 YE19
Source: Company reports, Haywood Securities

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Special Sits: Cannabis Sector 6/27/17

Lucky Lake Facility


Harvest One owns a facility in Lucky Lake Saskatchewan that is in the process of applying for a license
under Health Canadas ACMPR. The current facility is 62,000 square feet with approximately 40,000
square feet of cultivation space with 30 foot ceilings. The facility is located on an 18 acre site that
would provide ample opportunity for future expansion. The Company estimates that the current
facility would have capacity of about 12,000kg of dried cannabis annually. It is currently in the ACMPR
security clearance stage. Harvest One has entered into an agreement with Cannabis Wheaton (TSXV:
CBW, not rated) such that CBW will provide all the necessary funding to complete construction of the
facility as well as the necessary working capital to ramp up production. In return, CBW will received
49% of the equity of the subsidiary that owns the Lucky Lake facility as well as 40% of the production
yield from at a price per gram that is equal to cost of production + 10%.

Additional Site Agreement


In addition to the previously mentioned agreement with CBW, Harvest One has also entered into an
agreement with CBW to co-operatively source an expansion site that would be developed as a wholly
owned subsidiary of United Greeneries. Upon agreement between the parties surrounding the site
and construction plan, CBW will provide all of the funding to complete construction of the facility in
return for a 49% equity stake in the new subsidiary and 50% of the production yield + 10%. The new
site and facility will have a minimum of 60,000 square feet of cultivation space.

Satipharm
Satipharm is a subsidiary of Harvest One as a result of the recent transaction with MMJ PhytoTech.
Satipharm is focused on the development and distribution of medical cannabis with a focus on legally
accessible cannabidiol (CBD). Based in Cham Switzerland, Satipharm originated the CBD Gellpel
Microgel Capsules. The capsules are produced according to Swiss GMP certified production standards.

Currently Satipharm offers two GelPell capsules, a 10mg capsule and a 50mg capsule. The products
are intended as a form of cannabidiol (CBD) dietary supplement. The Company states that the products
are developed with an enhanced bioavailability helping the body absorb the ingredient. However,
given the fact that there has been no clinical research on the product, the Company is limited from
making any specific claims as the benefits. As a result, that is why Satipharm has positioned the product
as a dietary supplement in Germany, Poland and the UK according to the Euopean Union regulations.
The Companys GelPell products are now available on Amazon Prime in Europe which should help drive
awareness and adoption of the product.

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Special Sits: Cannabis Sector 6/27/17

Figure 5: Amazon Prime GelPell

Source: Amazon

We believe that the CBD market will become a significant market over the course of the next few years.
Satipharms Gelpell capsule could prove to provide a call option on this potential market. In our view
many investors have not taken the time to understand the potential opportunity of the offering and
continue to look at Harvest One as a Canadian LP. While sales of Gelpell have been very modest to-
date, we believe the Company is preparing a significant marketing campaign to drive sales throughout
the EU.

In addition, the Company recently announced that its first shipment of Gelpell CBD capsules to
Australia had been received by its distribution partner there. The capsules are approved to be used by
prescribing physicians under the Federal and State legislation in Australia. Satipharm is also working
with Health Canada in an effort to have the capsule approved for use in Canada.

Recent Financing
Harvest One recently completed an equity financing that raised gross proceeds of $25 million. The
Company issued 33,334,000 subscription receipts at a unit price of $0.75 per sub receipt. Each unit
was for 1 common share and a share purchase warrant with a strike of $1.00 per share, with a three
year term. The primary use of proceeds for the raise was the cash consideration of $2M to MMJ
Phytotech, the purchase of the Duncan facility and the phase 1 expansion of the Duncan facility. A list
of the use of proceeds is included in Figure 6.

Figure 6: Use of proceeds


MMJ Cash Consideration $2,000,000
Purchase of Duncan Facility $3,200,000
Acquisition of Genetic Material $1,350,000
Duncan Phase 1 Expansion $9,000,000
General Corporate and Working capital $9,450,000
Total use of proceeds $25,000,000
Source: Company reports, Haywood Securities

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Special Sits: Cannabis Sector 6/27/17

Model Assumptions and Estimates

Revenues
Management of Harvest One has indicated that it intends to sell its initial production from the Duncan
facility in the wholesale market. Rather than ramping up a patient acquisition strategy and sales force,
we believe that this makes sense to help monetize the initial harvests from the Duncan facility. We
believe that the supply situation in the market remains relatively tight currently. With a June 30, fiscal
year, this will essentially be the medical sales from the Duncan facility for Harvest One in Fiscal 2018.
Following that, we are assuming that the government is successful in implementing the recreational
framework for July 1, 2018. As a result, we forecast that sales from the Duncan facility will be targeted
towards the recreational, adult-use market. We expect that management is exploring its options with
respect to a potential retail strategy as more clarity is provided by various provincial distribution
models going forward. The company is currently evaluating its extraction options for the production
of oils and other potential products authorized for sale in the recreational market. In speaking with
management, we expect United Greeneries to have its oil production capabilities in place by July 1,
2018.

Figure 7: Estimated cannabis sales (kg)

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0
F2018E F2019E F2020E

Source: Haywood Securities estimates

We forecast United Greeneries to sell its product in F2018 in the wholesale market for $5 per gram. In
F2019, we expect similar price for dried cannabis as we assume a wholesale market with higher pricing
of oil based products. Our average sales price in F2019 is $5.80, increasing to $6.01 in F2019 with a
greater proportion of sales of oil based products and $5.97 in F2020.

We believe the Harvest Ones subsidiary Satipharm could provide significant optionality to the
Companys financial results. The Companys Gelpell product is essentially new to the market and at
this point it is too early to measure how well it will be received. However, based on the expected
adoption of CBD related products we believe that the Company should see decent adoption of the
product both in the EU region as well as Australia, not to mention other jurisdictions like Canada that
it is working on. Management is expecting gradual uptake and sales for its products with about 0.75
million Euros in its Fiscal 2018 or approximately $1.1M. We forecast that to increase towards $4 million
in F2019 and $10M in F2020.

Neal Gilmer, MBA ngilmer@haywood.com Page 58


Special Sits: Cannabis Sector 6/27/17

Figure 8: Satipharm revenues

12

10

8
C$(M)

0
F2018E F2019E F2020E

Source: Haywood Securities estimates

Overall, we forecast a fairly modest F2018 as the Company ramps up production and is focused on its
Phase 1 expansion plans. We estimate total revenue of $4.6M with an EBITDA loss of $3.9M. For HVSTs
fiscal 2019, we anticipate growth driven by penetration in the recreational market to bring revenues
to almost $16M and an EBITDA loss of $1.2M due to increased sales and marketing related costs to
establish its presence in the recreational market. For F2020 we forecast revenues of $94.1M and
EBITDA of $29.7M. A summary of our estimates is included in Figure 9.

Figure 9: Summary of estimates

FYE (Jun-30) F2018E F2019E F2020E


Revenue ($M) $4.6 $39.7 $94.1
Gross Profit ($M) $2.5 $26.7 $69.9
Gross Margin % 54.9% 67.2% 74.2%
EBITDA ($M) ($3.9) $8.2 $29.7
EBITDA margin % nmf 20.6% 31.5%
Net Income ($M) ($4.2) $6.8 $20.5
EPS ($0.04) $0.06 $0.19
Source: Haywood Securities estimates

Valuation
Our valuation is based on a 7x EV/EBITDA multiple. We have used a lower multiple to reflect some of
the execution risk in the story with respect to the construction build out and potential future financing
required for Phase II expansion and beyond. We have also used a lower multiple due to what we
consider a holding company discount, with MMJ Phytotech owning 53.3M shares outstanding or close
to 53% of the fully diluted shares outstanding. We have assumed for the purpose of our model that
the Company will raise $20M at a price of $1.50 per share in about a years time to finance Phase II.
We recognize that the Company may be able to attain different financing alternatives or at a different
price, but use this to reflect the potential dilution from future capital needs.

Neal Gilmer, MBA ngilmer@haywood.com Page 59


Special Sits: Cannabis Sector 6/27/17

Figure 10: Target price valuation on F2020


EBITDA $29.7
Target EV/EBITDA Multiple 7.0
Implied EV $208.2
Net Debt ($33.7)
Implied Equity Value $241.9
Implied Equity Value discounted + Investments
$193.51
Shares Outstanding 119.1
Implied Share Price Target $1.62
Source: Haywood Securities estimates

In Figure 11 below we provide scenarios of various potential target prices using different EBITDA
margins and different multiples based on Harvest One operating at full capacity based on Phase II
expansion completed with a $5.00 wholesale price assumption, consistent with our other scenarios.
We highlight that Harvest One has further expansion plans with its Phase III plans but we have not
assumed any potential financing for that alternative and therefore at this time have left it out of our
scenario analysis. We do highlight that there is potential upside based on the agreements with
Cannabis Wheaton but given the early stage and uncertainly around timing and execution, we have
left them out of our analysis for the time being.

Figure 11: Scenario analysis

EBITDA Margin
EV/EBITDA Target

$ 2.29 25% 30% 35% 40% 45%


6.0 $1.29 $1.61 $1.92 $2.24 $2.55
7.0 $1.55 $1.92 $2.29 $2.66 $3.02
8.0 $1.82 $2.24 $2.66 $3.08 $3.50
9.0 $2.08 $2.55 $3.02 $3.50 $3.97
10.0 $2.34 $2.87 $3.39 $3.92 $4.44
Source: Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 60


Special Sits: Cannabis Sector 6/27/17

Appendix A Management

Andreas Gedeon CEO & Director

Andreas Gedeon, a former Officer in the German Navy, is an experienced entrepreneur and
businessman with proven expertise in largescale and HR intensive projects. His previous areas of
business include media production and commercial construction. As the founder of United
Greeneries and Satipharm, Gedeon became Managing Director of MMJ Phytotech at time of the
merger with Phytotech Therapeutics in July 2015. He currently oversees the global expansion
strategy of the MMJ group.

Daniella Vaschi Chief of Staff and CEO of United Greeneries

Daniela Vaschi is an Organizational Psychologist from the European Union with more than ten
years of multidisciplinary experience, including over 6 years at the corporate level within global
operations. She has a successful background in developing business structures from ground zero,
as well as rebuilding infrastructure after mergers and acquisitions, downsizing and turnarounds.
Her past work experience includes a track record of leading complex improvement initiatives in
the automotive industry. She is an active member of the International Organization Development
Association, performing an ongoing meta-analytic research on Emotional Intelligence.

Graham Whitmarsh Chief Operating Officer

Mr. Whitmarsh has experience in finance, capital and deal structure, health care, aviation, and
technology at the CEO level in both the public and private sectors. Mr. Whitmarsh has held two of
the most senior positions in the government of British Columbia: deputy minister of health, and
deputy minister of finance and secretary to treasury board. He also brings experience within the
medical marijuana industry as CEO for a start-up, providing initial leadership on behalf of a group
of investors and consulting to the industry in Canada and the United States. Mr. Whitmarsh's
previous experience includes president and CEO of Mercury Scheduling Systems and holds a BSc
(honours) in engineering from the University of Leeds.

Nick Matchev Chief Technology Officer

Mr. Maltchev is a global executive with a passion for results and building great teams. He brings a
mix of strategic thinking and deep technical knowledge and over 25 years of technology
experience. He has been involved with the industry since 2004 and was an integral part of the
Advanced Nutrients management team over a period of 12 years, holding several positions
including information technology manager, COO and general manager. Mr. Maltchev holds a BBA
degree, as well as other designations in project management, cybersecurity and computer science.
He is also currently in the process of finishing an MBA in management information systems.

Lisa Dea Chief Financial Officer

Ms. Dea has over 20 years of experience in the finance, securities and accounting fields. Ms. Dea
has been the CFO of several TSX and TSX-V listed companies where she was responsible for
corporate strategy, all aspects of finance and legal, debt and capital market activities, internal and
external public reporting, financial controls, processes and corporate governance. She has been
instrumental in helping several companies grow from the development stage to large-scale
commercial operations. Prior to her time in industry, Lisa spent eleven years at Deloitte & Touche
LLP, achieving the position of Senior Manager. Ms. Dea obtained her Chartered Accountants
designation in 1997 and also holds a B.Comm from the University of British Columbia.

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Special Sits: Cannabis Sector 6/27/17

Catherine Harvey - Chief Regulatory Officer

Catherine Harvey is a highly experienced pharmaceutical industry executive, with an extensive


corporate background, having worked for multiple pharmaceutical organizations both
domestically and overseas. Most recently, she held executive leadership positions including
Director of Business Development and Corporate Affairs at Mundipharma Pty Limited and
Business Development Manager at Norwegian Pharmaceutical company, Nycomed.

Stanislav Sologubov CEO Satipharm

Stanislav Sologubov is an international sales and marketing executive with more than 15 years
experience in top global pharmaceutical and consumer goods companies including Johnson &
Johnson, Bausch + Lomb and British American Tobacco. He has a wide range of experience in
building and expanding international businesses, growing sales and achieving market leadership
in more than 50 countries. He holds a PhD in Economics from the State Technical University of
Russia and also studied in the top international business schools like IMD, Switzerland and Open
University, UK.

Colin Clancy VP Investor Relations

Mr. Clancy brings over a decade of international experience through a variety of financial and
business development roles. Most recently he was an integral member of the national Canadian
medical marijuana team in Deloitte. Back in 2014 Colin was one of the first practitioners in Deloitte
to focus on medical marijuana industry and led the marketplace activities in Western Canada.
Deloitte is now the leading professional services provider in this space representing the majority
of the public licensed producers. Prior to Deloitte, Colin was an Investor Relations Manger for
several mining companies in Vancouver were he managed all corporate communication and
investor relations activities for the companies. Prior to moving to Canada he worked within
banking in both Ireland and Australia. Mr. Clancy also holds a degree in finance from the Dublin
Institute of Technology.

Neal Gilmer, MBA ngilmer@haywood.com Page 62


Special Sits: Cannabis Sector 6/27/17

Appendix B Independent Directors

Peter Wall

Peter Wall is a corporate lawyer based in Perth, Western Australia and is a Partner at one of
Australias leading corporate and commercial law firms. He was a founding director and
shareholder in Phytotech Medical Limited, the first medical cannabis company to list on the
Australian Securities Exchange, which subsequently was renamed MMJ Phytotech Ltd after a
merger with MMJ Biosciences Inc.

Jason Bednar

Jason Bednar is a Chartered Accountant with more than 18 years of direct professional experience
in the financial and regulatory management of companies listed on the TSX, TSX-V, American Stock
Exchange and ASX.

Will Stewart

Will Stewart, as a Managing Principal at Navigator and founding Principal at Ensight, has earned
the trust and respect of leaders in corporations, government and not-for-profit organizations for
his expertise as a senior strategic public affairs advisor.

Risks

Significant Investment Risks


The investment to which this report relates carries various risks which are reflected in our Overall Risk
Rating. We consider the following to be the most significant of these investment risks:

Reliance on License Harvest One is reliant on its license from Health Canada to grow, cultivate
and process cannabis flower and oils and sell it to registered patients. Any change to the overall
framework and regulations could be positive or negative to Harvest Ones business opportunities
both in Canada and internationally.

Facility risk Harvest One is dependent on its facility infrastructure to grow, cultivate and process
cannabis for eventual use by patients across Canada. Anything that may impact the facilities that
it operates would impact its ability to grow and sell to its patient base.

Competition The medical cannabis market in Canada has strong competition that are all
pursuing the medical patient within Canada. As Health Canada continues to approve and expand
the number of licensed producers it could increase competition within the industry.

Execution Risk Harvest One needs to execute on its Phase 1 expansion plans and simultaneous
build out of its oil extraction capabilities. The Company also plans further phase 2 and 3 expansion
plans that are subject to the Companys successful execution.

Financing Risk Our forecast assumes that the Company is able to raise further capital to support
its expansion plans and as a result the Company is subject successfully raising funds.

For further information on our Risk Rating please visit: http://haywood.com/what-we-


offer/research/research-policy

Neal Gilmer, MBA ngilmer@haywood.com Page 63


Special Sits: Cannabis Sector 6/27/17

WeedMD (WMD-V, $0.79)


Rating BUY
Target Price $2.00
Return 238% Source: WeedMD
Overall Risk Rating Very High
Looking to Long-Term Care to Translate to Long-Term Value
Company Profile Event We are initiating coverage on WeedMD with a Buy rating and target price of
Website www.weedmd.com
$2.00. We believe that WeedMD is a good way for investors to gain exposure to the
CEO Bruce Dawson-Scully
About the Company WeedMD is a licensed Canadian cannabis market at an attractive valuation. In our view, WeedMD has a
producer under the ACMPR with facility in differentiated approach to the medical cannabis market by targeting the long-term
Aylmer Ontario with current production of care industry, and has started to build its strategy for the potential recreational market
approximately 1,500kg annually. with its recent agreement with Van der Pop.
Targeting Long-term care The management team at WeedMD has collectively
Company Data
more than 100 years of experience in the public, senior management and
52-Week High/Low $1.29/$0.26
Dividend Yield N/A ownership roles within the long-term care industry. In the U.S. the seniors market
Shares O/S 60.5M (basic)/ is the fastest growing demographic segment of the cannabis industry. With more
79.3M (F/D) than 50% growth Y/Y between 2013 and 2014, we believe this market segment has
Market Capitalization $63.4M significant opportunity. Many seniors are battling multiple and sometimes chronic
Cash $5.2M conditions and consume significant prescription medications. We believe that
Debt $0M
medical cannabis will be able to address some of the various needs within the long-
Enterprise Value $58M
Daily Volume 308,407 term care industry and provides WeedMD with a unique opportunity.
Currency C$ unless noted Recent announcements not reflected in the share price in our view Since going
public in late April 2017 WeedMD has achieved a number of milestones in its
evolution. First, the Company received its license to sell dried flower from Health
Haywood Estimates Canada towards the end of April. It subsequently began selling dried cannabis at
FYE Dec-31 the end of May and in June announced that it has commenced sales of clones. The
Company also received its license to produce oil from Health Canada which enables
2017E 2018E the Company to ramp up production and brings them closer to launching their
Revenue C$M 2.9 12.8 strategy for the long-term care industry. Lastly, the Company signed an agreement
EBITDA C$M (2.9) 0.4
with Van der Pop, a premium cannabis brand, that will provided branded cannabis
EPS C$ (0.03) 0.00
strains by the end of the year to medical patients and may also prove helpful in a
recreational market.
Expansion plans in process Management has put plans together for an expansion
of the current facility that will take production towards 2,000 kg per year, funded
with cash on hand. The Company is also in the planning phases for further more
significant expansion, either at its existing locations which has the possibility to
Price Performance
expand towards 8 acres or potential other locations they are evaluating. We expect
to hear more specifics from the Company over the next few months.
Valuation We value WeedMD based on an 8x EV/EBITDA multiple on our F2020
estimates, discounted by 20% to bring to one year forward basis. We have used a lower
multiple to reflect some of the execution risk in the story with respect to the
construction build out and financing required. We believe that WeedMD provides
investors with great value given the recent accomplishments and continued
momentum we expect to see from the Company over the next few months.
Source: Capital IQ and Haywood Securities Risk WeedMD operates a single facility with reliance on dried flower. Any disruption
to that facility that impacts its ability to grow will limit its ability to penetrate the
market.

Neal Gilmer, MBA ngilmer@haywood.com Page 64


Special Sits: Cannabis Sector 6/27/17

Target Price, C$ $2.00 Shares O/S, million 60.5


WeedMD Inc. Current Price, C$ $0.79 Shares F/D, million 79.3
Rating: BUY Return, % 153% Market Capitalization, C$M $62.7
Target Price: C$ 52-Week High / Low, C$ $1.29 / $0.26 Company CEO Bruce Dawson-Scully
Metric: EV/EBITDA Daily Volume (100-day avg) 308,407 Company Web Site www.weedmd.com

Balance Sheet and Capitalization FQ1/17 Peer-Group Comparables


C$M 2017E 2018E 2017E 2018E
Market Capitalization $ 62.68 Share Price EV/Rev EV/Rev EV/EBITDA EV/EBITDA
Current Cash $ 5.25 Aphria C$5.44 31.7x 16.4x 163.0x 52.4x
Working Capital $ 7.37 Aurora Cannabis Inc. C$2.17 28.9x 5.4x 561.3x 15.0x
Total Debt $- Canopy Growth Corporation C$8.46 31.4x 10.7x -- 67.3x
Enterprise Value (EV) $ 57 Cronos Group Inc. C$1.73 28.3x 4.5x -- 18.3x
Emblem Corp. C$1.63 17.5x 3.7x -- --
Financial Forecast OrganiGram Holdings Inc. C$2.24 19.7x 4.7x -- 15.9x
2017E 2018E 2019E Supreme Pharmaceuticals Inc. C$1.29 -- 10.2x -- 98.0x
Kg of cannabis sold 450 1,855 9,570
Avg. Selling Price per gram $6.53 $6.92 $6.09 Group Average 26.2x 7.9x 362.1x 44.5x
Revenue $2.9 $12.8 $58.3 Group Average (excluding high/low) 27.1x 7.1x NA 38.5x
Production Costs $2.0 $4.0 $19.1 WeedMD C$0.79 19.5x 4.5x nmf nmf
Gross Profit $0.97 $8.86 $39.18
Gross Margin 33% 69% 67%
Operating Expenses $3 $8 $22
Adj EBITDA ($2.9) $0.4 $16.9 Medical Cannabis (kg)
Income before taxes ($3) ($0) $17
Taxes $0 $0 $4 10,000
Net income ($3.4) ($0.4) $12.5
Shares o/s 86.6 86.6 86.6 8,000
Shares o/s 105.4 105.4 105.4 6,000

Kgs
EPS ($0.03) ($0.00) $0.12 4,000

2,000
Valuation Ratios
2017E 2018E 2019E 0
F2017E F2018E F2019E F2020E
EV / Revenue 19.5x 4.5x 1.0x
EV / EBITDA - 130.6x 3.4x

Recreational Cannabis (kg)


Growth Analysis
Revenue nmf 103% 380% 10,000
EBITDA nmf nmf 3732% 8,000
Net Income nmf nmf nmf
6,000
Kgs

Margin Analysis
4,000
Gross Margin 33% 69% 67%
EBITDA nmf nmf 29% 2,000
Net Income nmf nmf 21%
0
F2017E F2018E F2019E F2020E

Source: Capital IQ, Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 65


Special Sits: Cannabis Sector 6/27/17

Investment Thesis

WeedMD is beginning to establish itself within the Canadian cannabis landscape. Having received its
sales license and commenced sales of dried cannabis and clones in the past month, the Company is
well positioned to establish its name within the industry. The Company has a targeted approach in the
medical space and one that we expect will evolve and roll-out over the course of the next year. With
a management team in place that is well connected in the long-term care industry we believe that this
will provide WeedMD an advantage in penetrating that market.

The seniors market is one of the fastest growing demographics in the cannabis space. In the U.S. the
55 and older age group grew by 53% between 2013 and 2014. It is well known that seniors deal with
multiple health concerns, some of them chronic and are significant users of prescription drugs. We
believe that this market demographic could be one the largest beneficiaries of the medical cannabis
market as it continues to evolve, with further research and new and unique formulations and delivery
methods.

WeedMD has a strong management team with significant experience in the long-term care market.
The Companys CEO, Bruce Dawson-Scully has over 22 years of experience in the public and private
long-term care industry. As a whole the management team has over 100 years of collective experience
in public, senior management and ownership roles within the long-term care industry. We believe that
this should help management leverage its prior experience and industry connections to help WeedMD
penetrate and capture share in the market.

Neal Gilmer, MBA ngilmer@haywood.com Page 66


Special Sits: Cannabis Sector 6/27/17

Company Overview

WeedMD is a licensed producer of medical cannabis under the ACMPR in Canada. The Company is
operating out of a 26,000 sq ft facility in Aylmer Ontario that the Company has retrofitted with current
capacity of up to 1,500 kg annually. The Company has an extensive genetic library with the intention
of producing a high quality and diverse set of medicinal strains for its patient base. The Company
received its license to cultivate in April 2016 and just recently received its license to sell from Health
Canada in April 2017. WeedMD is currently growing at about 1,200kg per year and is in the late stages
of plans on its Phase 1 expansion that will bring production capacity towards 2,000kg per year later
this year.

WeedMDs management team has significant experience in the long-term care and senior living
industry. As a result, one of the Companys goals is to become a strategic partner within the long-term
care sector, providing high quality strains of THC and CBD to the seniors market.

Qualifying Transaction
WeedMD closed its qualifying transaction with Aumento Capital V on April 19, 2017 and commenced
trading on April 27, 2017. As a result of the qualifying transaction and following the completion of the
transaction, WeedMD had approximately 60.5 million shares outstanding as well as approximately
14.9 million warrants with an exercise price at $0.80, and 3.5 million options with an exercise price of
$0.60.

Facility Overview
WeedMDs facility is located at 250 Elm St. in Aylmer Ontario. The current facility is approximately
26,000 square feet and is situated on a 4 acre parcel of land that is leased by the Company for a current
term of five years. Under the terms of the lease WeedMD can extend the lease for an additional three
five year terms and also has an option to purchase the property for $1.5 million. The Company has also
negotiated options to purchase the adjacent two neighboring properties that if exercised would
provide a total land size of approximately 8 acres.

Neal Gilmer, MBA ngilmer@haywood.com Page 67


Special Sits: Cannabis Sector 6/27/17

Figure 1: WeedMD facility

Source: Company reports, Haywood Securities

WeedMD is currently exploring various expansion opportunities. The Companys phase 1 expansion is
in the late design stage and should be complete this fall. This will bring the Companys total production
capacity to at least 2,000 kg per year. As a result of the transaction WeedMD had approximately $6.5
million in cash available for various expenses. The Company has allocated approximately $600,000
650,000 for grow room expansion as a part of Phase 1.

Management is exploring other expansion alternatives and we would expect to hear further details on
those opportunities over the course of the next quarter. As noted previously the Company has 4 acres
of land it could build on, with an option for a total of 8 acres. Management estimates that would enable
the Company to develop over 220,000 square feet of production space. We believe the company is
currently evaluating various opportunities at its current site as well as other potential locations for
further expansion.

Neal Gilmer, MBA ngilmer@haywood.com Page 68


Special Sits: Cannabis Sector 6/27/17

Figure 2: Expansion options

Source: Company reports

Product Offering
WeedMD commenced selling dried flower on May 31, 2017, approximately 1 month after receiving its
license to sell from Health Canada. The Company negotiated with another LP to store genetics while it
went through its licensing process and has subsequently reimported those genetics to its facility. As a
result WeedMD has an impressive genetic library that it intends to leverage and penetrate the market.
In total the Company has about 200 strains within its library however it does not intend to grow and
offer that number of strains. WeedMD is currently in the process of developing those strains that it
believes will provide the most value out of its extensive catalogue.

Currently the company has 10 SKUs available at prices ranging from $6/gram on the low end for blends
up to $12.00/gram for premium product. WeedMD had good patient registrations throughout the
period while it had its cultivation license until it received its sales license. The Company anticipates
having solid demand for its product despite limited marketing to date which will accelerate and ramp
up as the Company expands out it product offering into oils and other delivery formats.

Figure 3: WeedMDs Dried Product

Source: Company website

Neal Gilmer, MBA ngilmer@haywood.com Page 69


Special Sits: Cannabis Sector 6/27/17

Oils
WeedMD received its supplemental license from Health Canada for the production of medical
cannabis oils on June 16th, 2017. The Company has taken an ethanol extraction approach for its oil
production. As a result it has imported a purpose built ethanol extraction machine from Germany.
Once the Company has produced enough batches and inventory of its oils, it will apply for its license
from Health Canada. We expect WeedMD will receive its license to sell oils prior to the end of 2017.

Clones
On June 13, 2017 WeedMd announced that it had commenced selling clones to patients registered
under for home grow under the ACMPR. At first the Company will offer several strains which have
been chosen for their characteristics with respect to cannabinoid profile, genetics, nutrient
requirements, and ease of cultivation. WeedMD has established very competitive pricing from our
perspective, charging $100 for the first 4 clones, a minimum purchase and then $10 for each additional
clone thereafter. We believe that this should be viewed positively by those patients who wish to
pursue home grown medical cannabis and provides an additional revenue opportunity for the
Company.

Go to market strategy
WeedMD intends to develop a focused medical cannabis strategy while also preparing for the
recreational market. Currently the Company is focused on the medicinal market with a science based
approach to consistently deliver quality medicine to its patients. At the same time the Company is
evaluating various different research and development initiatives / partnerships in an effort to validate
the medicinal benefits of medical cannabis.
As mentioned previously, WeedMDs management team and directors have more than 100 years of
experience in the long term care industry. Naturally the Company is developing a program that will
provide a comprehensive service and product offering for the industry based on medical cannabis.
Given the complexity and lack of information surrounding cannabis as a medicine, WeedMD is aiming
to simplify and educate those within the long-term care industry to deliver appropriate medicinal
cannabis to its patients.
In the US, the seniors population is the fastest growing cannabis demographic. People 55 years and
older consuming cannabis increased from 2.8 million to 4.3 million between 2013 and 2014. As
awareness about cannabis as a medication increases more of the population is looking at cannabis as
an alternative. Seniors are known to be on a significant prescription medications that may provide for
cannabis to be an alternative. Many seniors have multiple diagnoses in areas that have been identified
as appropriate for treatment with medical cannabis.
In Canada, according to CIHI, more than two-thirds of those aged 65 and older who live in long-term
care facilities are taking 10 or more prescription drugs. This is a much higher rate than those seniors
who are living at home. The majority within this age group have been diagnosed with multiple chronic
conditions. We believe that this will continue to be a growing demographic within the medical
cannabis space and that the WeedMD is well positioned to penetrate long-term care facilities with
innovative products that can serve the need the patients.
Van der Pop
WeedMD recently announced that it has entered into a letter of intent with Tokyo Smoke to license
North Americas premium focused cannabis brand, Van der Pop. Under the agreement, WeedMD will
produce and ship Van der Pops branded cannabis to medical patients later in 2017. Van der Pop is
considered the leading female focused cannabis brand in social media. We believe that this is an
excellent partnership for WeedMD. Women are one of the fastest growing demographics in the
cannabis industry and having the rights to sell branded cannabis should help drive patient adoption
and revenues as a result.
Neal Gilmer, MBA ngilmer@haywood.com Page 70
Special Sits: Cannabis Sector 6/27/17

Use of proceeds
WeedMDs had approximately $6.5 million is cash available on its balance sheet as of its closing of the
qualifying transaction in mid-to-late April. The table below in Figure 4 outlines managements intended
use of proceeds for its available cash on hand.

Figure 4: WeedMDs use of proceeds

Selling, general and administrative expenses $1,852,000


Facility expenses $1,080,000
Repairs and maintenance $360,000
Total direct labour $1,080,000
Grow room expansion $500,000
Oil extraction lab $250,000
Website and portal development $90,000
Unallocated working capital $1,288,000
Total use of proceeds $6,500,000
Source: Company reports, Haywood Securities estimates

Model Assumptions and Estimates

Revenues
WeedMD announced that it had commenced sales of its dried cannabis at the end of May 2017. We
expect modest sales of approximately 600 kg of product in 2017 comprised of dried cannabis as we
conservatively estimate that its oil sales commence at the beginning of 2018. We model continued
growth in the medical segment reaching close to capacity in 2018 before expansion production kicks
in.

Figure 5: Estimated medical cannabis sales (kg)

9,000
8,000
7,000
6,000
5,000
Kgs

4,000
3,000
2,000
1,000
0
F2017E F2018E F2019E F2020E

Source: Haywood Securities estimates

WeedMD intends to also serve customers in the recreational market with its strong genetic library.
The Company is evaluating various expansion plans both on its current site, the option of 4 acres next
door and other possible locations.

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Special Sits: Cannabis Sector 6/27/17

Figure 6: Recreational Cannabis sales (kg)

9,000
8,000
7,000
6,000
5,000
Kgs

4,000
3,000
2,000
1,000
0
F2017E F2018E F2019E F2020E

Source: Haywood Securities estimates

Consistent with our view on pricing we have a declining average sales price in our model for WeedMD
to account for what we expect to be wholesale medical sales, as well as wholesale pricing in the
recreational market. This is slightly offset by an increasing percentage of sales of oils/derivative
products that command a higher price. Our average sales price in F2018 is $7.22, declining to $6.09 in
F2019 and $6.07 in F2020.

Overall we forecast modest sales for WeedMD in 2017 of $4.2M with an EBITDA loss of $2.4M. We
project WeedMD to turn EBITDA positive in 2018 as it ramps up sales towards its capacity with $14.4M
in sales and EBITDA of $1.3M.

Figure 7: Summary of estimates

FYE Dec-31 F2017E F2018E F2019E


Revenue ($M) $2.9 $12.8 $58.3
Gross Profit ($M) $1.7 $8.9 $39.2
Gross Margin % 56.4% 69.0% 67.2%
EBITDA ($M) ($2.9) $0.4 $16.9
EBITDA margin % nmf 3.4% 28.9%
Net Income ($M) ($3.4) $0.0 $12.5
EPS ($0.03) $0.00 $0.12
Source: Haywood Securities estimates

Valuation
Our valuation for WeedMD is based on a 8x EV/EBITDA multiple. We have used a lower multiple to
reflect some of the execution risk in the story with respect to the construction build out and financing
required. We have assumed for the purpose of our model that the Company will raise $30M at a price
of $1.15 per share. We recognize that the Company may be able to attain different financing
alternatives or at a different price, but use this to reflect the potential dilution from future capital
needs.

Neal Gilmer, MBA ngilmer@haywood.com Page 72


Special Sits: Cannabis Sector 6/27/17

Figure 8: Target price valuation

EBITDA $33.0
Target EV/EBITDA Multiple 7.0
Implied EV $231.3
Net Debt ($27.3)
Implied Equity Value $258.6
Implied Equity Value discounted + Investments
$206.85
Shares Outstanding 105.4
Implied Share Price Target $1.96
Source: Haywood Securities estimates

In Figure 9 below we provide scenarios of various potential target prices using different EBITDA
margins and different multiples based on WeedMD operating at full capacity with $5.00 wholesale
price assumption.

Figure 9: Scenario analysis

$ 1.73 25% 30% 35% 40% 45%


7.0 $0.99 $1.23 $1.48 $1.73 $1.98
8.0 $1.16 $1.45 $1.73 $2.02 $2.30
9.0 $1.34 $1.66 $1.98 $2.30 $2.62
10.0 $1.52 $1.88 $2.23 $2.59 $2.94
11.0 $1.70 $2.09 $2.48 $2.87 $3.26
Source: Haywood Securities estimates

Neal Gilmer, MBA ngilmer@haywood.com Page 73


Special Sits: Cannabis Sector 6/27/17

Appendix A Management

Bruce Dawson-Scully CEO & Director

Bruce has worked in the Long-Term Care industry for 22 years, most recently for Leisureworld
Senior Care Corporation. He brings both management and government relations expertise. Bruce
has been the operations lead on 15 large company, government-regulated startups in long-term
care and retirement industry. Bruce has experience in international healthcare consulting to
Chinese government in Beijing. He is currently serving as Vice President of MICBA, a non-profit
organization that supports seniors in Peel. Bruce has also had extensive experience in all aspects
of the development of over 15 luxury retirement and long term care facilities across south western
Ontario.

Keith Merker CFO and Director

Keith holds the Chartered Financial Analyst designation and has over 15 years of experience
working as a Finance Professional, with extensive emphasis on emerging growth public and private
companies, corporate finance, accounting, business development, mergers/acquisitions and
raising funding in the capital markets.

Dr. Luc C Duchesne - Chief Scientific Officer

Luc holds a PhD in plant biochemistry and has published 85 peer-reviewed scientific articles, book
chapters and books. He enjoys 30 years experience in the issues associated with the production
and commercialization of natural products. He has taught as an adjunct professor in 8 universities
and has acted on the editorial boards of scientific journals and has received multiple science and
business awards including the 5NR Award for Leaders in Sustainability. He is a founding director
of Autism Canada Foundation. He brings a unique understanding of regulatory compliance,
experimental research and production.

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Special Sits: Cannabis Sector 6/27/17

Appendix B Independent Directors

Michael Kraft

Michael is a visionary and entrepreneur with more than 30 years of experience in sales, marketing
and corporate management, with a strong record of success in both public and private company
leadership. He has a formidable international network of industry and government leaders
including 10 years of hands-on experience in China and other global markets. Michael has secured
in excess of $100 Million in equity financing for projects in China, Latin America, Africa and abroad.

Gail Paech

Gail is a highly focused, seasoned professional with over 25 years of senior executive experience
in the public, private and not-for-profit sectors. She is a former Associate Deputy Minister,
Economic Development and Trade and Assistant Deputy Minister, Ministry of Health. During her
tenure as a senior civil servant, Gail gained the reputation for her ability to head up large-scale,
high-profile, provincial initiatives that resulted in system transformation and lasting change in the
delivery of core public services. She possesses in-depth knowledge of government decision-
making processes, having been responsible for policy formulation of both sector specific and
government-wide policies, programs and the regulatory process. As interim CEO of the largest
Long Term Care Association in Canada, Gail assisted in the development of consumer-oriented
strategy that unleashed the innovation potential of the Long-Term Care sector while generating
value for the healthcare system. As President and CEO of a large downtown Toronto hospital, Gail
was responsible for implementing strategic direction which successfully repositioned the hospital
during the province- wide restructuring program. Gail has considerable experience with a global
consulting company where she was National Director responsible for the development and future
direction of the healthcare practice across Canada. She conducted large scale health system
redesign projects across the country.

Rick Moscone

Rick is a partner at the law firm of Fogler, Rubinoff LLP and acts for several public companies on
the TSX and TSX Venture Exchange. Rick obtained an LL.B. from Queen's University and an MBA
from Schulich School of Business.

David Danziger

Mr. Danziger is a Chartered Professional Accountant and the Senior Vice President of Assurance
Services at MNP LLP, Chartered Professional Accountants, the fifth largest financial services and
accounting firm in Canada. He also leads the firms Public Markets practice. Mr. Danziger is
experienced in management consulting and business advisory services. He was Chief Executive
Officer and a director of Aumento Capital Corporation (now Annidis Corporation), a capital pool
company that completed its qualifying transaction in June 2011, Aumento Capital II Corporation
(now The Intertain Group), a capital pool company that completed its qualifying transaction in
February 2014, Aumento Capital III Corporation (now Exo U Inc.), a capital pool company that
completed its qualifying transaction in June 2013 and Aumento Capital IV Corporation (now
GreenSpace Brands Inc.), a capital pool company that completed its qualifying transaction in April
2015. He is currently a director of Jackpotjoy PLC (LSE), The Intertain Group Inc. (TSX), Eurotin Inc.
(TSXV), Euro Sun Mining Inc. (TSX), Era Resources Inc. (TSXV) and Poydras Gaming Finance Inc.
(TSXV). He graduated with a B.Comm from the University of Toronto in 1978 and was designated
a Chartered Accountant in 1983.

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Special Sits: Cannabis Sector 6/27/17

Risks

Significant Investment Risks


The investment to which this report relates carries various risks which are reflected in our Overall Risk
Rating. We consider the following to be the most significant of these investment risks:

Reliance on License WeedMD is reliant on its license from Health Canada to grow, cultivate and
process cannabis flower and oils and sell it to registered patients. Any change to the overall
framework and regulations could be positive or negative to WeedMDs business opportunities
both in Canada and internationally.

Facility risk WeedMD is dependent on its facility infrastructure to grow, cultivate and process
cannabis for eventual use by patients across Canada. Anything that may impact the facilities that
it operates would impact its ability to grow and sell to its patient base.

Competition The medical cannabis market in Canada has strong competition that are all
pursuing the medical patient within Canada. As Health Canada continues to approve and expand
the number of licensed producers it could increase competition within the industry.

Execution Risk WeedMD needs to execute on its oil extraction facility as well as its new
expansion plans, both Phase 1 and subsequent expansion. As is inherent in any expansion or
capital improvement project it is susceptible to execution risk to complete on time and on budget.

Finance Risk WeedMD is financed to complete its Phase 1 expansion and oil extraction build out.
However, in order to expand further to support our projections the Company is dependent on
securing further financing.

For further information on our Risk Rating please visit: http://haywood.com/what-we-


offer/research/research-policy

Neal Gilmer, MBA ngilmer@haywood.com Page 76


Special Sits: Cannabis Sector 6/27/17

Important Information and Legal Disclaimers


This report is neither a solicitation for the purchase of securities nor an offer of securities. Our ratings are intended only for
clients of Haywood Securities Inc., and those of its wholly owned subsidiary, Haywood Securities (USA) Inc. and such clients are
cautioned to consult the respective firm prior to purchasing or selling any security recommended or views contained in this
report.
Estimates and projections contained herein, whether or not our own, are based on assumptions that we believe to be
reasonable. The information presented, while obtained from sources we believe reliable, is checked but not guaranteed against
errors or omissions. Changes in the rates of exchange between currencies may cause the value of your investment to fluctuate.
Past performance should not be seen as an indication of future performance. The investments to which this report relates can
fluctuate in value and accordingly you are not certain to make a profit on any investment: you could make a loss.
Haywood Securities, or certain of its affiliated companies, may from time to time receive a portion of commissions or other fees
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the firm does maintain and enforce written policies and procedures reasonably designed to prevent influence on the activities
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distribution. This policy applies equally to recommendation changes, target changes and/or forecast revisions.
For Canadian residents: Haywood Securities Inc. is a Canadian registered broker-dealer and a member of the Investment
Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the Toronto Venture Exchange and the Canadian
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information on any securities discussed in this report should contact a qualified salesperson of Haywood Securities Inc.
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Haywood Securities (USA) Inc. as a U.S. registered broker-dealer accepts responsibility for this Research Report and its
dissemination in the United States. Any U.S. client that wishes further information on any securities discussed in this report or
wish to effect a transaction in these securities should contact a qualified salesperson of Haywood Securities (USA) Inc. Haywood
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Research Analysts with FINRA. As these analysts are considered Foreign Research Analysts they may not be specifically subject
to FINRA (formerly NASD) Rule 2711 and FINRA (formerly NYSE) Rule 472 restrictions on communications with a Subject
Company, Public Appearances and trading securities held by a Research Analyst Account.
This report may be distributed in the following states: nil. Otherwise, this report may only be distributed into those states with
an institutional buyer state securities registration exemption.
Analyst Certification
I, Neal Gilmer, hereby certify that the views expressed in this report (which includes the rating assigned to the issuers shares
as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities
and the issuer. No part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations.
Important Disclosures
Of the companies included in the report the following Important Disclosures apply:
As of the end of the month immediately preceding this publication either Haywood Securities, Inc., its officers or directors
beneficially owned 1% or more of CanniMed Therapeutics Inc. (CMED-T).
Haywood Securities, Inc. has reviewed lead projects of CanniMed Therapeutics Inc. (CMED-T), Weed MD (WMD-V) and a
portion of the expenses for this travel may have been reimbursed by the issuer.

Neal Gilmer, MBA ngilmer@haywood.com Page 77


Special Sits: Cannabis Sector 6/27/17

Haywood Securities, Inc. or an Affiliate has managed or co-managed or participated as selling group in a public offering of
securities for Aphria Inc. (APH-T), CanniMed Therapeutics Inc. (CMED-T) in the last 12 months.
Other material conflict of interest of the research analyst of which the research analyst or Haywood Securities Inc. knows or has
reason to know at the time of publication or at the time of public appearance:
n/a
Rating Structure
Each company within an analysts universe, or group of companies covered, is assigned: (i) a recommendation or rating, usually
BUY, HOLD, or SELL; (ii) a 12 month target price, which represents an analysts current assessment of a companys potential
stock price over the next year; (iii) an overall risk rating which represents an analysts assessment of the companys overall
investment risk; and (iv) specific risk ratings or risk profile parameters which in their aggregate support an analysts overall risk
rating. These ratings are more fully explained below. Before acting on our recommendation we caution you to confer with your
Haywood investment advisor to determine the suitability of our recommendation for your specific investment objectives, risk
tolerance and investment time horizon.
Recommendation Rating
BUY The analyst believes that the security will outperform other companies in their sector on a risk adjusted basis or for the
reasons stated in the research report the analyst believes that the security is deserving of a (continued) BUY rating.
HOLD The analyst believes that the security is expected to perform in line with other companies in their sector on a risk
adjusted basis or for the reasons stated in the research report the analyst believes that the security is deserving of a (continued)
HOLD rating.
SELL Investors are advised to sell the security or hold alternative securities within the sector. Stocks in this category
areexpected to under-perform other companies on a risk adjusted basis or for the reasons stated in the research report the
analyst believes that the security is deserving of a (continued) SELL rating.
TENDER The analyst is recommending that investors tender to a specific offering for the companys stock.
RESEARCH COMMENT An analyst comment about an issuer event that does not include a rating or recommendation.
UNDER REVIEW Placing a stock Under Review does not revise the current rating or recommendation of the analyst. A stock
will be placed Under Review when the relevant company has a significant material event with further information pending or
to be announced. An analyst will place a stock Under Review while he/she awaits sufficient information to re-evaluate the
companys financial situation.
COVERAGE DROPPED Haywood Securities will no longer cover the issuer. Haywood will provide notice to clients whenever
coverage of an issuer is discontinued.
Haywood's focus is to search for undervalued companies which analysts believe may achieve attractive risk-adjusted returns.
This research coverage on potentially undervalued companies may result in an outweighed percentage of companies rated as
BUY. Management regularly reviews rating and targets in all sectors to ensure fairness and accuracy.
For further information on Haywood Securities research dissemination policies, please visit: http://haywood.com/what-we-
offer/research/research-policy
Overall Risk Rating
Very High Risk: Venture type companies or more established micro, small, mid or large cap companies whose risk profile
parameters and/or lack of liquidity warrant such a designation. These companies are only appropriate for investors who have
a very high tolerance for risk and volatility and who are capable of incurring temporary or permanent loss of a very significant
portion of their investment capital.
High Risk: Typically micro or small cap companies which have an above average investment risk relative to more established or
mid to large cap companies. These companies will generally not form part of the broad senior stock market indices and often
will have less liquidity than more established mid and large cap companies. These companies are only appropriate for investors
who have a high tolerance for risk and volatility and who are capable of incurring a temporary or permanent loss of a significant
loss of their investment capital.
Medium-High Risk: Typically mid to large cap companies that have a medium to high investment risk. These companies will
often form part of the broader senior stock market indices or sector specific indices. These companies are only appropriate for

Neal Gilmer, MBA ngilmer@haywood.com Page 78


Special Sits: Cannabis Sector 6/27/17

investors who have a medium to high tolerance for risk and volatility and who are prepared to accept general stock market risk
including the risk of a temporary or permanent loss of some of their investment capital
Moderate Risk: Large to very large cap companies with established earnings who have a track record of lower volatility when
compared against the broad senior stock market indices. These companies are only appropriate for investors who have a
medium tolerance for risk and volatility and who are prepared to accept general stock market risk including the risk of a
temporary or permanent loss of some of their investment capital.
Distribution of Ratings (as of June 27, 2017)
IB Clients
% # (TTM)
Buy 71.7% 71 93.1%
Hold 6.1% 6 3.4%
Sell 0.0% 0 0.0%
Tender 2.0% 2 0.0%
UR (Buy) 0.0% 0 0.0%
UR (Hold) 0.0% 0 0.0%
UR (Sell) 0.0% 0 0.0%
Dropped (TTM) 20.2% 20 3.4%

Price Chart, Rating and Target Price History (as of June 27, 2017)
Aphria Inc. (APH-T) Date Target(C$) Rating CanniMed Therapeutics Inc. (CMED-T) Date Target(C$) Rating
6/27/17 $8.25 Buy 6/27/17 $13.00 Buy
Price History (C$) Target/Rating/Coverage Change Price History (C$) Target/Rating/Coverage Change
9 16
8 14
7 12
6
10
5
8
4
6
3
2 4
1 2
0 0
Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Dec Jan Jan Feb Feb Mar Mar Apr Apr May May Jun Jun
14 15 15 15 15 16 16 16 16 17 17 16 17 17 17 17 17 17 17 17 17 17 17 17

Initiated Coverage: 6/27/2017 Initiated Coverage: 6/27/2017

Harvest One Cannabis Inc. (HVST-V) Date Target(C$) Rating WeedMD Inc. (WMD-V) Date Target(C$) Rating
6/27/17 $1.60 Buy 6/27/17 $2.00 Buy
Price History (C$) Target/Rating/Coverage Change Price History (C$) Target/Rating/Coverage Change
3 3

2.5 2.5

2 2

1.5 1.5

1 1

0.5 0.5

0 0
Apr May May May May Jun Jun Jun Apr May May May May Jun Jun Jun
17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17

Initiated Coverage: 6/27/2017 Initiated Coverage: 6/27/2017

B: Buy; H: Hold; S: Sell; T: Tender; UR: Under Review


Source: Capital IQ and Haywood Securities

Neal Gilmer, MBA ngilmer@haywood.com Page 79

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