INITIATING COVERAGE October 2018

Growing for the Future Initiating Coverage on Aphria Inc. and Canopy Growth Corporation

Oliver Rowe, MBA, CFA | Associate Ben Isaacson, MBA, CFA | Analyst 416-863-5907 416-945-5310 oliver.rowe@scotiabank.com [email protected] Scotia Capital Inc. – Canada Scotia Capital Inc. – Canada

This report is not to be distributed outside of Canada under any circumstances.

For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S. CANNABIS October 2018

Executive Summary

The cannabis sector is on fire. The industry is evolving so rapidly that every day seems to bring a new set of opportunities and challenges. What is important to investors one week seems irrelevant the next. Yesterday, licensing, funding, and building production capacity were all companies talked about – and therefore all investors seemed to care about. Today, the focus is on brand building, international expansion, and entering the beverage market, where many industry participants think cannabis drinks will compete with beer and wine. Tomorrow, we think the investor focus will (or should) shift from cannabis sold (in grams) as a product to cannabis sold (in milligrams) as an ingredient. Think about the chocolate industry. Few care about which companies produce chocolate in Ivory Coast. Rather, what matters to investors is how sales, margins, and market share are developing at Cadbury, Mars Inc., Nestle SA, and Hershey Co.

Exhibit 1.1: What Matters to Investors?

Yesterday Today Tomorrow - Legality - Domestic recreational market - International expansion - Domestic medical market - International expansion - Brand development - Flower combustion - Supply agreements - Product development - Cash costs - Illicit market response - Consumer packaged goods - Grams sold - New form factors - Pharmaceuticals - Price development - Market share - Commoditization - Milligrams sold

Source: Scotiabank GBM.

At some point soon, we think investors will have to focus on fundamentals and common-sense valuations. If not, history will almost certainly repeat itself, with the speculative bubble popping. We have seen it before, beginning with the tulip craze in 1634 and moving through the U.K. railway mania in the 1840s, the U.S. stock market bubble in the 1920s, the commodities hype between 2002 and 2008 (particularly for uranium and rhodium), numerous property bubbles worldwide, and, most recently, the cryptocurrency craze. While prudent investors will have to be selective in picking not just the survivors but the industry champions, let’s be clear: the cannabis industry is real, it is here to stay, and we believe there is money to be made.

There is a good reason why fundamentals don’t seem to matter to some. Simply put, nobody knows what cannabis fundamentals are: not us, and not the CEOs of any of the cannabis majors. Forget about prices, costs, and margins for the moment, and even forget about the size of the Canadian recreational market, for now. What is even a reasonable ballpark figure for the size of the cannabis beverage industry? What about the pharmaceutical potential?

Our report discusses where we see the industry heading, which companies are likely to succeed, and, of course, our best investment ideas. Similar to any rapidly emerging sector, historical company financials will be almost useless for forecasting, and consensus likely won’t matter much over the medium term as estimates will vary widely and shift often. For us, what will matter is quality of management, funding – not just to build production capacity, but for R&D, too – and strategic relationships, both vertically and horizontally. We have initiated coverage on Aphria Inc. (Sector Outperform) and Canopy Growth Corporation (Canopy; Sector Perform), which, in our view, are trailblazers ahead of the curve. We intend to initiate coverage on several other cannabis majors over the coming months.

The days of cannabis being a taboo subject are gone. While the pre-legalization Wild West trade is behind us and some companies are bound to fail, the industry is not going anywhere. Rather, the opportunity for strategic and financial investors (both individual and corporate) is set to grow… like a weed.

This report is not to be distributed outside of Canada under any circumstances. 1

GROWING FOR THE FUTURE October 2018

Table of Contents

Executive Summary 1

Investment Highlights 3 Growing for the Future 3 Birth of an Industry 5 Why Is/Was Cannabis Illegal Anyway? 6 Why Are Some Countries Decriminalizing or Legalizing Cannabis? 6 Sizing Up Canadian Supply and Demand 7 A Brief History 7 A $5.5 Billion Market… 7 We Forecast Demand Could Rise ~20% in 2019 9 Converting Illicit Demand to Legal Demand Should Be Swift 12 We Expect Domestic Medical Demand Growth to Slow to 5% 14 Cannabis Beverages Could Drive the Next Big Wave of Demand Growth 15 Initial Shortage Followed by Oversupply 16 Mid-term Domestic Oversupply Seems Inevitable 17 Pricing Outlook 19 Government Projections Imply $9.50/g Retail Pricing 19 We Think Retail Prices Will Fall to $8/g and Wholesale Prices to $3.50/g 19 We Think the Wholesale Market Could Be Worth $20 Billion to $25 Billion 21 The Retail Opportunity 23 Retail Offers Additional Margin Capture for the LPs 23 Limited Packaging and Advertising Opportunities Will Make Product Reviews Critical for Brand Success 24 Online Government Sales Will Set a Price Ceiling for Retailers 24 Volume Commitments Will Be Key to Success 25

Looking Beyond Canada 27 A Background on the U.S. Regulatory Environment 27 The United States Is Worth Watching but Inaccessible, for Now 28 Big International Potential but Little Near-Term Earnings 29 Investment Catalysts 32

Investment Risks 33

Company Reports Aphria Inc. – Ticking All the Boxes (Sector Outperform; One-Year Target $25.00) 34 Canopy Growth Corporation – Superb Story and Outlook, Full Valuation (Sector Perform; One-Year Target $61.00) 59

Publication date October 17, 2018. Pricing as of October 11, 2018, unless otherwise stated. All currencies in Canadian dollars unless otherwise stated. Cover photo credit: www.istockphoto.com/ca/OpenRangeStock.

This report is not to be distributed outside of Canada under any circumstances. 2

CANNABIS October 2018

Investment Highlights Growing for the Future Birth of an Industry

We have initiated coverage on the cannabis industry with a positive outlook. October 17, 2018, marks the first day of legal recreational cannabis sales in Canada. As the first G20 country to fully legalize cannabis use (and the second country worldwide, behind Uruguay), Canada has positioned itself to be far more than just a tolerant and progressive society as it relates to cannabis. While there will always be pockets of Western culture that consider cannabis taboo (similar to alcohol), gone are the days of “reefer madness” and cannabis being tied to only hippies, “stoners,” and “burnouts.” Within a decade, we expect cannabis consumption to compete seriously with beer and wine consumption in Canada.

We believe Canada’s first-mover advantage allows it to establish a thriving and highly profitable industry, with little organized international competition. This is why there are now more than 120 licensed producers (LPs) in Canada, each preparing to grab a piece of the current $6+ billion domestic cannabis market, which is set to soar when recreational use is legalized. As with any illicit activity, statistics on recreational cannabis demand are hard to come by. However, most agree estimates the size of the 2017 market in Canada was 775,000 kilograms (775 tonnes). We forecast a surge in demand in 2019 and 2020 to ~1,000 tonnes and ~1,130 tonnes, respectively, driven by new consumers coming to the market and higher daily intake once new product formats are introduced. We estimate 80% of illicit recreational demand will convert to legal demand by 2021.

Beyond Canada, several countries are at different stages of partially or fully legalizing (or decriminalizing) various forms of cannabis use. Some, including Canopy, expect the global market to eventually reach $200 billion or more, with half of that coming from the United States. That said, while the opportunities for Canadian companies are set to grow, we do not expect a paradigm shift in international legalization of recreational use without a change to the classification of cannabis as a Schedule I and Schedule IV narcotic by the United Nations.

Oversupply Seems Inevitable…

We estimate $1 invested in production capacity generates $1 in annual EBITDA, assuming full utilization rates and commoditized margins. This exceptional return on capital and payback is why market observers estimate between 5x and 10x annual demand will be built as production capacity within the next 12 to 24 months. This capacity growth suggests to us industry consolidation is inevitable, as are failures by companies that don’t have sufficient funding or are simply too late out of the gate.

With oversupply likely comes some price compression. As such, we expect the long-term recreational retail price for dried flowers to decline to $8/g, from initial pricing closer to $10/g. For the producer, we expect netbacks to fall toward $3.50/g (excluding the excise tax), from about $5/g today. As many of the large-scale producers expect their cash costs to also fall (improve) to well below $1/g, margin contraction shouldn’t reflect the magnitude of decline that headline prices will likely experience.

… but the Future Is Bright

As the wholesale cannabis business matures quickly, we expect well-funded producers to diversify into many different business lines. Opportunities range from establishing international operations and export markets and opening up retail stores to developing cannabis products to be used as an ingredient in food and beverages, topical sprays and creams, pharmaceutical products, and medical applications. In our minds and if regulations permit, the U.S. recreational market and the cannabis-based beverage market offer the most lucrative future opportunities.

This report is not to be distributed outside of Canada under any circumstances. 3

GROWING FOR THE FUTURE October 2018

Some Suggest Valuations Reflect a Bubble

Remember the dot-com bubble in the early 2000s? As adoption of the Internet took off, valuations of dot- com stocks almost appeared irrelevant despite most of the companies incurring net operating losses (to fund growth). Traditional metrics, such as P/E, EV/EBITDA, etc., were seemingly ignored, with the investment community inventing measures to justify sky-high stock prices, such as value per click and value per eyeball. While some stocks went on to be huge successes, such as Amazon.com, Inc., most crashed and burned.

So is history repeating itself with cannabis valuations? To many, it may feel that way, and it is easy to see why. Just look at the valuation of Canopy, the industry giant. Its calendar-year 2021E EV/EBITDA and P/E multiples are above 50x and 100x, respectively, but we don’t put a lot of weight behind these multiples – which is not to say some stocks aren’t overvalued. The issue, as we see it, is that cannabis companies have a much larger opportunity set than solely being producers with low utilization rates. In fact, many already have the funding to begin diversifying their portfolios to include other product formats. Ultimately, run-rate EBITDA estimates could grow by leaps and bounds, which is not to suggest the equities should already be pricing in near-perfect execution on business plans that haven’t been announced yet.

Initiating Coverage on Two Cannabis Pioneers

We have initiated coverage on Aphria Inc. with a Sector Outperform rating, a target price of $25.00 per share, and a bear-to-bull range of $15 to $34. Aphria is building one of the largest cannabis production platforms in Canada and internationally. The company is not trying to be all things to all people; rather, it intends to focus on perfecting large-scale production economics to generate high industry margins in the Canadian medical and recreational markets. We value Aphria by applying a 15x EV/EBITDA multiple to out-year achievable EBITDA of $450 million, ~40% of which is theoretical and based on likely funding capabilities. We think Aphria is the best way to play the cannabis space in our limited coverage universe.

We have initiated coverage on the common shares of Canopy Growth Corporation (Canopy) with a Sector Perform rating, a one-year target of $61.00 per share, and a bear-to-bull range of $26 to $88. Canopy is the dominant Canadian player and global leader in the rapidly evolving cannabis space. Its first- mover advantage has positioned the company to not only be the largest global producer of legal cannabis in the world, but also to capture significant market share in many cannabis-related markets. The recent cash injection of $5 billion from Constellation Brands, Inc. (STZ-N) provides Canopy with ample funding to build out multiple cannabis-based business lines, brands, and, ultimately, earnings streams. We value Canopy by applying a 15x EV/EBITDA multiple to out-year EBITDA of $1.5 billion, two-thirds of which is theoretical and based on likely funding capabilities. While we believe the story and outlook are superb, we think the stock is fully valued.

Plenty of Catalysts… Plenty of Risks

Key catalysts include the following: (1) regulatory trends are moving toward more partial or full legalization, with even a possible UN review of the classification of cannabis; (2) health insurance providers are starting to cover medical cannabis; (3) transformational merger and acquisition (M&A) transactions crystallize value and could lead to the emergence of new market opportunities; (4) sales data following legalization in Canada will bring clarity where none existed before; and (5) the legalization of new product formats, such as edibles and beverages, and improved distribution channels could expand the market size.

In addition to straightforward investment risks, industry-specific risks include the following: (1) inaccurate market size estimates; (2) the illicit recreational market may not be easily converted into the legal market; (3) increased competition will likely lead to pricing pressure and force industry consolidation; (4) the development of global regulations will be slow and not necessarily favourable; and (5) domestic cultivators may face competition from outdoor production, hemp-based CBD (cannabidiol, the non- psychoactive compound of cannabis) products, and global imports.

This report is not to be distributed outside of Canada under any circumstances. 4

CANNABIS October 2018

Birth of an Industry

We all know the traditional joint, rolled using the dried flower of the cannabis (or marijuana) plant. The psychoactive constituent in the dried flower is tetrahydrocannabinol (THC), which is one of at least 113 cannabinoids found in cannabis plants. THC levels typically range between 5% and 30% – the higher the level, the more intense the “high.” The other important cannabinoid is CBD, which may have medical benefits for the treatment of multiple sclerosis, epilepsy, and post-traumatic stress disorder (PTSD), among many other ailments.

Over the past few decades, the active ingredients in cannabis have become available in a greatly expanded number of forms that now include oils, highly concentrated extracts, edibles (food and drinks infused with THC or CBD), sprays, and creams.

Exhibit 1.2: Cannabis Product Formats

Source: © All rights reserved. Licensed Producers: Market Data. Health Canada, modified 2018. Adapted and reproduced with permission from the Minister of Health, 2018; Scotiabank GBM.

Product formats will continue to evolve, Exhibit 1.3: Demand Patterns Are Changing which could increase average prices and 100% bring new consumers to the market. While 95% 4% 5% 6% 7% 90% Canada is expected to wait a year after 14% 85% 15% 13% 13% legalizing recreational cannabis on October 80% 17, 2018, before allowing many value-added 75% 12% 17% 20% 23% 70% formats, we expect product mix to eventually 65% 66% follow a similar path as in U.S. markets. 60% 62% 55% 59% According to Colorado’s Marijuana Policy ProductMarket Share (Adult Use) 54% 50% Group LLC (MPG), the use of cannabis 2014 2015 2016 2017 flower declined sharply in the state after Flower Concentrate Edibles Shake/Trim Other legalization (from 66% to 54% of the Source: Marijuana Policy Group LLC (MPG); Scotiabank GBM. recreational market), while concentrate demand increased (from 12% to 23% of the recreational market) as consumers moved up the value chain. Of particular note are cannabis vape pens and cannabis-infused beverages in the United States, which have quickly gained market share. New formats may also appeal to a broader demographic, increasing the customer base.

This report is not to be distributed outside of Canada under any circumstances. 5

GROWING FOR THE FUTURE October 2018

Why Is/Was Cannabis Illegal Anyway?

In the United States, many will point to an elaborate 1930s conspiracy among the wealthy and political elite to destroy the hemp industry. The so-called conspirators included William Randolph Hearst (newspaper baron), DuPont Company (the chemical producer that had recently invented nylon), Andrew Mellon (the richest person in the United States and a significant investor in DuPont), and Harry Anslinger (Commissioner of the Federal Bureau of Narcotics). These four allegedly cooperated to kill the hemp industry through the U.S. Marihuana Tax Act of 1937.

The story starts with how Mr. Hearst was heavily invested in timber to support his newspaper business. The reality is that he did not own vast timber acreage; in fact, he was a huge net buyer of paper – not a seller. He owned some acreage that was not used for timber production, but rather to build estates. In other words, he should have welcomed and encouraged the competition from hemp to make his newspaper business more profitable. Mr. Hearst was so heavily dependent on imports of Canadian newsprint that he almost claimed bankruptcy in the late 1930s.

The conspiracy goes on to discuss how Mr. Mellon, who was the uncle of Mr. Anslinger’s wife, appointed Mr. Anslinger as Commissioner, partially to ensure that hemp didn’t threaten DuPont, which he was heavily invested in. However, the du Pont family was never threatened by hemp. It certainly didn’t need money to invest in General Motors since it had been financially successful as the lead manufacturer of explosives in the First World War.

The reality, in our view, is that outlawing cannabis is no different than the campaigns against opium and alcohol – each was perpetuated by racism and cultural warfare. Anti-cannabis laws began in countries where white minorities ruled black majorities. In South Africa, “dagga” was banned in 1911; two years later, “ganja” was outlawed in Jamaica. In the 1920s, Canada, Britain, and New Zealand all followed suit. In the United States, the criminalization of marijuana started in regions where Mexicans and African-Americans were the primary consumers. By 1933, when Prohibition was repealed in the United States, 30 states had some form of law against cannabis.

Why Are Some Countries Decriminalizing or Legalizing Cannabis?

There are several reasons why some countries are decriminalizing or legalizing cannabis use:

1. The war on marijuana largely appears to have failed and has cost the taxpayer billions of dollars. Despite the costly war on drugs, millions of people still consume marijuana. In fact, we think many Canadians and Americans view marijuana use as relatively safe. 2. In the United States, 64% of Americans support marijuana legalization, up from 12% in 1969, according to a survey from Gallup and others.

3. Medical benefits of CBD oils are just starting to be understood, and their acceptance is growing rapidly. CBD helps with pain relief, has anti-seizure properties, combats anxiety, reduces the risk of diabetes, and can aid sleep issues, among many other benefits. 4. A recent study suggests violent crime drops in areas where cannabis has been legalized. 5. In Canada, the new law is intended to better protect youth from access to cannabis, with similar restrictions as alcohol and tobacco; displace the illicit market; and protect public health and safety with product quality and safety requirements.

This report is not to be distributed outside of Canada under any circumstances. 6

CANNABIS October 2018

Sizing Up Canadian Supply and Demand A Brief History

2001 Medical Medical cannabis was legalized in Canada in 2001 under the Marihuana Medical MMAR cannabis Access Regulations (MMAR) framework. MMAR allowed individuals to grow legalized cannabis or appoint a designated grower.

In 2014, MMAR was replaced by the Marihuana for Medical Purposes Regulations (MMPR); the primary change was the privatization of production, 2014 LP's not placing the right to grow in the hands of a limited number of LPs. Pricing was not MMPR individuals producing fixed, selection was done online, and product was shipped directly to patients.

The short-lived MMPR was replaced in 2016 by the Access to Cannabis for Medical Purposes Regulations (ACMPR), which is the current regulatory Patients can 2016 framework. Under the ACMPR, patients are once again allowed to grow cannabis purchase or ACMPR grow as are LPs.

Following the 2016 publication of the report from the Task Force on Cannabis Legalization and Regulation, Bill C-45 was drafted and proposed as the Cannabis Act to regulatory framework to legalize recreational cannabis. On April 2017, the 2017 legalize government of Canada introduced Bill C-45 into parliament, and it received royal Bill-C45 recreational cannabis assent in June 2018, officially making the Cannabis Act law. introduced

On October 17, 2018, Canada became the first G20 nation to legalize recreational cannabis, still under the ACMPR framework. Today, there are ~270,000 medical-cannabis client registrations, and 60 tonnes (60,000 kilograms) Recreational 2018 cannabis of cannabis flower and oil have been shipped over the last 12 months, according ACMPR legalized to Health Canada.

Today, the full legalization of recreational cannabis in Canada will leave the provinces and territories responsible for controlling the distribution and, in some cases, the retail sale of cannabis. Accordingly, Canadian LPs will have different market opportunities with varying economics in each region, and in many cases they will be limited to only the wholesale margin. As provinces put the finishing touches on their policies, LPs are scrambling for market share.

A $5.5 Billion Market…

Exhibit 1.4: Canadian Cannabis Market Size (2017) In 2017, Statistics Canada estimates total cannabis expenditures (illicit + medical) $20 $16.0 were $5.5 billion, larger than the market for liquor. Cannabis expenditures have $15 grown at a 6.2% CAGR over the past 45 $9.1 $10 years, driven by volume (5.3% CAGR) rather $7.2 $5.3 $5.5 than price (0.9% CAGR). Statistics Canada $5 Market Size ($B) pegs current Canadian cannabis consumption at 775 tonnes (775,000 $0 kilograms). Statistics Canada’s estimates use Spirits Cannabis Wine Beer Tobacco a price of ~$7/g, in line with what it estimates Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM. as the current illicit market average price.

This report is not to be distributed outside of Canada under any circumstances. 7

GROWING FOR THE FUTURE October 2018

Nobody actually knows the size of the cannabis market. Without reported sales tracking or tax data, there is simply no reliable method of understanding exactly how big the customer base is, how much is spent, and how much is consumed. Instead, we have survey data and precedents from other markets, both of which are subject to various nuances and biases. Statistics Canada relies on infrequent survey results and fills in missing data with assumptions for frequency of consumption and quantity consumed. It is a useful data point and the best one we have, but it is still a guess. We will begin getting improved data in the near term, but we expect it will take a year or more before we can truly size the Canadian market with accuracy.

Exhibit 1.5: Canadian Cannabis Consumption and Price Exhibit 1.6: Scotiabank GBM Demand Forecast

900 Quantity (mt) $12 1,400 800 Price (C$/g) $10 1,200 700 1,000 600 $8 800 500 $6 400 600

300 $4 400

200 Avg. Selling Price($/g)

$2 (mt) Demand Cannabis Canadian 200

CanadianCannabis Demand (mt) 100 0

0 $0

1963 1977 1999 2013 1965 1967 1969 1971 1973 1975 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 2001 2003 2005 2007 2009 2011 2015 2017 1961 Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM. Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM estimates.

… That Could Be Understated…

Colorado’s MPG developed a demand model by grouping the population into frequency groups and estimating daily consumption. Key takeaways include (1) 17.5% of Colorado citizens over the age of 21 use cannabis at least once per day, while Statistics Canada’s 2017 estimate is 15.8%, including ages as low as 15, and (2) usage patterns are skewed, with the 50% of the lowest-frequency users consuming just 4% of demand and 27% of the highest-frequency users consuming 82% of demand. The model prediction for Colorado’s 2017 demand of 190 tonnes was 37% below the actual demand – far from perfect.

Of course, there are many differences between the Colorado and Canadian markets, the most notable being legal status, price, and availability. Still, MPG’s methodology offers a compelling read-through for Canadian demand. Using similar assumptions and Canada’s population implies 2017 demand in Canada of 938 tonnes, 22% higher than the Statistics Canada estimate. Perhaps also 37% too low.

Exhibit 1.7: Colorado Demand Model Exhibit 1.8: Implied Canadian Demand Model

Frequency of Group Annual Usage Frequency of Group Annual Usage Share of… Share of… Group Use Population Quantity (mt) Group Use Population Quantity (mt) (days per month) Colorado Mean Estimate Users Demand (days per month) Canada Mean Estimate Users Demand

Less than once 297,592 0.7 30% 0.4% Less than once 1,472,703 3.5 30% 0.4% 1-5 216,387 6.4 22% 3.4% 1-5 1,072,830 31.7 22% 3.4% 6-10 68,694 5.4 7% 2.8% 6-10 341,355 26.8 7% 2.9% 11-15 58,390 7.5 6% 3.9% 11-15 287,714 37.0 6% 3.9% 16-20 78,998 14.0 8% 7.4% 16-20 390,120 69.1 8% 7.4% 21-25 42,590 20.9 4% 11.0% 21-25 209,690 102.9 4% 11.0% 26-31 221,882 134.9 23% 71.1% 26-31 1,097,213 667.1 23% 71.1% Total 984,533 189.8 100% 100.0% Total 4,876,500 938.1 100% 100.0%

Source: Marijuana Policy Group LLC (MPG); Scotiabank GBM. Source: Adapted from Statistics Canada, 17-10-0009-01, October 12, 2018 – this does not constitute an endorsement by Statistics Canada of this product; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 8

CANNABIS October 2018

… or Overstated

A November 2016 study by the Office of the Parliamentary Budget Officer (PBO) estimated 2018 Canadian cannabis consumption would be between 378 tonnes and 1,017 tonnes, growing to 403 tonnes to 1,190 tonnes by 2021. This range indicates the risk is to the downside. While these estimates are on the low side, given the uncertain nature of the data and the fact that the report is two years old, we don’t think these estimates are necessarily the most representative of the actual market size.

We Forecast Demand Could Rise ~20% in 2019

We think total Canadian cannabis demand in 2019 could reach 1,000 tonnes (1 million kilograms), ~20% higher than our 2018 forecast and 30% above Statistics Canada’s 2017 demand estimate of 775 tonnes. While the headline number may seem high, we forecast cannabis purchased through legal channels (medical + recreational) will be 366 tonnes as it will take time to phase out the illicit market. Of course, just like Statistics Canada, MPG, the PBO, cannabis LPs, and the rest of the Street, we don’t really know.

Exhibit 1.9: Legalization Could Increase Demand by 30%

1,050 D 85 1000 1,000 C 950 60 B 900 C 24 B 850 16 831 A 40 800 775

CanadianCannabis Demand (mt) 750 2017 Other New 2018E Other New Daily Intake 2019E Consumers Consumers

Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM estimates.

Here’s how:

A. Our starting point is Statistics Canada’s 2017 demand number of 775 tonnes, subject to limitations (see above). B. We group annual population growth, inventory build, and demand from tourism under other. Combined, we think these segments will add 40 tonnes of demand in 2018 and account for 24 tonnes in 2019.

 We assume population growth generates ~14 tonnes/year of demand growth, on top of an initial 25 tonnes in late 2018. We forecast annual Canadian population growth of 1.4%, in line with historical levels, which will create ongoing demand growth. Our 27-tonne forecast includes two years of population growth.

 Inventory build adds 25 tonnes of demand in 2018 and 15 tonnes in 2019. We include a one-time initial inventory build in 2018 and 2019 as distributors and retailers stock their shelves for the first time. We don’t know how much the increase will be, but it will be more than zero.

This report is not to be distributed outside of Canada under any circumstances. 9

GROWING FOR THE FUTURE October 2018

 We add 2.5% of demand (24 tonnes by 2019) to account for cannabis tourism. In Colorado, cannabis tourism accounts for ~10% of demand, according to MPG. However, we note several differences between Canada and Colorado; namely, (1) Colorado was a first mover and has become well known for its cannabis tourism; (2) Colorado is surrounded by states that have not legalized recreational cannabis, likely resulting in legal product moving into neighbouring states for resale; and (3) Canada will initially have low accessibility in many provinces because of their limited physical retail store footprints. C. The addition of 1.5% of new consumers increases demand by 76 tonnes. We think there are many potential users in Canada who can’t or won’t participate in the illicit market. Currently, about 15.8% of Canadians over the age of 15 consume cannabis, and we assume the legal market will bring 1.5% more new users to the market in 2019, particularly as the physical store footprint expands. We wouldn’t be surprised to see a higher surge of new consumers than our 1.5% increase. But if this occurred, we believe many of these new users would be casual, low-frequency consumers, so average usage rates would decline offsetting the increase. D. Increasing daily intake to 0.48 grams from 0.44 grams adds 85 tonnes to our demand estimate. Over time, we expect Canada’s daily intake level (0.44 grams inferred from Statistics Canada data) to shift toward Colorado’s, where the average daily intake is estimated to be 0.53 grams (MPG). Initially, intake in Canada will likely be lower because Colorado (1) operates a free-market cannabis economy, keeping prices lower; (2) has a well-established physical store presence; and (3) sells formats not initially available in the legal Canadian market. We assume Canada will close the gap over time as new formats become available. A 20% increase (going to 0.53 grams from 0.44 grams per day) is consistent with Deloitte’s 2018 Cannabis Report, which indicates high-frequency users will likely increase their frequency of use by 20% upon legalization.

Where could we be wrong? The foundation of this forecast is based on Statistics Canada’s survey estimate data, which could be much higher or lower. Growth from a smaller base would result in substantially lower demand forecasts. Additionally, we simply don’t know exactly how much inventory build will occur or how many new users will come to the market.

This report is not to be distributed outside of Canada under any circumstances. 10

CANNABIS October 2018

Exhibit 1.10: Scotiabank GBM Canadian Demand Estimates

2017 2018E 2019E 2020E 2021E

Population 36,708,083 37,221,996 37,743,104 38,271,508 38,807,309 % of Population Aged 15+ 84% 84% 84% 84% 84% Addressable Market1 30,831,002 31,262,636 31,700,313 32,144,117 32,594,135

Existing Consumers (% Pop. 15+) 15.8% 15.8% 15.8% 15.8% 15.8% New Consumers (% Pop. 15+) 0.3% 1.5% 2.0% 2.0% Total Consumers2 (Addressable Pop. %) 15.8% 16.1% 17.3% 17.8% 17.8%

Existing Consumers 4,876,500 5,038,559 5,489,502 5,727,076 5,807,255

Avg. Daily Intake3 (g) 0.44 0.44 0.48 0.53 0.53 Total Canadian Consumption (mt) 775 801 964 1,102 1,117

Additional Demand (mt) Add Channel Inventories4 (mt) 25 15 - - Add Visitor/Tourism Demand5 (mt) 5 24 28 28 Total Canadian Cannabis Demand (mt) 775 831 1,003 1,129 1,145

Segmented Demand 2017 2018E 2019E 2020E 2021E Medical Market: Registration Growth 50.0% 25.0% 10.0% 5.0% # of Registrations 260,948 391,422 489,278 538,205 565,116 Avg. daily intake6 (g) 0.3 0.3 0.3 0.3 0.3 Medical Demand (mt): 29 43 54 59 62

Legal Recreational Market: Illicit Conversion Rate7 0% 6% 30% 60% 80% Recreational Market: 47 273 626 844 Inventory Build 25 15 - - Tourism/Visitors 5 24 28 28 Total Legal Recreational Demand - 77 312 653 872

Illicit Market 746 711 637 417 211

Total Canadian Demand (mt) 775 831 1,003 1,129 1,145 LPs Addressable Market Size (mt) 29 120 366 712 934

1.Notes: Population estimates from 2017 Statistics Canada data. 2.1) Based Population on Statistics estimates Canada from 2017 2017 data. Statistics New consumers Canada onboarded data as retail locations increase and new formats hit the market. 3.2) 2017 Based based on o Statisticsn Statistics Canada Canada estimates;2017 data. increases New consumers to MPG Colorado onboarded figure as as retail the number locations of product increase formats and andnew the formats retail footprint hit the marketincrease. Also consistent3) 2017 withbased Deloitte on Statistics’s 2018 Cannabis Canada Report estimates;, which Increases indicates frequency to MPG Coloradowill increase figure by > as20% form post factors-legalization and. the retail footprint increase 4. Both Also distrib consistentutors and with retailers Deloitte's will build 2018 channel Cannabis inventories Report, creating that indicates a one-time frequency lift in demand will increase. by >20% post-legalization 5.4) 10% Both demand distributors in Colorado and retailersis visitors; will may build be inflated channel as inventoriesbordering states creating do not a haveone-time legal cannabis;lift in demand we use 2.5% for Canada. 5) 10% demand in Colorado is visitors; may be inflated as bording states do not have legal cannabis; we use 2.5% for Canada 6. Based on Canopy’s consumer base (~30% of medical sales); similar to LP numbers from Statistics Canada if oil is converted at 10%. 6) Based on Canopy's consumer base (~30% of medical sales); similar to LP #'s from Statistics Canada if oil is converted at 10% 7. We forecast illicit conversion will be swift, although limited product formats and potentially limited supply may keep 2019 low. 7) We forecast illicit conversion will be swift, although limited form factors and potentially limited supply may keep 2019 low Source: Adapted from Statistics Canada, 17-10-0009-01, October 12, 2018 – this does not constitute an endorsement by Statistics Canada of this product; Statistics Canada Cannabis Stats Hub; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 11

GROWING FOR THE FUTURE October 2018

Converting Illicit Demand to Legal Demand Should Be Swift

We expect the conversion of illicit-to-legal Exhibit 1.11: Canadian Demand by Channel demand to reach 30% in 2019 and 1,400 5.9 increase to 80% long term. A core objective of Canada’s recreational legalization policy 1,200 5.7 is to eliminate the illicit market; as such,

1,000 5.5 we expect government policy to favour accessibility, convenience, and price while 800 5.3 prosecuting those involved in large illicit production and distribution operations. 600 5.1 Enforced compliance of dispensaries, with 400 4.9 penalties laid against owners, would help

TotalCannabis Consumers(M) convert demand. Additionally, a tax CanadianCannabis Demand (mt) 200 4.7 incentive to snuff out the illicit market

- 4.5 exists, which is another reason why we 2017 2018E 2019E 2020E 2021E expect the government to back the LPs Medical Recreational Illicit Consumers (M) to the extent it can. Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM estimates. The legalization of several U.S. markets, as well as domestic surveys, provides a strong Exhibit 1.12: Illicit Conversion Rates indication that most consumers are likely

800 746 90% to make the switch from the illicit to the 711 80% legal market over time, provided (1) the 700 637 price is competitive and (2) locations are 600 70% convenient. There are many benefits of 60% 500 purchasing in the legal channel, including 417 50% 400 quality, selection, and safety. We think it is 40% 300 likely consumers will pay a premium for legal 30% 211 cannabis, between 10% and 25%.

200 20% Illicit Illicit ConversionRate(%) Illicit Illicit CannabisDemand (mt) 100 10% In the United States, we have seen the - 0% (near) complete absorption of Colorado’s 2017 2018E 2019E 2020E 2021E illicit market as a result of the state’s free- Illicit Cannabis Demand Conversion Rate market system, according to Colorado’s MPG. A 2014 MPG study forecast that Source: Statistics Canada Cannabis Stats Hub; Scotiabank GBM estimates. the legal market would capture only 65% of the illicit market. Colorado’s market is well served via convenient locations, a vast product assortment, and low prices. Additionally, many illicit producers in Colorado were able to transition to legal production. We expect Canada will fall short of 100% conversion, especially in the near term, as the government distribution mechanism is likely to keep prices higher than under a free-market system. Canada’s large land area may lead to inconvenient locations for many consumers.

In Washington, the initial conversion to the legal market in 2014 was impaired by high taxation, which kept prices at a significant premium to the illicit market. However, an overhaul of the tax system in 2015 saw prices fall to $8/g from $10/g, comparable with illicit prices at the time. Legal sales have increased sharply, with market participants estimating a legal market share of ~65%.

This report is not to be distributed outside of Canada under any circumstances. 12

CANNABIS October 2018

Deloitte’s 2018 survey suggests nearly two-thirds of cannabis purchases will be conducted through the legal market.

The evidence for a high conversion of illicit-to-legal demand is strong; we expect conversion levels will reach ~80% over time. However, we are concerned that the path to getting there may be slower than some expect. Factors driving this view include the following:

 Multiple layers of government margin (distribution + excise tax + sales tax) may result in legal prices that are uncompetitive with the illicit market.  The PBO’s 2016 cannabis report indicates price is paramount for illicit conversion. Exhibit 1.13 shows the illicit-to-legal market conversion sensitivity to price. It indicates that if legal prices are equal to illicit prices, conversion will be 98%. At a $1 premium, it falls to 65%. Beyond a $1 premium, illicit conversion could become challenging.  Convenient locations are an important factor in driving conversion; however, provinces may open too few stores or open stores too slowly to satiate demand, forcing would-be converts to stay in the illicit market.  We think that most of the current illicit Canadian production will still exist post-legalization, increasing competition.  Some product formats that will initially not be available in the legal market will exist in the illicit market (i.e., edibles).

Exhibit 1.13: Illicit Conversion Sensitivity Where could we be wrong? Post- legalization, the illicit market may still be competitive on price, convenience, and product selection. The casual consumer may not see much benefit from transacting in the illicit market aside from convenience. The high-usage consumer (28% of consumers account for 82% of cannabis consumption in Colorado) may realize meaningful financial savings from lower prices. As a result, high- volume consumers may be slow or unwilling to convert to the legal market, significantly reducing overall conversion.

Source: Legalized Cannabis: Fiscal Considerations, by Nigel Wodrich, published by the Office of the Parliamentary Budget Officer (PBO).

This report is not to be distributed outside of Canada under any circumstances. 13

GROWING FOR THE FUTURE October 2018

We Expect Domestic Medical Demand Growth to Slow to 5%

Just how much medical cannabis is Exhibit 1.14: Medical Registrations consumed in Canada? This is one of the 350 Client registrations (LHS) 9% few hard data points we have in this industry, Growth (RHS) 8% 300 as Statistics Canada reports reliable figures 7% 250 from the aggregate LPs. In the last 12 6% 200 5% months (LTM) ending June 30, 2018, the LPs

150 4% reported selling 25,600 kilograms of 3% cannabis flower and 39,500 kilograms of 100 2% cannabis oil. What we don’t know is the

50 Total Client TotalClient Registrations(000) 1% MonthOverMonth Growth(%) conversion factor from oil to flower to

0 0% determine equivalency.

Jul-17

Jan-18

Jun-17 Jun-18

Oct-17

Apr-17 Apr-18

Sep-17 Feb-18

Dec-17 Aug-17

Nov-17 In other words, medical sales were not equal

Mar-18 May-18 May-17 to 65,100 kilograms of flower equivalents. Source: © All rights reserved. Licensed Producers: Market Data. Health Canada, modified 2018. Adapted and reproduced with permission from the Minister of Health, 2018; Scotiabank GBM. Cannabis oil is not standardized; different LPs include different THC concentrations in Exhibit 1.15: Medical Market Growth oil (the bulk of oil is typically sunflower oil not oil from cannabis plants). For example, 600 565 100 538 Canopy reports 1 kilogram of cannabis 90 489 500 equals 10 litres of oil; however, Aphria 80 converts 1 kilogram of cannabis equivalents 391 70 400 to ~4.5 litres of oil. To simplify matters, 60 we assume Canopy sells 30% of medical 300 261 50 40 cannabis, consistent with its share of client 200 30 registrations, and gross up its last year’s

20 sales (8,455 kilograms), getting us to 28,200 Medical Cannabis Demand Medical (mt)

Medical Client Registrations(000) 100 10 kilograms of cannabis equivalent sales. - - 2017 2018E 2019E 2020E 2021E Health Canada expects the medical Client Registrations (LHS) Medical Demand (mt) - (RHS) market to grow at an 8.5% CAGR from 2017 to 2025, reaching 450,000 patients. Source: © All rights reserved. Licensed Producers: Market Data. Health Canada, modified 2018. Adapted and reproduced with permission from the We think this number is too low since growth Minister of Health, 2018; Scotiabank GBM estimates. in 2018 could be 50% alone. While the number of registrations is likely to grow, Exhibit 1.16: Falling Medical Demand in Colorado partially because de-registrations are uncommon, we have seen a slowdown in $160 Retail Sales $140 Medical Sales client registrations. Over the past six months, $120 the monthly CAGR fell to 3% from 8% a year $100 ago. A lesson learned from observing the $80 Colorado market is that post-legalization $60 medical sales are stagnant. This is likely $40 due to some medical users switching to

ColoradoCannabis Sales ($M) $20 the legal market. As such, while we believe $0 registrations will increase after legalization,

actual consumption likely won’t rise nearly

Jul 2014Jul 2015Jul 2016Jul 2017Jul

Jan 2014 Jan Jan2015 Jan2016 Jan2017 Jan2018

Oct Oct 2014 Oct 2015 Oct 2016 Oct 2017

Apr Apr 2014 Apr 2018 Apr 2016 Apr 2017 Apr 2015 as quickly and may even fall. Source: Colorado Department of Revenue; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 14

CANNABIS October 2018

We don’t expect medical-cannabis insurance coverage to be a major near-term driver of growth. Recently, Sun Life Financial Inc. (Sun Life) added medical cannabis to some premium coverage plans, but it only covers a few conditions as a last resort. Manulife Financial Corporation (Manulife) partnered with Shoppers Drug Mart Corporation (Shoppers) to offer enhanced medical-cannabis insurance coverage, but with similar limitations as Sun Life. As such, we do not view medical insurance as a major demand driver, unless the list of covered conditions is expanded and coverage becomes core.

Shoppers might bring medical cannabis to a store near you. Shoppers is currently waiting for its LP approval to sell medical cannabis, which will be sourced from other LPs. Supply agreements have been signed with Aphria and Aurora Cannabis Inc. (Aurora), among others. While distribution from pharmacies could improve medical-cannabis demand (as more patients and doctors sign on), LPs will have added an intermediary. The result is they will earn a wholesale margin rather than a retail margin on product sold via pharmacies. Shoppers will not target recreational sales, but parent company Loblaw Companies Limited (Loblaw) has received licences to develop cannabis stores in New Brunswick and to sell recreational cannabis in 10 of its Dominion supermarkets, based in Newfoundland and Labrador.

Cannabis Beverages Could Drive the Next Big Wave of Demand Growth

Global alcohol companies have identified cannabis as an opportunity and possibly a threat. Over the past year, we have seen several agreements between Canadian LPs and alcohol companies and expect more are on the way. It was the Constellation Brands investment in Canopy that initially crystallized the opportunity. Subsequently, we have seen HEXO Corp. and Molson Coors Canada joining forces to develop cannabis-infused drinks, as well as CannTrust Holdings Inc. and Breakthru Beverage Group, LLC. Heineken already sells non-alcoholic cannabis-infused beer under its Lagunitas brand in California dispensaries. Additionally, Diageo plc has held talks with major Canadian cannabis producers. Traditional beverage companies are also monitoring the cannabis industry, with The Coca-Cola Company having had talks with Aurora.

More than just kicking tires and positive headlines? We believe a real opportunity exists for cannabis- based beverages, but we think investors should be careful attributing too much value too quickly. Why?

1. Many beverage companies are kicking tires – Maricann Group Inc. has reported having discussions with 10 beverage companies over the past six months. 2. Beverage companies are trying to understand cannabis rather than necessarily commit capital. 3. Given U.S. federal policy, we don’t think investing in cannabis companies is without risk for U.S.-based beverage companies. 4. The technology is not fully developed – the end goal is to produce a clear, odour-free, taste-free beverage that is a fast-absorbing, fully soluble product, but we aren’t quite there yet.

5. There will be plenty of competition and only a handful of winners.

The can is 20x more valuable than the gram. A popular U.S. cannabis-based beverage is Lagunitas Hi-Fi Hops, which contains 10 milligrams of THC. In comparison, a gram of cannabis with 20% THC content contains 200 milligrams of THC, enough to make 20 cans of Hi-Fi Hops. Yet a gram of cannabis and a can of Hi-Fi Hops sell for about the same price – ~$10.

This report is not to be distributed outside of Canada under any circumstances. 15

GROWING FOR THE FUTURE October 2018

Many cannabis companies want to capture both the beverage and cannabis margins. However, not all joint ventures and partnerships are created equal. For example, the Canopy/Constellation Brands agreement has Canopy developing beverages in-house, with support from Constellation Brands. This setup presents a much larger opportunity for cannabis companies than simply providing product to a beverage manufacturer. Ultimately, the biggest share of margin will be in selling the branded drink, not the raw ingredients.

In U.S. recreational markets, less than 5% of total cannabis spend is on beverages. To move beyond the cannabis wallet, we think regulatory changes will be needed to allow beverages to be sold in stores other than cannabis dispensaries. With limited sales in the United States and a slow rollout in Canada (the format won’t even be legal in year 1), we think it is too early to divvy up the market among those involved just yet.

Initial Shortage Followed by Oversupply

Beyond what some producers are “guaranteeing” will be an initial supply shortage, we don’t expect meaningful supply issues as we move through 2019 for several reasons. (1) The inventory levels of LPs are high and growing; (2) the delay in legalization from June 2018 to October 2018 gave producers more time to catch up; (3) demand conversion from illicit to legal will not be instant; and (4) retail store build- outs will take time and won’t even begin in the largest market, Ontario, until April 2019.

We expect initial product calls to absorb Exhibit 1.17: LP Inventories Are Rising much of the existing inventory and that 120 Cannabis Oil the legal industry will be hand to mouth in 100 Cannabis Flower the initial months. While we believe some popular strains and brands will likely sell 80 out, we doubt store shelves will be empty. 60 Underpinning this view is our expectation 40 for total 2019 legal demand (recreational +

LP Inventory LP Levels (mt) medical) of 366 tonnes, largely driven by an 20 estimated illicit-to-legal conversion rate of

0 30%. In the event of an initial shortage, we

Jul-17

Jan-18

Jun-17 Jun-18

Oct-17 Apr-18

Apr-17 don’t necessarily expect the price surge we

Sep-17 Feb-18

Dec-17

Aug-17

Nov-17

Mar-18

May-17 May-18 saw in some U.S. markets since we don’t Source: © All rights reserved. Licensed Producers: Market Data. Health think the government distribution and retail Canada, modified 2018. Adapted and reproduced with permission from the Minister of Health, 2018; Scotiabank GBM. channels will necessarily adjust pricing to match demand with supply.

Other reasons we don’t expect critical under-supply include the following:

 As of June 2018, LPs had 66 tonnes of cannabis flower and 30 tonnes of cannabis oil in inventory. Given the acceleration of production in recent months, we expect inventory levels today are even higher.  Ontario, which accounts for ~40% of cannabis demand, will not open privatized physical retail stores until April 2019.  Since both the provinces and retailers are scrambling to determine retail plans, deal with licensing, and build out locations, we expect it will take some time to reach full scale.  Advertising and marketing will be limited given policy constraints.

This report is not to be distributed outside of Canada under any circumstances. 16

CANNABIS October 2018

We estimate production capacity capable of producing 240 tonnes to 836 tonnes of cannabis is either currently online or will be ramping up by the end of 2018, and that is just from the 10 largest LPs. There is a high level of execution risk with new capacity as it takes time to ramp up new facilities. The five LPs below produced more than 15 tonnes last quarter and 60 tonnes annualized, and production capability is growing quickly.

 Canopy harvested 9,685 kilograms in Q1/F19 (ending June 30, 2018) and stated, “We expect the amount of cannabis harvested to increase significantly in the coming quarters.”  Aphria sold nearly 1,800 kilograms in Q1/F19 (ending August 31, 2018).  CannTrust sold 1,062 kilograms of equivalent products (more than 50% dried cannabis) in Q2/18.  Aurora produced 2,212 kilograms in Q4/F18 (ending June 30, 2018).  Tilray, Inc. sold 745 kilograms in Q2/18.  Cronos Group Inc. sold 477 kilograms in Q2/18, 87% of which was cannabis flower.

Where we could be wrong. There is execution risk when ramping up large facilities quickly, and mould, mildew, and pests can all be problems. Additionally, some producers have limited experience growing cannabis at scale. If actual production falls short of producer expectations or if our demand estimates (particularly on illicit-to-legal conversion) are too conservative, the result could be a very tight market or near-term supply shortage.

Mid-term Domestic Oversupply Seems Inevitable

We expect the domestic cannabis market to become heavily oversupplied in the medium to long term despite our bullish view on Canadian demand growth. Impending domestic capacity from Canopy, Aphria, and Aurora alone is enough to supply our estimated legal Canadian market. We do not expect export volumes to meaningfully offset our expectation of oversupply in the medium term.

Exhibit 1.18: Oversupply Appears Inevitable Exhibit 1.19: Expected to Result in Low Utilization Rates

Kg Product Existing 2018E 2019E 2020E 2021E 2.5 Hexo Supply - Big 10 239,250 836,500 1,954,000 2,028,000 2,028,000 Supply - Others (Placeholders) 0 100,000 300,000 500,000 500,000 TGOD Total 239,250 936,500 2,254,000 2,528,000 2,528,000 2.0 Less Legal Demand 28,574 120,251 365,877 712,157 934,031 Tilray Excess Supply 816,249 1,888,123 1,815,843 1,593,969 Organigram 1.5 Implied Big 10 Utilization 12% 14% 19% 35% 46% CannTrust Implied Other Utilization 0% 0% 0% 0% 0% Medreleaf (Aurora) 1.0 Cronos

Canopy 0.5

LP Production LP Capacity mt) (000 Aurora

Aphria 0.0 Legal Demand Existing 2018E 2019E 2020E 2021E

Source: Company reports; Scotiabank GBM estimates. Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 17

GROWING FOR THE FUTURE October 2018

If we give credit to the other ~65 LPs with production plans, we could eventually see oversupply move to a multiple of 5x or 10x demand. The oversupply issue is exacerbated by a relatively cheap cost of capacity compared with the value of production. Building 100,000 square feet (sf) of greenhouse space costs ~$15 million and can produce 10,000 kilograms of cannabis annually. With margins of $2/g, the payback period is less than a year, which is exactly why producers are overbuilding. We expect oversupply will result in (1) price compression, with many producers fighting for the same market share, and (2) a shakeout of winners and losers that will be decided by the consumer’s wallet.

We think the winners will have at least some of the following characteristics:

 A first-mover advantage since being front of mind for consumers will be critical.  Substantial supply commitments with provinces, other LPs, retailers, international channels, etc.  Low production costs.  Popular brands.

As the industry matures, we expect several large wholesale producers to emerge, acting as contract cultivators. Long-term price compression could force an industry restructuring, with scores of less efficient producers or those unable to get product on shelves being forced out of business. Some producers may also simply choose to exit the commodity side of the business. We wouldn’t be surprised if large LPs eventually spun off their production assets, separating the commodity business from the portion of the business focused higher up the value chain.

Where we could be wrong. The supply/demand balance could improve if new international markets open, penetration in existing markets increases, and the industry consolidates. Tapping into new channels of demand such as animal health products, pharmaceuticals, and new formats may alleviate the problem.

This report is not to be distributed outside of Canada under any circumstances. 18

CANNABIS October 2018

Pricing Outlook Government Projections Imply $9.50/g Retail Pricing

In a free market, we view cannabis flower as largely commoditized, subject to supply/demand economics, with prices falling toward the marginal producer’s cost. However, Canada will not be operating a strictly free-market economy. Licences are limited, and the government will be a strategic intermediary, controlling the distribution between the producer and the retail outlet, which in some cases will be run by the provincial government. Many initial provincial supply contracts have been inked with LPs, but they have focused on volume rather than price, leading to uncertainty over how much wholesale margin is available to the LPs. The government will be walking a tightrope as it attempts to make prices competitive with the illicit market but not so low as to encourage increased consumption.

According to the 2016 Marijuana Task Force report, “Taxes should be high enough to limit the growth of consumption, but low enough to compete effectively with the illicit market. Mechanisms such as a minimum price should be used to prevent predatory pricing, if necessary.”

Exhibit 1.20: Government Price Projections The government expects pre-tax prices to be $7.50/g in 2018, falling to $6.67/g in 2021. The Canadian government offered insight into what the price build-up could look like in Legalized Cannabis: Fiscal Considerations, a 2016 report published by the PBO. Specifically, it expects the build- up to account for declining production costs over time, with the wholesale price of $4.50/g in 2018 falling to $4/g in 2021. The report assumed retail margins were 40%, which we believe includes the distribution margin. Overall, on a post-tax basis (adding $2/g for Note: Average pre-tax price for legalized dried cannabis, based on industry financial statements, consultations with industry representatives, and PBO excise and sales taxes), we view day 1 post- calculations. tax pricing of $9.50/g as reasonable, about Source: Legalized Cannabis: Fiscal Considerations, by Nigel Wodrich, 20% higher than the current illicit price. published by the Office of the Parliamentary Budget Officer (PBO).

We Think Retail Prices Will Fall to $8/g and Wholesale Prices to $3.50/g

Near term, we forecast retail prices of ~$10/g, falling to $8/g as oversupply leads to price compression. As such, we estimate the long-term recreational retail price for average dried flower pricing at $8/g, below the PBO projections of $9.50/g. For the producer, we expect netbacks to fall toward $3.50/g (excluding the excise tax) from about $5/g today. As many of the large-scale producers expect their cash costs to also fall (improve) to well below $1/g, margin contraction shouldn’t reflect the magnitude of the decline that headline prices will likely experience.

HEXO and Quebec have agreed on a firm wholesale price of $5.40/g (including the $1/g excise tax), for a realized price of $4.40/g. We think initial pricing could be sticky since sufficient production may not be available during the first year as capacity ramps up. We don’t think HEXO’s pricing is necessarily a high point and expect some producers to realize initial prices between $5/g and $6/g.

This report is not to be distributed outside of Canada under any circumstances. 19

GROWING FOR THE FUTURE October 2018

Some worry that oversupply will lead to increased commoditization and further margin compression. However, margins may prove more resilient than some think for the following reasons: (1) cannabis will be a branded product, and many consumers will not base their decisions purely on price; (2) the sale of higher- margin formats may offset lower prices; and (3) margins for alcohol and tobacco companies are between 50% and 70%, suggesting a disconnect from their underlying input costs. We think that, over time, selling product will become more important than producing it as market share rather than capacity will ultimately determine the winners.

Exhibit 1.21: Cannabis Price Build-Up Scenarios

Source: Scotiabank GBM estimates.

A. We expect production costs to decline to $1/g, in some cases even lower, as capacity increases drive greater efficiencies on production costs. Efficient producers with high levels of automation in their facilities could see even lower costs; for example, Aphria expects to be able to produce at less than $0.80/g in the long term. These costs are average expectations only. We expect indoor growers to have higher costs, at ~$2/g, offset by higher revenue from premium product. B. We assume packaging and shipping costs of $0.75/g long term. We assume the average package size in the recreational market will be smaller than in the medical market, leading to somewhat higher packaging and shipping costs. Offset by efficiencies as volumes increase. C. Wholesale margins will be $1.75/g (50%) in our view. Existing wholesale gross margins for LPs are higher, in the 70% to 80% range, but that is because medical sales don’t involve an intermediary because they are sold direct to consumers. Gross margins in other regulated industries are comparable, including beer (55%), spirits and wine (52%), and tobacco (70%). Margins for the lowest-cost producers should be even higher.

D. We forecast realized wholesale prices of $3.50/g (before the excise tax). Removing the tax from revenues or including it in costs is simply an accounting issue; it won’t make any difference to underlying earnings. In our models, we use realized prices. E. Cannabis will have an excise tax of $1/g on sales of up to $10 and a 10% tax on sales worth more than $10. The excise tax is significantly above that of tobacco, which is ~$0.12 per cigarette, while a single joint could be taxed at $1/g. The tax revenue split is set at 75% for the provinces and 25% for the federal government.

This report is not to be distributed outside of Canada under any circumstances. 20

CANNABIS October 2018

F. Provincial distributors will set how much wholesalers can earn and then take their own cut. Provinces controlling distribution is nothing new for Canada, with a precedent in the alcohol market. Both Alberta and Ontario control alcohol distribution in their respective markets, with the key difference being that the Alberta Gaming, Liquor, and Cannabis Commission (AGLC) controls only distribution, whereas the Liquor Control Board of Ontario (LCBO) controls both distribution and retail sales.

Exhibit 1.22: AGLC and LCBO Alcohol Margins, 2017 As a distributor only, the AGLC sells to retailers, adding a flat markup on most AGLC LCBO products (beer has a volume-based Liquor Sales ($M) 2545 5892 markup). In 2017, the AGLC earned COGS ($M) 1668 2943 a 34% gross margin (33% EBITDA Gross Margin ($M) 877 2949 margin) on $2.5 billion in sales, which Gross Margin (%) 34% 50% we think could be a reasonable proxy for cannabis distribution margins. LCBO SG&A ($M) 39 945 EBITDA margins are similar. We view EBITDA ($M) 838 2004 the distribution business for cannabis as EBITDA (%) 33% 34% more simplistic than the system for Source: Alberta Gaming, Liquor, and Cannabis Commission (AGLC); alcohol; for example, in some cases, Liquor Control Board of Ontario (LCBO); Scotiabank GBM. the LPs will simply buy their own wholesale product from the provinces and sell it in their retail channels. As such, we think gross margins will be somewhat lower. We assume 25% margins (pre-excise tax), which adds ~$1.25/g to retail prices.

G. Retailers will take a cut as well. The retail landscape will look very different in each province; however, three of the top four markets (Ontario, British Columbia, and Alberta) will operate privatized retail networks. As a proxy for what margins may look like in a privatized environment, we use Alcanna Inc. (CLIQ-T). Gross margins for Alcanna’s liquor sales business in 2017 were 26%, implying another ~$1.50/g markup on the retail side. H. In addition to excise taxes, cannabis will be subject to regular sales taxes at the federal level (5%) and provincial levels (up to 10%). Assuming average pre-tax prices of $7.25/g to $9/g, we expect average taxes to be $0.75/g.

Pricing takeaways. (1) LPs can earn only the wholesale margin and the retail margin; (2) production costs will be critical for margins; (3) the government will be a huge beneficiary of legalization, increasing its incentive to enforce compliance; and (4) given the layers of margins, taxes, and costs, pushing prices below $8/g will be challenging. We Think the Wholesale Market Could Be Worth $20 Billion to $25 Billion

We estimate the value (not size) of the legal Canadian wholesale cannabis industry could be as much as $25 billion by 2021, with wholesale prices at $3.50/g and a 20x EV/EBITDA multiple. These figures are based on (1) our volume expectations for the Canadian legal cannabis market (recreational + medical); (2) our wholesale pricing estimates at $3.50/g for recreational cannabis and $8/g for medical cannabis; (3) 35% EBITDA margins, consistent with alcohol peers; and (4) 20x EV/EBITDA multiples, at the upper end of large spirit and wine companies. At 15x EV/EBITDA, we estimate a market value of nearly $20 billion in 2021.

This report is not to be distributed outside of Canada under any circumstances. 21

GROWING FOR THE FUTURE October 2018

Exhibit 1.23: Canadian Wholesale Market Value (Not Comparable industry average EV/EBITDA Size) Could be $25 Billion by 2021 multiples (see Exhibit 1.24) for global

$30 $3.50/g Wholesale Price spirit and wine companies are 15x, while

$25 beer and tobacco multiples are lower, at ~11x, on 2020 numbers. While cannabis $20 companies trade well above these levels on $15 near-term earnings, we need to look further $10 out to capture the growth in the industry. As $5 such, we think multiples on the higher end of

$0 our range (10x to 20x) are appropriate for DomesticWholesale Market ($B) Value 2017 2018E 2019E 2020E 2021E cannabis companies, even though large 10x EV/EBITDA - Low 15x EV/EBITDA - Low 20x EV/EBITDA - Low alcohol and tobacco companies trade closer Source: Scotiabank GBM estimates. to the lower end.

 EBITDA margins for alcohol companies are largely in the mid-30% range, with large tobacco companies closer to the upper-40% range, which we expect is due to a higher degree of industry consolidation in the tobacco industry. These ranges support our estimate of a 35% EBITDA margin for wholesale cannabis producers.

Exhibit 1.24: Comparable Industry Multiples

Share Market Enterprise EV/Sales EV/EBITDA EBITDA Margin Company: Price Cap Value 2019E 2020E 2019E 2020E 2019E 2020E US$/sh US$B US$B Beer: Ambev SA $4.59 $72,160 $71,242 4.6x 4.3x 10.5x 9.6x 44% 44% Anheuser-Busch InBev SA/NV $86.04 $145,693 $288,552 4.7x 4.5x 11.3x 10.5x 42% 43% Boston Beer Company, Inc. Class A $270.76 $2,338 $3,118 2.9x 2.7x 15.5x 14.1x 19% 19% Carlsberg A/S Class B $113.14 $17,188 $20,504 2.0x 1.9x 8.9x 8.4x 22% 23% Diageo plc $34.32 $83,916 $100,033 5.7x 5.4x 15.8x 14.9x 36% 36% Heineken NV $88.87 $51,189 $67,422 2.3x 2.2x 9.5x 8.8x 24% 25% Molson Coors Brewing Company Class B $61.31 $12,162 $23,567 2.0x 1.9x 8.5x 8.1x 23% 23% Average: 3.5x 3.3x 11.4x 10.6x 30% 30% Spirits & Wine: Andrew Peller Limited Class A $11.72 $528 $630 2.0x N.A. 11.2x N.A. 18% N.A. Brown-Forman Corporation Class B $47.26 $22,748 $25,170 6.7x 6.3x 18.9x 17.4x 35% 36% Constellation Brands, Inc. Class A $221.61 $42,063 $58,051 6.0x 5.6x 15.8x 14.4x 38% 39% Pernod Ricard SA $152.46 $40,466 $48,778 4.4x 4.1x 14.8x 13.7x 30% 30% Vina Concha Y Toro S.A. $1.99 $1,484 $1,868 1.9x N.A. 11.8x N.A. 16% 17% Average: 4.2x 5.3x 14.5x 15.2x 27% 31% Tobacco: Altria Group Inc $62.91 $118,596 $131,415 6.4x 6.3x 12.2x 11.5x 52% 55% British American Tobacco p.l.c. $45.54 $104,453 $165,355 4.7x 4.4x 10.1x 9.3x 46% 47% Imperial Brands PLC $35.39 $33,757 $51,831 4.2x 4.0x 9.1x 8.5x 46% 47% Philip Morris International Inc. $84.62 $131,542 $158,374 5.1x 4.9x 11.8x 11.1x 43% 44% Average: 5.1x 4.9x 10.8x 10.1x 47% 48% Source: FactSet; Scotiabank GBM.

With the current enterprise value of the 10 largest cannabis producers at more than $50 billion, it is clear the market is pricing in more than just the wholesale business. We believe it is also capturing (1) additional EBITDA from retail; (2) international EBITDA, either through exports or local production; (3) higher-margin formats after the first year; and (4) blue-sky opportunities in pharmaceuticals and consumer packaged goods (CPG). While we agree that the LPs should be pricing in more than just the Canadian wholesale market, we are concerned that aggregate valuations are beginning to price in a bit too much too quickly.

This report is not to be distributed outside of Canada under any circumstances. 22

CANNABIS October 2018

The Retail Opportunity Retail Offers Additional Margin Capture for the LPs

Exhibit 1.25: Canadian Recreational Demand Post-legalization, we expect Canadian recreational demand to rise sharply, 1,000 900 reaching ~870 tonnes by 2021. Initially, 800 we expect nearly half the volume to be sold 700 600 through the online channel, declining to 25% 500 as the physical retail footprint grows over 400 300 time. We expect the pace of store openings 200 and retail sales may be slower than some 100 expect as delays in provincial decisions, pilot

Canadian Legal Rec.Market Share (mt) 0 2017 2018E 2019E 2020E 2021E tests, potential under-supply, and limited Retail Rec. Demand Online Rec. Demand formats all affect sales. Source: Scotiabank GBM estimates. We think high-quality retail stores can earn EBITDA margins in the mid-teens. Precedents from U.S. dispensaries (average net income margins of 15% to 20%, according to Marijuana Business Daily) indicate cannabis stores can be even more profitable. In fact, in Q2/18, MedMen Enterprises Inc. reported annualized revenue of a staggering US$6,541/sf, even ahead of Apple at ~US$5,546/sf for its retail stores, according to CoStar. While we don’t expect all stores to perform as well, particularly as density rises, we think industry revenue can average ~$1,000/sf. As such, we think cannabis retail multiples deserve to be bucketed with other premium retailers, at 15x to 20x EV/EBITDA.

Exhibit 1.26: Premium Retailer Multiples Share Market Enterprise EV/Sales EV/EBITDA EBITDA Margin Retail Comps Price Cap Value 2019E 2020E 2019E 2020E 2019E 2020E C$ C$ 000 C$ 000 Costco Wholesale Corporation 221.05* $125,726 $126,162 0.6x 0.6x 15.1x 14.1x 4% 4% Canada Goose Holdings, Inc. $62.99 $2,995 $6,971 6.9x 5.6x 25.6x 18.9x 27% 30% Lululemon Athletica Inc 140.68* $22,386 $23,683 4.8x 4.2x 18.8x 16.2x 25% 26% Starbucks Corporation 56.01* $98,081 $107,297 3.1x 3.1x 13.5x 13.3x 23% 23% Average: 3.9x 3.4x 18.3x 15.6x 20% 21%

*US$ share price. * U.S.-dollar share price.

Source: FactSet; Scotiabank GBM.

Given our 2021 estimate of 872 tonnes of recreational demand and assuming online sales take 25% market share, we think physical retail stores could sell ~650 tonnes of product. Assuming an $8/g retail price implies market revenues of $5.2 billion ($6.5 billion at $10/g). We view this estimate as conservative as stores will also sell merchandise and accessories. Assuming 15% EBITDA margins (total retail EBITDA of $0.8 billion) and 20x EV/EBITDA multiples, we calculate the value of the retail opportunity at ~$16 billion. We estimate ~75% of this amount will be available to private retailers, including the LPs, and the rest will go to government retailers.

The retail opportunity is more than just a source of additional margin. Capturing retail sales will also help companies lock in supply for their wholesale production. We see several benefits for LPs to also invest in retail: (1) capturing the retail margin; (2) owning the data and direct customer relationships, giving the LPs valuable information that can be used for future production decisions; and (3) being able to promote their own products ahead of their competitors’ products. We believe these benefits are why LPs have invested in retailers, such as Aurora buying 20% of Alcanna and Canopy purchasing Hiku Brands Company Ltd. (Hiku).

This report is not to be distributed outside of Canada under any circumstances. 23

GROWING FOR THE FUTURE October 2018

Limited Packaging and Advertising Opportunities Will Make Product Reviews Critical for Brand Success

Exhibit 1.27: Packaging Restrictions Under the Proposed Approach to the Regulation of Cannabis, promotion, packaging, and labelling will be strictly controlled. The non-descript nature of product packaging will mean stores could struggle to communicate product characteristics to customers. Companies may also struggle to create brand loyalty. We believe some level of advertising and product display will be permissible inside stores.

We expect online reviews to be critical for the success of both strains and brands, just as they are critical for everything from electronics to restaurants. With limited chances to advertise, we expect third-party review sites, such as Lift.co, to become critical demand drivers. We think one of the best places to determine which companies are the

brand winners and which the brand losers will Source: © All rights reserved. Proposed Approach to the Regulation of Cannabis: Summary of comments received during the public consultation. be on these third-party review sites. Health Canada, 2018. Adapted and reproduced with permission from the Minister of Health, 2018.

Online Government Sales Will Set a Price Ceiling for Retailers

Exhibit 1.28: Preferred Method of Legal Purchase The four key provinces (Ontario, Quebec, British Columbia, and Alberta) will control Private Retail Store online sales. In our view, 25% of legal sales Government Retail Store will be sold online, likely even more initially. Direct from LP The rollout of physical retail stores will be LP Website slower than online outlets, giving the Private Website provinces a chance to gain market share. Government Website Self Cultivation According to a 2018 Deloitte survey, Mobile App consumers display a preference for

0% 10% 20% 30% 40% 50% 60% purchasing legal cannabis from physical Preferred Method of Legal Purchase retail stores (see Exhibit 1.28). About half the respondents selected physical stores, Source: Deloitte 2018 Cannabis Report; Scotiabank GBM. and only one-third selected online.

Online advantages include the following: (1) potentially higher margins; (2) wider product selection; and (3) privacy for the purchaser. Disadvantages include (1) shipping costs; (2) customer experience, particularly given strict packaging and advertising guidelines; and (3) increased time between purchasing and receiving product.

We think online sales will set a price ceiling for retail sales. While retail outlets offer several advantages relative to online sales, at the end of the day, if pricing is better online, customers will shift from retail. As such, we view the online selling price as being a soft price ceiling for retail prices.

This report is not to be distributed outside of Canada under any circumstances. 24

CANNABIS October 2018

Volume Commitments Will Be Key to Success

In an oversupplied market, securing provincial demand is critical. In total, about 200 tonnes of supply deals with the provinces have been inked. Contract terms vary in length, ranging from one to five years. Provincial supply announcements are memoranda of understanding (MOUs), which indicate potential sales, not guaranteed sales; there is no firm commitment by the provinces to actually purchase the volumes indicated.

The land grab we have seen with provincial supply agreements heavily favour LPs with existing or near-term production availability, as well as local production facilities. Longer term, LPs that miss out on the initial rounds of deal making may struggle to get product to market, which could lead to lower prices. While each province offers the LPs a unique set of opportunities, only four really matter (Ontario, Quebec, British Columbia, and Alberta) since they account for nearly 90% of expected Canadian demand.

Exhibit 1.29: Provincial Supply

Source: Canadian Centre on Substance Use and Addiction (CCSA); Scotiabank GBM estimates.

Ontario. The Ontario Cannabis Store (OCS) has inked supply deals with 32 LPs to satiate the expected online demand, although volumes and prices have not been disclosed. LPs include the usual suspects: Canopy, Aurora, Aphria, HEXO, Tilray, and CannTrust, among others. SKUs have been selected. For example, Canopy, under its Tweed brand, has listed more than 100 SKUs in a wide variety of formats (e.g., pre-rolled cannabis cigarettes, dried flowers, oils, and softgel caps). Ontario recently announced it will move forward on privatized retail stores beginning in April 2019 and allow LPs to run one store on the site of their production facilities. We expect LPs will find a workaround to secure more retail locations through joint ventures, partnerships, or franchising.

This report is not to be distributed outside of Canada under any circumstances. 25

GROWING FOR THE FUTURE October 2018

Quebec. Some of the largest supply deals so far have been with Quebec, with ~62 tonnes of MOUs in place for the first year. Most contracts last three years. Six LPs have received supply agreements, including HEXO (20 tonnes), Canopy (12 tonnes), Aphria (12 tonnes), Aurora and MedReleaf Corp. (13 tonnes); and Tilray (5 tonnes). Of particular note is the size of HEXO’s Quebec supply agreement: 20 tonnes. Quebec plans to open 20 government-run stores (operated by the Société québécoise du cannabis) by December 2018, expanding the footprint to 50-60 stores by the end of year 1 of legalization. Long term, Quebec is targeting 150-160 stores. Of note, Quebec is one of the few provinces to prohibit personal cultivation.

British Columbia. Under the British Columbia Liquor Distribution Branch (BCLDB), the province will give consumers access to ~150 strains of cannabis as it focuses on product selection, aided by the signing of 31 LP MOUs, including 12 B.C.-based LPs. The list of LPs includes the usual suspects once again, with other producers signed up once they receive their licences. British Columbia is one of the few provinces to offer both private and public retail sales and will not cap the number of licences issued, instead leaving that decision to local governments. British Columbia’s first private retail location will be in Kamloops, and the province plans to roll out its government-run BC Cannabis Stores carefully and efficiently. An important caveat is that the retail regulations in British Columbia do not allow stores owned by LPs to sell cannabis products produced by that LP.

Alberta. The AGLC selected 13 supply partners out of 31 applicants, including Canopy, Aurora, Aphria, and OrganiGram Holdings Inc. We expect additional LPs to receive supply deals over time, with a bias to those with local production facilities. Under the supply deal, Canopy is contracted to supply the province with 15 tonnes in the first six months of legalization, while Aurora will supply 25 tonnes over the same time. The retail network in Alberta will remain private, similar to the existing system for alcohol, with the AGLC acting as the sole distributor (and online seller) of cannabis. On the retail side, Alberta expects to open up to 250 private stores; ~700 store applications have been received so far. We note the initial store footprint was based on Colorado’s year 1 footprint and is not a firm number. Retail store ownership is limited to a maximum 15% market share for any one entity.

This report is not to be distributed outside of Canada under any circumstances. 26

CANNABIS October 2018

Looking Beyond Canada A Background on the U.S. Regulatory Environment

Exhibit 1.30: U.S. State Legalization The U.S. federal government continues to view cannabis as a Schedule 1 narcotic; however, many states have legalized recreational and/or medical use. The path to legalization was largely brought about under the Obama administration, when two watershed memoranda were issued. The first, issued in 2019 and known as the Ogden Memo, paved the way for medical- cannabis acceptance by guiding prosecutors to not focus federal resources on “individuals whose actions are in clear and unambiguous

compliance with existing state laws providing Source: National Organization for the Reform of Marijuana Laws (NORML). for the medical use of marijuana.”

The path to state legalization was furthered in 2013 by what is known as the Cole Memo, which specified a focus for law enforcement on (1) preventing distribution to minors; (2) eliminating criminal enterprises, gangs, and cartels; and (3) preventing drugged driving, among others. Effectively, the memorandum allowed for the general recreational use of cannabis without fear of persecution, where state law permitted.

Congress supported the Ogden and Cole memoranda, via the Rohrabacher-Blumenauer amendment in 2014, which prevents the U.S. Department of Justice from using funds to interfere with state-held medical- cannabis laws. With congressional support and an increasing appetite from both Republican and Democrat voters to legalize cannabis, many states moved quickly to adopt legalization for medical cannabis and, in some cases, recreational cannabis.

The path to legalization hit a bump in the road with the onset of the Trump administration at the beginning of 2017. Of particular consequence was when Attorney General Jeff Sessions rescinded the Ogden and Cole memoranda, labelling the move as a “return to the rule of law.” While the move was unquestionably a blow to the cannabis industry, Mr. Sessions conceded that both law enforcement and prosecutors have finite resources, implying, in our view, that state laws would not be affected, but leaving a significant legal overhang on the industry.

The Marijuana Justice Act of 2017 was introduced by Senator Cory Booker and proposes legalizing marijuana in the United States at the federal level. While it is not the first bill to propose removing marijuana from the list of federal “schedule” drugs, it has been getting significant traction as several high-profile political figures (including Bernie Sanders, a potential 2020 presidential nominee) sign on.

This report is not to be distributed outside of Canada under any circumstances. 27

GROWING FOR THE FUTURE October 2018

The arrival of 2018 brought a whirlwind of activity; of particular note was an April bill to decriminalize marijuana, introduced by Senate Minority Leader Chuck Schumer. In June, the New York Department of Health issued a comprehensive report that was generally in support of legalization. Additionally, historically vocally opposed New York Governor Andrew Cuomo acknowledged the inevitability of legalization in New York. Perhaps most notable was the “unalterably opposed” former House Speaker John Boehner joining the board of Acreage Holdings, which has cannabis cultivation, processing, and dispensing operations in several states and is scheduled to have its IPO in 2018.

The quick pace of legalizing cannabis by individual states and the signs of a softening federal stance indicate, in our view, that legal cannabis in the United States is increasingly likely, although we don’t expect it to occur while cannabis remains a UN Schedule 1 and IV narcotic. Instead, we see increasing support for the status quo, where the federal system continues to respect state-held cannabis laws. In fact, the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, introduced by Senators Cory Gardner and Elizabeth Warren, proposes exactly that. President Donald Trump indicated approval of the STATES Act, stating, “I support Senator Gardner” when asked about the bill and “I know exactly what he is doing. We are looking at it. But I probably will end up supporting that, yes.”

The United States Is Worth Watching but Inaccessible, for Now

The California cannabis market alone is as big as the entire Canadian market. We estimate the entire U.S. market, including illicit demand, could be worth more than $65 billion, ~10x more than Canada’s. However, cannabis remains illegal federally despite nine states legalizing recreational cannabis and half of all states legalizing medical-cannabis consumption. As such, it is a completely inaccessible market for Canadian companies. Canadian LPs face delisting on the Toronto Stock Exchange (TSX) if they hold U.S. cannabis assets. While the United States appears to be on a path to federal legalization, we don’t think it is necessarily Canadian companies that will end up the winners. Either way, Canadian companies will continue to trade positively on U.S. news about various states opening up, federal memos and statements, and even tweets.

Several U.S. states have been operating legal markets for years, giving them a head start in the cannabis market. This head start is seen in product availability, innovation, and competitive pricing. Wholesale prices in Washington reportedly dropped as low as US$1/g because of oversupply. As such, if the United States legalizes recreational cannabis federally and cross-border trade opens up with Canada, we aren’t sure if Canadian LPs will end up the winners. We view U.S. federal legalization as double-sided: on one hand, it would open up a much larger market opportunity, but on the other, Canadian LPs would no longer be insulated from U.S. competition.

The longer the U.S. cannabis market remains illegal at the federal level, the better off Canadian cannabis companies will be, in our view. U.S. companies are capital constrained, with limited access to banking services and the traditional capital markets. This critical hindrance means U.S. companies will likely fall behind better-financed Canadian peers, especially if the ability for U.S. expansion across state borders is limited and U.S. companies are unable to supply international markets. The result is Canadian companies will continue to take advantage of international opportunities and receive a valuation premium to U.S. peers, giving them a valuable currency (shares) with which to expand.

Eventually, the United States may be far enough behind Canada that if (when) the market opens up on a federal level, it is the Canadian companies that will be the best positioned to acquire the most attractive U.S. companies, at reasonable valuations.

This report is not to be distributed outside of Canada under any circumstances. 28

CANNABIS October 2018

Big International Potential but Little Near-Term Earnings

We do not expect a paradigm shift toward international legalization of recreational cannabis use without a change to the scheduling of cannabis by the United Nations.

Cannabis remains under international control, included in Schedule I and Schedule IV of the 1961 Single Convention on Narcotic Drugs, as amended by a 1972 protocol. Exceptions to this are limited exclusively to medical and scientific purposes; recreational legalization is in strict defiance of UN drug- control conventions. As such, the path to legalization in international markets has been very slow, although medical cannabis has become legal in an increasing number of countries. In many respects, Canada has paved the way for the world in laying out a detailed framework for the legalization of recreational cannabis production and consumption, but it earned itself a reprimand from the International Narcotics Control Board (INCB) in the process. While many countries have laid out policy to enable medical marijuana, few have regulations in place to control cultivation; as such, an international export opportunity has opened up for Canadian LPs.

Many view the international cannabis opportunity as justification for valuations that have outgrown the Canadian market. We agree that companies expanding internationally should be given credit for capturing market share, but the extreme uncertainty of how regulatory policy, demand, and supply will ensue in these markets leads to a wide range of estimates for the size of the international market.

Exhibit 1.31: Legal Status of Global Markets  The ArcView Group estimates global spending on cannabis will reach US$57 billion by 2027, with medical spending reaching US$19 billion. It expects more than 80% of this spending to occur in North America, although ArcView notes that Europe has the potential to become the largest medical-cannabis market in the world.  Prohibition Partners thinks that by 2028, the European medical-cannabis market could reach €55 billion. This assumes 28 European Union countries fully legalize medical cannabis and other aggressive assumptions, in our view.  Brightfield Group thinks the market could reach US$31 billion in 2021, with North America contributing more than 85% of sales. 1. Current commercial legal status estimates as of June 2018; includes  Canopy thinks the global market could material updates. Legislation permitted the recreational market in Canada will come into force in October 2018. Limited legalization includes the legal be worth $200 billion, assuming global “Coffee shop” system in Amsterdam and areas where cannabis is permitted in recreational legalization. This splits out as private clubs. $11 billion for Canada, $96 billion for the Source: Canopy Growth Corporation. United States, and $120 billion for international.

This report is not to be distributed outside of Canada under any circumstances. 29

GROWING FOR THE FUTURE October 2018

European countries, including Germany and the Czech Republic, offer the nearest-term opportunities, but globally there are more than two dozen countries with medical-cannabis regulations in place, and the list is growing quickly. Each market has its own nuances in terms of (1) which formats will be allowed, with many countries allowing only a few prescribed medications (e.g., Sativex and Dronabinol); (2) insurance coverage; and (3) where and how it will be sold. In the short term, an opportunity for exports from Canada exists; however, long term, international markets are likely to be satiated domestically, which is why many large LPs have begun building local production facilities.

Exhibit 1.32: A $3 Billion to $11 Billion International We think the international medical- Opportunity cannabis market (excluding North America) could reach $3 billion to Low High Countries with Legal Medical (#) 25 25 more than $11 billion over the next Total Population (M) 519 519 few years. Our estimate uses the addressable population from 25 countries, Addressable population - ages 15-64 (M) 337 337 with progressive medical-cannabis regulatory Medical market penetration 1.25% 1.75% Grams per day 0.3 0.5 environments and incidence rates, based Avg. price per gram $7.0 $10.0 on the U.S. and Canadian medical-cannabis Total Revenue ($M) $3,233 $10,776 markets (~1.25% to 1.75% of the population Source: World Bank Group (population data); Scotiabank GBM estimates. and 0.3/g to 0.5/g per day). We also use a conservative average price of $7/g to $10/g, compared with current prices in Germany closer to $13/g. Given the recent pace of capital investments by Canadian LPs, we think they have a strong probability of capturing a significant share of the international medical-cannabis market, but a lot of work still needs to be done.

This report is not to be distributed outside of Canada under any circumstances. 30

CANNABIS October 2018

Exhibit 1.33: Key International Opportunities

Medical Population Market Size* Region Status 15-64 (M) ($M) Description

All Europe 333 $14,030 Total number includes countries that have no legalization framework. Netherlands Medical use 11 $468 Amsterdam is known as an international hotspot for cannabis tourism; however, recreational use is technically illegal, although tolerated in small legalized; amounts. The famous coffee shops actually stock their wares through black market channels. The medical market is currently monopolized by recreational use Bedrocan, although given the high cost, many patients go to the coffee shops to meet their needs. Given a long history of production, the decriminalized Netherlands is a leader in cannabis genetics. Denmark Medical use 4 $159 January 2018 brought about the legalization of medical cannabis for Denmark following a unanimous vote by parliament. Similar to Germany, legalized Denmark issued a 12-licence tender for applications to cultivate to both international and domestic companies. One of the stipulations was the application must be submitted in Danish, but we think this is easily navigable by Canadian LPs. Germany Medical use 54 $2,264 With an addressable population of 54M and being the largest European economy, Germany is Europe's most attractive market. Additionally, legalized demand is soaring as public health insurers (covering 90% of the population) are required to cover cannabis medication for all cannabis treatments. Currently, Germany tenders for its import needs. Longer term, Germany plans to set up domestic cultivation by offering a limited number of licences, which Canadian companies are competing for.

Greece Medical use 7 $296 Medical cannabis was legalized in Greece in June 2017, and in March 2018, a law was passed allowing the growing and processing of medical legalized cannabis. Five groups have approached the government to cultivate cannabis for medical use, two of which we understand are Canopy and Aphria. Given the early stage of issuing production licences, it is expected that Greece will import its current medical requirements.

Malta Medical use 0.3 $14 The April 2018 Production of Cannabis for Medicinal Use Act opened up the ability for companies to apply for licences to cultivate cannabis for both legalized; domestic consumption and export purposes. International companies rushed in to secure licences (six issued). Companies are looking to use recreational use Malta as an export hub into other European countries. decriminalized Spain Personal use 30 $1,276 The majority of cannabis in Spain is purchased through hundreds of cannabis clubs (non-profit collectives), particularly as Spain prohibits medical decriminalized cannabis containing THC. Cannabis clubs are non-profit collectives. Catalonia specifically has relaxed cannabis policy in which it allows medical patients to purchase an unlimited amount of medical cannabis and sets a monthly limit on recreational users.

United Kingdom Potential 43 $1,807 Medical cannabis in the U.K. is currently illegal, with two rarely prescribed exceptions, Nabilone and Sativex. However, in June 2018, the U.K. government announced it would review cannabis-based medicines, creating a potential opening to what could be a large medicinal market. According to Aphria, in-country cultivation is likely two to three years away, leaving the potential for a near-term export opportunity.

All LATAM + Caribbean 419 $17,632 Includes countries without a legalization framework. Jamaica Medical use 2 $100 Jamaica's market opportunity is largely based on its tourism industry, with companies looking to set up shops in resort complexes and in key legalized; cities. recreational use decriminalized Brazil Potential 136 $5,730 Brazil is considering legalizing medical and recreational cannabis with a bill submitted by the Worker's Party. While support is high among voters, substantial opposition to cannabis reform remains. Canadian companies are beginning to look for call options on the Brazilian market to position themselves for when (if) the market opens up. Colombia Medical use 32 $1,341 Colombia legalized medical cannabis in 2015 and is quickly becoming a production hub for Canadian companies looking to supply the Latin legalized American markets. Argentina Medical use 29 $1,213 Argentina passed its medical marijuana bill in 2017; however, legal cultivation in the country has not yet begun. legalized

Other Australia Medical use 16 $673 Having legalized medical use in 2016, the country is quickly becoming a hub for many companies eyeing the Asia-Pacific region for expansion. legalized * Medical market size calculated as 1.5% penetration of addressable population; 0.5/g average daily intake; and $10/g average price.

Source: World Bank Group (population data); Reuters; Bloomberg; company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 31

GROWING FOR THE FUTURE October 2018

Investment Catalysts

While we have seen dozens of markets shift regulatory policy to allow medical-cannabis sales, plenty of new market opportunities remain. It is possible the United Nations will review the scheduling of cannabis, which could pave the way for widespread global acceptance and increase the number of countries willing to adopt policies enabling medical and possibly recreational use. This result would be a significantly larger addressable market than we currently expect. Additionally, there are various bills in the works that could legalize U.S. cannabis federally or formally hand power to legislate to individual states, making the market investable for Canadian LPs. Depending on how regulatory policy unfolds, a much larger untapped global market opportunity may one day emerge.

Health insurance plan providers may include medical-cannabis coverage. Recently, both Manulife and Sun Life added medical-cannabis coverage to premium insurance plans for a small number of medical conditions. In both domestic and international markets, the inclusion of medical-cannabis coverage could drive sales, expanding the market opportunity. Increased coverage could also lead to greater acceptance of the medical properties of cannabis, improving demand.

Transformational M&A transactions crystallize value and could lead to the emergence of new market opportunities. The Constellation Brands investment in Canopy showed the market that cannabis is viewed as both a threat and an opportunity by incumbent players in related industries. More important than the reaffirmation of value are the new market opportunities these investments could bring. If the cannabis market is able to bite into the tobacco, alcohol, and pharmaceutical industries, the market may be much larger than many expect. We would not be surprised to see additional joint venture investments with cannabis companies or acquisitions by large players in the tobacco, alcohol, healthcare, and CPG industries.

Sales data after legalization in Canada will bring clarity where none existed before. Since cannabis is a historically illicit substance, there are very few reliable numbers when it comes to sizing the cannabis opportunity, with most estimates relying on survey data or using U.S. state data as a proxy for market size. This will change quickly as actual numbers become accessible in the months following recreational legalization in Canada. The first indicators will be product calls by the provinces to the LPs, which will be an indicator of forward demand. Next, we will see sales data begin to emerge, reported by the provinces, retailers, and LPs. Finally, in conjunction with sales data, we will begin to see popular brands emerge. We think new data will result in the shakeout of winners and losers, representing both an opportunity and a risk for investors.

New cannabis products and distribution channels could expand the size of the market. The advent of legal sales of other product formats, including but not limited to cannabis-based beverages and edibles, may bring new consumer demographics to the market. R&D dollars spent by the companies could unlock new market opportunities, particularly in healthcare, where the prior illicit nature of cannabis limited the number of studies performed. New distribution channels – for example, cannabis-infused beverages sold in grocery stores – could also improve accessibility and bring new consumers on board.

This report is not to be distributed outside of Canada under any circumstances. 32

CANNABIS October 2018

Investment Risks

Market size estimates may be overly optimistic. Given the historical illicit nature of cannabis markets, sizing estimates have primarily relied on survey data and assumptions. As a result, the size of the existing market remains up for debate, and future estimates growing from this base are at risk. It is possible assumptions have been too aggressive, resulting in market participants overestimating the market size. This may result in a misallocation of capital investments and decreased industry-wide earnings.

The illicit market may not be easily absorbed into the legal market. If conversion proves more difficult than expected, the size of the addressable market available to LPs will shrink. Causes of slow conversion may include high retail prices, inconvenient locations and store hours, the limited selection of product formats, and advertising and marketing restrictions. The result would be additional competition and further potential for price deterioration and industry consolidation.

Increased competition may lead to pricing pressure and force industry consolidation. We expect the combined capacity of the three largest LPs (Canopy, Aurora, and Aphria) to be sufficient to supply the entire Canadian market. Another ~65 existing LPs also have plans to produce, and more are on the way. We think excess capacity in the industry is an eventuality; the only question is when. We expect overcapacity to result in wholesale prices moving lower, pressuring margins. As some producers are unable to sell product, their utilization rates will fall, and we expect some facilities to close. In our view, this will lead to consolidation through attrition rather than M&A deals as few producers will be in the market for more production assets.

Global regulatory changes may be unfavourable. Opportunities in the international medical-cannabis market have expanded quickly, and many expect the U.S. market to eventually open up federally. However, there is no guarantee future regulatory changes will be favourable to industry participants.

Industry-wide valuations may be too high. Valuation multiples have been expanding as investors give additional credit for future market opportunities. However, there is no guarantee earnings will grow into expected valuations, that sentiment will not reverse, and that any particular company will necessarily end up a winner. As a result, we expect cannabis stocks to continue to experience significant volatility.

Domestic cultivators may face competition from outdoor production, hemp-based CBD products, and global imports. The Cannabis Act allows for outdoor cultivation, and while the security and quality of indoor facilities may be hard to replicate outdoors, it is not impossible. Outdoor production could bring extremely low-cost (albeit highly seasonal) competition to indoor producers. The Canadian government views industrial hemp as relatively low risk, and LPs will be permitted to use hemp as a source for low-THC, high-CBD products. Finally, if regulatory hurdles are removed, global imports from lower-cost nations could be a threat, potentially making Canadian production uncompetitive.

This report is not to be distributed outside of Canada under any circumstances. 33

October 2018

PERTINENT DATA

Aphria Inc. Rating Sector Outperform 1-Yr. Target C$25.00

Ticking All the Boxes APH-T C$19.70

1-Yr. Return 26.9% INVESTMENT HIGHLIGHTS Risk Ranking Speculative Div. (NTM) $0.00 We have initiated coverage on the common shares of Aphria Inc. with a Sector Div. (Curr.) $0.00 Yield (Curr.) 0.0% Outperform rating and a one-year target of $25.00 per share. Aphria is building one Valuation: 15x achievable out-year EBITDA of of the largest cannabis production platforms in Canada, at 260 tonnes/year capacity. $450 million Additionally, the company is rapidly expanding its presence in international markets through the build-out of production hubs in several countries. Once domestic capacity growth is complete, we forecast Aphria will generate adjusted EBITDA of $243 million in F2021 (ending May 31, 2021), which assumes a ~70% utilization rate and a ~20% share of the Canadian market. If Aphria were to fully utilize its capacity and assuming no cost improvement from greater economies of scale, we think F2021E EBITDA could rise to ~$350 million.

Aphria is not trying to be all things to all people, at least not for now. Rather, it intends to focus on perfecting large-scale production economics (i.e., cash costs below $0.80/g) to generate high industry margins in the Canadian medical and recreational markets. Beyond the development of international markets, Aphria is exploring building a presence in other product formats of recreational cannabis consumption (e.g., edibles and beverages) and may build shareholder value through developing pharmaceuticals that contain cannabis. Given its exclusive distribution agreement with Southern Glazer’s Wine and Spirits, LLC (Southern Glazer’s), we do not expect the company to invest time or capital building a retail footprint.

Aphria appears to be a perfectly packaged takeout play given its large production footprint, low-cost profile, in-place supply and distribution agreements, and valuation that isn’t egregious compared with those of many of its peers. Given its size, there are few, if any, licensed producers (LPs) that could afford Aphria. Accordingly, we think potential acquirers mostly include companies that want to add cannabis-based segments to their traditional business lines, such as tobacco, alcohol, and beverage manufacturers, as well as possibly pharmaceutical and consumer packaged goods (CPG) players.

CAPITALIZATION

EV/Adj. Market Cap. (M) $4,847 Qtly Adj EBITDA (M) (FD) Q1 Q2 Q3 Q4 Year EBITDA Net Debt + Pref. (M) $-258 2018A $1.7 $1.6 $2.9 $-1 $5.6 571.9x Enterprise Value (M) $4,589 2019E $-4A $-2 $7.5 $24 $26 181.1x Shares O/S (M) 246 $44 $44 $39 $39 $166 28.1x 2020E Volume and Closing Price for APH-T 2021E $62 $243 18.5x 30 25

(FY-May.) 2017A 2018A 2019E 2020E 2021E 25 Revenues (M) $20 $37 $221 $484 $680 20 20 EPS $0.04 $0.18 $0.14 $0.44 $0.64 Net Debt (M) $-134 $-74 $-82 $-142 $-290 15 15 Vol (M) Vol

Sales Volumes (000 kg) 3 5 39 122 181 10 (CAD) Price Avg. Price per Gram $7.81 $7.64 $5.68 $3.96 $3.76 10 5 Avg. Cost per Gram $1.88 $1.58 $1.78 $1.30 $1.22 0 5 Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated. Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Source: FactSet; company reports; Scotiabank GBM estimates. This report is not to be distributed outside of Volume APH-T Canada under any circumstances. Source: FactSet.

34 APHRIA INC. October 2018

Investment Highlights (Continued)

 Earnings set to soar. Historically, 100% of Aphria’s earnings have come from the Canadian medical- cannabis market. The legalization of recreational cannabis in Canada will create an inflection point for Aphria’s earnings – we estimate the recreational market will quickly account for ~80% of its total revenues over the next two years. We believe that other international medical and recreational markets opening up will have a profound impact on Aphria’s earnings profile, as will legal sales of other product formats, which could create new sources of demand outside the traditional combustion-based user of the past. Because many of these new markets and formats are simply too nascent or too unpredictable to model effectively, we expect this initial earnings inflection point won’t be Aphria’s last.  CEO Vic Neufeld is well suited to creating value for Aphria shareholders. Prior to joining Aphria in 2014, Mr. Neufeld was CEO of Jamieson Laboratories for 21 years – Canada’s largest manufacturer and distributor of natural vitamins, minerals, and supplements. He increased sales by more than 10 times to $250 million, helped the company achieve a 27% market share in Canada, and expanded distribution to 40+ countries.  Contract cultivation will help Aphria diversify its earnings. We expect cannabis cultivation to become increasingly commoditized over time and wholesale margins to fall. To manage this changing market, Aphria intends to use its economies of scale and expertise to produce cannabis for other companies. Recently, Aphria announced that it would produce up to 45,000 kilograms annually for Emblem Corp., possibly using Emblem’s strains, and up to 20,000 kilograms annually for Auxly Cannabis Group Inc. (Auxly). While Aphria will also bring its own branded products to market, we wouldn’t be surprised to see it emerge as a leading contract cultivator in the space, allowing the company to operate at higher-than-average utilization rates.  To achieve our one-year target of $25.00 per share, we apply a 15x out-year EBITDA multiple to our F2021 estimate and assume minimal leverage for incremental EBITDA growth. In short, we forecast conservative net debt to EBITDA of 1x will generate about $450 million of out-year EBITDA. We think this EBITDA level is likely conservative since we think $1 of capex can generate ~$1 of annual cannabis production EBITDA at commoditized margins; for Aphria, we assume $1 of capex generates only $0.40 of EBITDA. We justify our conservative estimates by assuming low utilization rates, but the reality is that Aphria likely wouldn’t spend more capital to run a business at low rates.  We think a back-of-the-envelope upper boundary of $34.00 per share could eventually be supported. To be clear, we do not think this stock price is warranted today, and it may not be over the next several years without material de-risking and seamless execution. To achieve this share price estimate, we add debt to the balance sheet (to a maximum of 2.3x net debt to EBITDA) to generate significant EBITDA growth. In a realistic bear-case scenario, we see downside to $15.00 per share. This assumes EBITDA of $243 million at a 15x long-term multiple and no optimization of its balance sheet.  Key investment risks include the following: (1) the future size of the global cannabis market is highly uncertain and depends on rapidly evolving regulations worldwide; (2) Aphria faces significant execution risk as it builds capacity and ramps up production; (3) the company competes for market share with a large and growing number of competitors; (4) Aphria has a limited operating history, as well as a history of acquisitions that may not be integrated according to plan; (5) international expansion will likely result in increased operational, regulatory, and currency risks; (6) Aphria’s ability to operate in Canada depends on keeping several licences with Health Canada, whose renewals are not certain; and (7) Aphria has historically issued equity to finance growth, and shareholders may face further dilution as Aphria continues to expand.

This report is not to be distributed outside of Canada under any circumstances. 35

GROWING FOR THE FUTURE October 2018

Company Snapshot

Exhibit 2.1: Aphria Inc. Tear Sheet Aphria Inc. APH-T 1-Year Target: $25 Last Price: $19.70 1-Year Return: 27% Market Cap: $4.8B Rating: SO EV: $4.6B NTM Dividend $0.00 Avg. Volume: 8.6M FY End: May. 31 FD Shares O/S: 246M Insider Ownership: 7.7% Float: 208M Institutional Ownership: 7.0% Valuation: 15x Achievable Out-Year EBITDA of $450M Short Interest (% of float) 2.0%

Financial 2018 2019E 2020E 2021E Operational 2019E 2020E 2021E EV/EBITDA 821.7x 177.3x 27.6x 18.9x Domestic Medical Volume (kg) 5,638 5,862 6,221 P/E (Adjusted) 106.6x 139.4x 44.9x 30.6x Domestic Recreational Volume (kg) 32,000 95,000 140,000 P/BV 4.1x 3.3x 3.0x 2.7x Sales to Other LPs (kg) 313 20,000 30,000 International Volume (kg) 900 1,600 4,500 Dividend Yield 0.0% 0.0% 0.0% 0.0% Total Sales Volume 38,851 122,462 180,721 Gross Margin 76% 66% 66% 67% Adj. EBITDA Margin 15% 12% 34% 36% Avg. Price Per Gram $5.68 $3.96 $3.76 Adj. EBITDA Growth -8% 364% 542% 47% Avg. Cost Per Gram $1.78 $1.30 $1.22

Income Statement 2018 2019E 2020E 2021E 2021E Adj. EBITDA Sensitivity Δ $M % Net Sales 37 221 484 680 Wholesale Sales Volumes (kg) 10,000 $19 8% COGS 9 73 165 226 Avg. Selling Price ($/g) $0.25 $37 15% Gross Profit 28 146 318 452 Adj. EBITDA 6 26 166 243 EPS Estimates 2018 2019E 2020E 2021E Net Income 29 33 107 156 Q1 $0.10a $0.09a $0.12 $0.16 EPS (FD) $0.18 $0.14 $0.44 $0.64 Q2 $0.04a -$0.02 $0.12 $0.16 Q3 $0.08a $0.01 $0.10 $0.17 Balance Sheet 2018 2019E 2020E 2021E Q4 -$0.04a $0.06 $0.10 $0.16 Cash & Equivalents 105 138 198 347 Total $0.18a $0.14 $0.44 $0.64 Inventory 22 35 35 35 Consensus $0.13 $0.71 $1.06 Biological Assets 7 7 7 7 PP&E 303 465 506 486 Credit Metrics 2018 2019E 2020E 2021E Total Assets 1,314 1,641 1,770 1,950 Net Debt/Adj. EBITDA -13.3x -3.2x -0.9x -1.2x Short-Term Debt 2 4 4 4 Debt/Total Capital 0.03x 0.04x 0.03x 0.03x Long-Term Debt 28 52 52 52 Total Liabilities 140 161 173 187 Free Cash Flow 2018 2019E 2020E 2021E Shareholders' Equity 1,174 1,480 1,597 1,764 EBITDA 6 26 166 243 Less: Taxes 5 34 51 53 Cash Flow Statement 2018 2019E 2020E 2021E Less: NWC Δ 100 17 37 1 Operating (post-WC) -6 -74 119 159 Less: CAPEX 174 60 10 10 Investing -221 -161 -60 -10 Free Cash Flow -273 -85 67 179 Financing 206 273 0 0 All figures are FY and in C$M, unless otherwise noted. Cash Δ -20 38 59 149 Source: Company reports; FactSet; Bloomberg; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 36

APHRIA INC. October 2018

Scenario Analysis

Risk/Reward Trade-Off: Aphria Inc. (APH-T; SO; One-Year Target $25.00) Investment Thesis Aphria Inc. is one of the largest producers of cannabis in Canada, with low operating costs and several paths to take its products to market. Additionally, Aphria has become one of the leading international players in the space after it purchased Nuuvera in Europe and LATAM Holdings Inc. in Latin America. Once domestic capacity growth is complete, we forecast Aphria will generate adjusted EBITDA of $243 million in F2021 (ending May 31, 2021), which assumes a ~70% utilization rate and a ~20% share of the Canadian market.

Key Risks What’s Likely Priced In? Key Stock Catalysts Timing Competition pushing prices lower. ~20% market share in Canada. Reported volumes in Quarterly Canada’s recreational Uncertain market size. Near-perfect execution. market. Regulatory risk in multiple jurisdictions. Capture of ~$150 million of additional long- International sales volume Quarterly term EBITDA growth from international Execution risk on production and strategy. growth. sales and adjacent market opportunities. Uncertainty about long-term growth Merger and acquisition Ongoing potential. (M&A) transactions.

Regulatory progress in the Ongoing United States and internationally.

Bear Current Base Bull Case Price Case Case

$15.00 $19.70 $25.00 $34.00 (-24%) (27%) (73%)

Bear Case: $15.00 Base Case: $25.00 Bull Case: $34.00 Earnings. $243 million of F2021 EBITDA Earnings. $450 million of F2021 EBITDA Earnings. $650 million of F2021 EBITDA. (Scotiabank GBM estimate). Balance sheet. $500 million of leverage Balance sheet. $1,500 million of leverage Balance sheet. No additional use of taking net debt to EBITDA to 1.1x to fund taking net debt to EBITDA to 2.3x to fund balance sheet to fund investments. $207 million of incremental EBITDA growth. $407 million of incremental EBITDA growth.

Bear Case Valuation Base Case Valuation Bull Case Valuation 15x F2021E EBITDA of $243 million. 15x F2021E achievable out-year EBITDA of 15x F2021E achievable out-year EBITDA of $450 million. $650 million.

This report is not to be distributed outside of Canada under any circumstances. 37

GROWING FOR THE FUTURE October 2018

Company Profile

Aphria is building some of the largest cannabis facilities in the world, which, along with its first- mover advantage, should help it secure significant market share in Canada and internationally. Aphria has taken a strategic approach to developing its business that focuses on (1) building out domestic flower and concentrates production, (2) building an international footprint, (3) forming selective partnerships to get product into the retail channels, and (4) innovating for the future. We think Aphria’s eye on the bottom line will lead to methodical growth rather than chasing every blue-sky opportunity presented to it. Aphria has generated 11 consecutive quarters of positive adjusted EBITDA.

Historically, all revenues were from the sale of medical cannabis in Canada, rising to $37 million in F2018, up from $0.5 million in F2015. In Q1/F19, Aphria sold ~1,800 kilograms of cannabis at an average price of ~$7.47/g, up from 585 kilograms two years ago at a similar price, driving ~300% revenue growth. Aphria’s volumes and prices were boosted by the acquisition of Broken Coast Cannabis (Broken Coast), a premium B.C. producer, in early F2018. With Aphria ramping up domestic capacity, the legalization of the recreational market, and the onset of international sales, we estimate Aphria’s revenue will reach $680 million in F2021.

Exhibit 2.2: Aphria’s Sales Volumes by Segment Exhibit 2.3: Aphria’s Production Costs

50,000 International $12 $2.50 All-in Costs Cash Costs Sales to Other LPs Forecast 45,000 Recreational Forecast $10 40,000 Medical $2.00 Realized Selling Price 35,000 $8 30,000 $1.50 25,000 $6 20,000 $1.00 $4

15,000 ProductionCosts($/g)

10,000 Avg. Realized Price($/g) $0.50 $2 Sales Sales Volumesequivalent) (kg 5,000

0 $0 $0.00

Q3-17 Q1-17 Q2-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Q2-19E Q1-21E Q4-19E Q1-20E Q2-20E Q3-20E Q4-20E Q2-21E Q3-21E Q4-21E Q3-19E Source: Company reports; Scotiabank GBM estimates. Source: Company reports; Scotiabank GBM estimates.

Exhibit 2.4: Aphria’s Cannabis Inventory Exhibit 2.5: Aphria’s Earnings Progression – Revenue and EBITDA

9,000 $200 Revenue Forecast Cannabis Oils (kg equivalent) $180 8,000 Adj. EBITDA $160 7,000 Dry Cannabis $140 6,000 $120 $100 5,000 $80 4,000 $60 $40

3,000 Earnings Profile ($M) $20

Inventory(kg equivalent) 2,000 $0 1,000 -$20

0

Q1-17 Q2-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q3-17

Q3-19E Q4-19E Q1-20E Q2-20E Q3-20E Q4-20E Q1-21E Q2-21E Q3-21E Q4-21E Q2-19E Source: Company reports; Scotiabank GBM. Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 38

APHRIA INC. October 2018

Historical sales volumes and prices aren’t reflective of Aphria’s future economics. We believe historical prices are higher than future prices will be as sales were historically made directly to the consumer and the company didn’t have any distributor and retail margins or excise taxes to contend with. We forecast Aphria’s average realized price (net of the excise tax) will fall to ~$3.76/g by F2021. While average prices will be lower, volumes will more than offset with the advent of the recreational market. During the first six months of a legal Canadian recreational market, we estimate Aphria will sell ~3.3x more product in the recreational channel (~25,000 kilograms) than it has sold during its entire operating history (less than 10,000 kilograms).

Aphria has maintained positive adjusted EBITDA while rapidly growing earnings. In the past two years, Aphria’s quarterly revenue CAGR was 15%. We expect EBITDA to be negative until Q3/F19 as Aphria gears up for Canada’s recreational market, with higher staffing and marketing requirements. We think Aphria can quickly resume a path of positive revenue and EBITDA growth as recreational sales begin and forecast adjusted EBITDA of $243 million in F2021.

Capital Markets Profile

Exchange. Aphria is listed on the Toronto Stock Exchange (TSX) under the ticker APH. The company reports financials in Canadian dollars and has a fiscal year-end of May 31. We think it is likely Aphria will cross-list on a main U.S. exchange in the near term, having recently divested its U.S. assets.

Exhibit 2.6: Aphria’s Ownership Profile Market capitalization of $4.8 billion makes Aphria the fourth-largest cannabis company Institutional Insider in Canada. Following the closing of its Ownership Ownership 7% $258 million bought deal, Aphria is in a net 8% cash position of $258 million and has an enterprise value of $4.6 billion. We use a pro forma share count of 246 million, which includes the issuance of 16 million shares for the LATAM Holdings acquisition, which closed in September 2018.

Other Ownership. Aphria is 85% owned by retail 85% shareholders, even higher when recognizing that much of the 7% institutional ownership is ETFs. Insider ownership is 8%, with notable Source: FactSet; Scotiabank GBM. insider stakeholders including Mr. Neufeld (0.8%), co-founder Cole Cacciavillani (2.9%), and co-founder John Cervini (3.9%).

Liquidity. Aphria is one of the most actively traded stocks in the world, with average daily trading volume (ADTV) over the past 180 days of $100 million on the TSX. Short interest on the TSX is ~2% of free float.

This report is not to be distributed outside of Canada under any circumstances. 39

GROWING FOR THE FUTURE October 2018

Exhibit 2.7: Aphria’s Share Price and Recent Developments

$25 California legalizes recreational Altria & Aphria in discussions for 30 cannabis possible equity stake Aphria exits final U.S. investment, 25 $20 ETF available to U.S. investors goes Liberty Health Sciences live Aphria closes $425M Nuuvera 20

acquisition (M) TSX 7 states legalize post election day Constellation increases Canopy $15 - TSX notice of U.S. compliance with stake to 38% for $5.1B Horizons cannabis ETF begins federal laws signals potential 15 trading delisting $10 Aphria closes Broken Coast

acquistion Canadian senate passes Bill C-45 10 SharePrice ($/sh)

$5 TradeVolume 5

$0 - Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Apr/18 Jul/18 Oct/18

Source: FactSet; Scotiabank GBM.

Management Profiles

Vic Neufeld, President and Chief Executive Officer, joined Aphria as CEO in 2014. Previously, Mr. Neufeld was the CEO of Jamieson Laboratories for 21 years, Canada’s largest manufacturer and distributor of natural vitamins, minerals, and supplements, taking sales from $20 million to more than $250 million (and market share from 7% to 27%). Under Mr. Neufeld’s leadership, Jamieson Laboratories expanded its distribution network to include more than 40 countries. Prior to Jamieson Laboratories, Mr. Neufeld was a chartered accountant and partner at Ernst & Young, where he spent 15 years. He earned a bachelor’s degree in economics from Western University and an honours degree in business and an MBA from the University of Windsor. He is also a CPA.

Cole Cacciavillani, Co-founder, Vice-President of Growing Operations, has 35 years of industrial engineering experience in the agricultural and greenhouse industry. He is a founding chair of The Ontario Greenhouse Alliance and serves on the board of the Agricultural Research Institute of Ontario.

John Cervini, Co-founder, Vice-President of Infrastructure and Technology, has many years of hydroponic agricultural experience, helping establish Lakeside Produce, which sells produce from Canada to multinational retailers throughout North America. He has overseen greenhouse expansions in California and Mexico, is the founding chair of the Ontario Greenhouse Marketers Association, and is involved with the Ontario Greenhouse Vegetable Growers association.

Carl Merton, Chief Financial Officer, joined the company in December 2015, previously spending 12 years at Ernst & Young and KPMG, where he earned his CPA, CA. Prior to that, he was Vice-President of Special Projects of Atlas Tube Canada and Chief Financial Officer of Reko International Group Inc. (REKO-V). Additionally, he is a fellow of the Canadian Institute of Chartered Business Valuators.

This report is not to be distributed outside of Canada under any circumstances. 40

APHRIA INC. October 2018

Business Strategy and Operations Analysis

Near term, the majority of Aphria’s earnings will be generated by domestic sales in the recreational market, while the longer-term opportunity is likely to lie in international expansion and developing new products. We break down Aphria’s wide scope of operations in Exhibit 2.8.

Exhibit 2.8: Aphria’s Operations

Aphria Inc.

Production Sales Market Development

-Greenhouse -Domestic Medical -International Markets -Indoor -Domestic Recreational -Branding -Domestic -International Medical -R&D -International -Retail -Product Development

Source: Company reports; Scotiabank GBM. One of Canada’s Largest Producers

Following the completion of announced expansions, we expect Aphria will have the third-largest production platform in Canada. Aphria’s existing run rate is at least 34,500 kilograms/year, with fully funded expansions set to increase this to 260,000 kilograms/year (260 tonnes/year) by early 2019. Aphria has two large Ontario greenhouses under development and a smaller indoor facility in British Columbia. Aphria will also begin building production facilities in Europe and Latin America.

Exhibit 2.9: Aphria’s Production Facilities

Production Project Facility Ownership Description Capability Status Completion (kg/year) Broken Coast 100% B.C. indoor production facility Currently, 4,500 Completed expansion Jan-20 purchased in early 2018, giving the kg, may increase to 4,500 kg, with company strong genetics and a to 10,500 kg additional 6,000 kg premium “B.C. bud” product. expansion underway. Aphria One 100% Phase III of a five-phase expansion Currently, 30,000 Completed fully funded Jan-19 has been completed at the original kg, growing to Phase III; Phase IV Leamington, Ontario, greenhouse 110,000 kg and Phase V facility. underway for ~$45M.

Aphria Diamond 51% Leamington, Ontario, greenhouse Growing to About $40M of capex Jan-19 facility modeled after the Aphria One 140,000 kg left to completion. facility, still requires ACMPR licensing.

Extraction Centre 100% Facility will give Aphria state-of-the-art Capable of Cost of $55M. First of Excellence extraction capabilities, positioning the processing concentrates company for growing demand of non- 200,000 kg of by March 2019 combustible form factors. cannabis

Total: Currently 34,500 kg, growing to 260,000 kg Source: Company reports; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 41

GROWING FOR THE FUTURE October 2018

Aphria acquired Broken Coast, a premium B.C. producer, in early 2018. Broken Coast had 26,000 square feet (sf) of existing production capacity, with room to expand; subsequently, its square footage has increased to 44,000 sf, with production capacity of 4,500 kilograms/year. The Phase IV expansion could add 6,000 kilograms. The acquisition added a very-high-end product/brand, genetics, and expertise, and despite the price tag ($239 million in shares), it has, in our view, solidified Aphria as a major player in the premium market.

Aphria One. This facility has completed Phase III of five phases and recorded its first Phase III harvest in April 2018, validating Aphria’s ability to scale up large greenhouse operations. Aphria One’s capacity has reached 30,000 kilograms/year; however, production is held back somewhat as some capacity is used for mother and vegetative plants, which will be used to ramp up future expansions. The company expects to complete Phase IV and Phase V in January 2019 for a cost of ~$45 million, bringing total production at the Aphria One facility to 110,000 kilograms. The Aphria One facility features state-of-the-art automation, reducing labour costs as such tasks as transplanting cuttings, growing-cycle evaluation, monitoring and feeding plants, and plant transportation are all automated. This should provide Aphria with one of the lowest cost structures in the business.

Aphria Diamond. A 51%-owned joint venture with Double Diamond Farms (Diamond) is waiting to receive a cultivation licence from Health Canada under the Access to Cannabis for Medical Purposes Regulations (ACMPR). The Diamond facility is modelled on the Aphria One facility, which, in our view, will help de-risk the project and improve the ramp-up time, while providing a similar level of automation. Aphria expects the total project to cost ~$143 million, with $40 million left to spend, and be completed by January 2019. Once the facility is fully ramped up, it will add 140,000 kilograms/year of production. All production from the facility will be sold to Aphria at an agreed-upon transfer price, which will leave the processing and branding margins for Aphria, and over time, Aphria will be repaid the ~$123 million of capex it contributed to fund the project.

Extraction Centre of Excellence. Aphria is spending $55 million to build a state-of-the-art extraction facility capable of processing more than 200,000 kilograms/year of dry cannabis. The centre will use existing extraction technologies and techniques as well as create new ones, giving Aphria the ability to add new product formats when they become legal to sell. Extraction Centre of Excellence was designed with the view that cannabis is an ingredient rather than a product. We think this extraction facility will position Aphria well as consumer preferences shift from flower to higher concentrates and other forms of cannabis, as seen in other markets.

Building Out the Brand Portfolio – More to Come

Exhibit 2.10: Aphria’s Brands Aphria is targeting multiple consumer segments with a variety of brands. These will allow it to engage with many demographic groups. We think Aphria’s approach is a wise one since there is no guarantee any particular brand will succeed.

 Broken Coast produces the company’s flagship premium “B.C. bud,” which has a score of 4.5 out of five stars on Lift.co. It is grown in small batches, with one strain per room, and is hand-trimmed and slow-cured.

Source: Company reports.

This report is not to be distributed outside of Canada under any circumstances. 42

APHRIA INC. October 2018

 Solei Sungrown Cannabis is designed for current and novice users and pairs an assortment of strains and product formats.  Riff is a community and cannabis brand. The brand will have high potency offerings available for experienced users. Targeted at the 19-30 age demographic based on its website.  Good Supply is a value-priced brand without the frills, designed for the everyday cannabis user.  Goodfields is for current and new users interested in quality cannabis from a trusted source. Domestic Medical Sales Are Lucrative but Declining in Importance

We estimate Aphria has captured about 15% of historical domestic medical sales, a trend we think it can maintain. Aphria will continue to service its estimated 45,000 (and growing) medical patients, selling product via online and telephone, with direct shipping to patients’ homes. We expect sales growth will slow as some medical users switch to the recreational channel.

Exhibit 2.11: Aphria’s Domestic Medical Sales Margins in the domestic medical business are better than what we expect them to 1,800 Cannabis Sales Forecast $12 be in the recreational market as there is 1,600 Realized Price $11 no intermediary; sales are direct to the 1,400 consumer. As a result, Aphria was able to $10 1,200 achieve a gross margin of ~77% in Q1/F19. 1,000 $9 We expect realized prices to fall because of 800 $8 the addition of an excise tax on LPs ($1/g 600 and 10% on sales over $10) beginning on $7

400 October 17, 2018. While Aphria’s medical Cannabis Sales Price($/g)

Sales Sales Volumesequivalent) (kg $6 200 margins are healthy, increasing recreational 0 $5 sales volumes will make the medical segment less important overall – we estimate just 3% of total volume by F2021. Source: Company reports; Scotiabank GBM estimates. Aphria’s agreement with Shoppers Drug Mart Corporation (Shoppers) could push Exhibit 2.12: Aphria’s Recreational Sales medical sales volumes even higher, but margins would fall. Shoppers has a licence 45,000 Recreational Volumes Forecast $10 to label and test medical-cannabis products 40,000 Sales to Other LPs $9 $8 and is waiting for a licence to sell them. 35,000 Avg. Selling Price $7 Shoppers’ partnerships with insurers such 30,000 $6 as Manulife Financial Corporation could 25,000 $5 drive demand, depending on how medical 20,000 $4 cannabis is included in policies. We think 15,000 $3 Aphria would capture a normal wholesale 10,000 Avg. Selling Price($/g) $2 margin on sales to Shoppers (low 60%), Sales Sales Volumesequivalent) (kg 5,000 $1 with the added bonus of having one more 0 $0 channel to place product.

Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 43

GROWING FOR THE FUTURE October 2018

Domestic Recreational Sales Will Quickly Become the Dominant Revenue Driver

The medical market was only a warm-up; the real show began on October 17, 2018. Earnings are set to leap higher as Aphria begins selling into the much larger legal recreational market. We think Aphria can achieve ~20% market share in the recreational market by selling its own branded products and selling wholesale cannabis to other LPs. This is based on (1) historically selling about 15% of Canadian medical volumes; (2) acquiring about 10% of the existing provincial memoranda of understanding (MOUs); (3) its significant first-mover advantage; (4) offtake agreements with Auxly and Emblem; and (5) a solid portfolio of brands.

We assume Aphria’s average realized pricing (net of the excise tax) for recreational sales will fall to $3.50/g, from an initial $5/g. The decline is due to price compression as oversupply hits the industry, offset by the sale of higher-margin products. We expect Aphria to more than offset a lower average price with significant volume increases.

Aphria will sell its own product directly to distributors as well as to other LPs. Aphria has signed agreements to produce product for Emblem and Auxly, essentially acting as a contract manufacturer. We assume Aphria captures 75% of the wholesale margin, which would result in realized prices on sales to other LPs of $2.83/g in F2021. We assume volumes taken on these contracts are 20,000 kilograms in F2020, rising to 30,000 kilograms in F2021. We view these agreements positively given the need for producers to lock in as many supply channels as possible ahead of an increasingly competitive market.

 Emblem. In September 2018, Aphria entered into a wholesale agreement with Emblem to supply up to 175,000 kilograms of product over a five-year period, beginning in May 2019. Volumes in the first year could be as much as 25,000 kilograms (dried-flower equivalent), rising by 5,000 kilograms per year. If the offtake agreement is met in full, we estimate it would absorb up to 17% of Aphria’s total announced capacity.  Auxly. Also in September 2018, Aphria entered into a wholesale agreement with Auxly to initially supply up to 1,200 kilograms of cannabis products each year, largely destined for export markets. Additionally, upon receiving necessary approvals for its expansion plans, Auxly’s purchase option will increase to 20,000 kilograms/year. The contract includes minimum quantities, but volumes and prices have not been disclosed.

Exhibit 2.13: Aphria’s Provincial Supply Agreements Aphria has signed provincial supply agreements for more than 21,000 kilograms (~10% of total MOUs signed thus far). Agreements in all 10 provinces and Yukon have been inked, with initial shipments underway. Aphria has begun shipping volumes to the provinces, which we estimate will have an initial average selling price of $6/g and a realized price of $5/g (net of excise taxes).

Source: Company reports.

This report is not to be distributed outside of Canada under any circumstances. 44

APHRIA INC. October 2018

We Don’t Expect Aphria to Open Physical Retail Stores

Instead, Aphria will stock retailers’ shelves with branded products via a distribution agreement with Southern Glazer’s. While most LPs will need to hire their own sales force, Aphria will have boots on the ground on day 1, which should lead to rapid access to the retail channel.

Great North Distributors (GND), a subsidiary of Southern Glazer’s, will serve as Aphria’s exclusive manufacturer’s representative for recreational cannabis products in Canada. We expect the agreement to give Aphria coverage of most cannabis retailers, both provincially and privately operated on day 1 of legalization. GND will still be able to distribute product from micro-cultivators and micro- processors along with Aphria’s products. We think GND’s incentive will be aligned with Aphria’s as the money GND earns increases with higher sales volumes. Both companies expect to benefit from Southern Glazer’s data-analytics capabilities. GND will be responsible for getting the brands into stores, positioning shelf space, tracking inventory, and making sure the retail staff is properly educated about Aphria’s products, in exchange GND receives a percentage of the sales.

We see possible limitations to Aphria’s retail strategy. Many LPs are opening their own physical retail stores that will focus on selling their own branded products; some may not even stock products from other LPs at all. Additionally, a retail presence can be part of the brand itself and generate useful data from customer interactions. Finally, retail stores are simply one more channel of demand.

International Opportunities Are Heating Up

Exhibit 2.14: Aphria’s International Footprint Aphria’s international strategy involves developing regional hubs as “spoke” markets for cannabis exports or future domestic operations. We expect Aphria to enter new markets as opportunities arise.

Historically, Aphria has had no international sales, but we expect sales to begin imminently. Aphria has a contract to sell 1,200 kilograms of product annually to a German pharmaceutical distributor. We assume volumes will increase to 5,000

kilograms as Aphria develops other export Source: Company reports. markets. We assume initial pricing will be Exhibit 2.15: Aphria’s International Sales $13/g, in line with the international sales price Canopy Growth Corporation (Canopy) 1,400 Sales Volumes (kg) Forecast $14 Realized Price ($/g) garners. Our international sales forecasts for 1,200 $14 Aphria capture our expectations for Canadian 1,000 export volumes, but they do not include any $13 exports to the regional hubs Aphria plans 800 $13 to set up around the world, which may be a 600 bigger opportunity down the line. We expect $12

400 international pricing to fall over time as Avg. Avg. Selling Price($/g) $12 local production increases and international

Sales Volumes (kgequivalent) 200 health insurers resist paying a premium 0 $11 for imported products.

Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 45

GROWING FOR THE FUTURE October 2018

Aphria quickly expanded its international footprint by purchasing Nuuvera for $425 million in March 2018. The acquisition has strategic significance on the international front, helping take Aphria from a North American company to a global player. Particularly coveted are Nuuvera’s German connections. Nuuvera was shortlisted by Germany’s Federal Institute for Drugs and Medical Devices (BfArM) to grow, store, and deliver cannabis in Germany, and it has a supply agreement with the second-largest pharmaceutical distribution company in Germany. While the German licensing process was subsequently scrapped, we expect Aphria (via Nuuvera) to be a front-runner when the tendering process restarts. Nuuvera also gives Aphria access to several other key European markets, adding international bench strength.

Aphria’s management team took some flak for its undisclosed ownership position in Nuuvera (0.9%), which it subsequently acquired. While disclosure would have been optimal, our review of the situation indicates no wrongdoing in the arm’s-length transaction.

Exhibit 2.16: Nuuvera’s International Presence

Source: Company reports.

LATAM Holdings Inc. Similar to the Nuuvera acquisition, the purchase of LATAM Holdings Inc., a subsidiary of Scythian Biosciences Corp., in September 2018 for $193 million in stock provides Aphria with immediate access to a portfolio of key countries, including Colombia, Argentina, Jamaica, and possibly Brazil. The transaction gives Aphria an important foothold in a medical-cannabis market with significant potential.

This report is not to be distributed outside of Canada under any circumstances. 46

APHRIA INC. October 2018

Exhibit 2.17: Aphria’s International Operations

Agreements to Country Operating Unit Ownership Import Market Opportunity / Description Argentina ABP Pharma 0% Yes In March 2018, Aphria signed an exclusive supply agreement with ABP Pharma. ABP Pharma is licensed to import, sell, and distribute medical products in Argentina. Australia Althea 38% Yes In January 2018, Aphria entered into a supply agreement with Australian-based Althea Company Pty Ltd., investing $2.5M for a 25% ownership in Althea. Aphria will supply Althea with packaged co-branded cannabis oil and dried flower products for the Australian medical-cannabis market. The first shipment from Aphria to Althea occurred in April 2018 and will be used for clinical drug trials.

Brazil Unnamed entity N/A N/A Via LATAM Holdings, Aphria has the right to acquire a majority stake in a Brazilian entity for US$24M, which we expect will be exercised, provided the entity obtains a licence. Colombia Colcanna SAS 0% Yes In May 2018, Aphria signed an exclusive supply agreement with Colcanna SAS. Colcanna is licensed to import, sell, and distribute medical cannabis, products, and derivatives in Colombia. Denmark Scholl Medical 15% No The partnership with the Danish flower producer is expected to produce first product by early 2019. Scholl will be responsible for EU GMP-certified cultivation of organic medical cannabis and is currently retrofitting a 100,000 sq. ft. greenhouse.

Germany Nuuvera Deutschland 100% Yes Aphria seeks to receive a coveted cultivation licence through the German tender process currently GmbH underway and will export product to Germany. Aphria has a 1,200 kg letter of intent to supply cannabis through CC Pharma GmbH, a distributor to more than 13,000 pharmacies. Italy FL-Group 100% Underway One of seven companies authorized to distribute pharmaceutical products (including cannabis) in Italian pharmacies, FL-Group is waiting for regulatory approval to import/cultivate cannabis.

Jamaica Marigold 49% Yes Via LATAM Holdings, Aphria received a Tier 3 cultivation licence, a Tier 2 herb house licence, and import/export licences in Jamaica.

LATAM LATAM Holdings Inc. 100% Yes The pending acquisition of LATAM Holdings Inc. (a subsidiary of Scythian Biosciences) will give Aphria access to Colombia, Argentina, Jamaica, and possibly Brazil.

Lesotho CannInvest 50% No In May 2018, Aphria acquired a 50% stake in CannInvest, which will acquire a 60% stake in Verve Dynamics Inc., a licensed producer of medical cannabis extracts in the Kingdom of Lesotho.

Malta ASG Pharma 90% Yes Aphria plans on using the Malta import licence to import cannabis resin and flower for further processing, packaging, and distribution throughout Europe. Portugal TBD TBD TBD Aphria is currently pursuing strategic partners. U.S. None N/A N/A Aphria recently divested its only U.S. business to comply with TSX listing rules.

Source: Company reports; Scotiabank GBM.

New Product Formats Taking Cannabis Mainstream

Exhibit 2.18: Future Product Formats The initial Canadian rollout of recreational cannabis will exclude many popular formats of the product, including vape pens, edibles, and beverages. The federal government has indicated these products will be licensed within a year, although there is a risk it takes longer or that the licensing of the products is staggered. As regulations allow, we expect Aphria will be involved in each product segment by either developing the products itself or licensing or acquiring the technology. Beyond simply taking existing Source: Company reports. cannabis market share, these new product types may dip into much larger sources of incremental demand, particularly alcohol, tobacco, and pharmaceuticals.

Aphria has several ways in which it can pursue future opportunities for different formats, including its in-house Extraction Centre of Excellence, where it will conduct research and development (R&D) and test products.

This report is not to be distributed outside of Canada under any circumstances. 47

GROWING FOR THE FUTURE October 2018

Exhibit 2.19: Strategic Innovation Partners

Source: Company reports. M&A Activity Has Been Critical As Aphria Moved Quickly into New Markets

Aphria has mainly undertaken M&A transactions to gain a foothold in new markets. Aphria has been a part of more than a dozen M&A transactions since 2014 (see Exhibit 2.20). Shares have been the primary currency for transactions. Looking ahead, Aphria’s target list may include companies for further international footholds, successful brands, hemp, or even a cannabis retailer.

Exhibit 2.20: Key M&A Transactions

Announced Target Date Status Purchase Price Market Opportunity / Description LATAM Holdings Inc. 17-Jul-18 Complete $193M Acquisition gave Aphria immediate access to a portfolio of key countries in South America and the Caribbean, including Colombia, Argentina, Jamaica, and possibly Brazil. The transaction gives Aphria an important foothold in a medical market with significant potential.

Liberty Health Sciences Inc. 5-Feb-18 Complete ~$50M Acquisition was expected to be the base for a U.S. expansion strategy targeting key states that had approved medical cannabis use. However, the business was recently divested following a TSX warning that Canadian companies with U.S. cannabis assets may face delisting.

Nuuvera Inc. 29-Jan-18 Complete $425M The Nuuvera acquisition had strategic significance on the international front, helping take Aphria from a North American company to a global player. Particularly coveted were Nuuvera’s German connections. Nuuvera was shortlisted by BfArM to grow, store, and deliver cannabis and has an agreement with the second-largest pharmaceutical distribution company. While the German licensing tender process was subsequently scrapped, we expect Aphria will continue to be a front- runner in the new tender process currently underway. Additionally, Nuuvera gave Aphria access to several other key European markets and added to its international bench strength.

Broken Coast Cannabis Ltd 15-Jan-18 Complete $239M Broken Coast gave Aphria diversification of its production assets in B.C., an additional LP licence, an established premium brand, strong additions to the company’s genetics library, producer know- how, and a strong management team. Despite what could be viewed as a lofty price tag, the market viewed the transaction positively. Broken Coast capacity is increasing to 10,500 kg.

Source: Company reports; Scotiabank GBM.

Could Aphria Be a Takeout Target?

Aphria’s large production footprint, low-cost production profile, supply agreements, and head start on many peers could make it an attractive takeout target in our view. That said, it is also one of the largest companies in the space, making it unaffordable for most LPs. Additionally, we don’t think LPs such as Canopy or Aurora Cannabis Inc. (Aurora) would be in the market for more production assets. LPs aside, other potential acquirers include companies in the industries that cannabis will likely disrupt, including pharmaceutical, alcohol, and tobacco.

This report is not to be distributed outside of Canada under any circumstances. 48

APHRIA INC. October 2018

Financial Analysis and Outlook Revenue Is Growing Exponentially

Aphria’s revenue has grown from just $0.5 million in F2015 to $36.9 million in F2018. Historically, all revenue was generated from the sale of medical cannabis to Canadian patients. Revenue has been buoyed by the acquisition of Broken Coast in early 2018, which brought increased capacity and a higher-priced premium product. With Aphria ramping up domestic capacity, the legalization of the recreational market, and increasing international sales, we think Aphria can reach $680 million in revenue by the end of F2021.

We assume potential opportunities such as pharmaceuticals, animal health, and cosmetics do not drive near-term revenue.

Exhibit 2.21: We Expect Aphria’s Revenue to Move Higher After Canada Legalizes Recreational Sales

Canadian legalization in FY Q2/19; sales $200 Sales to Other LPs Forecast $180 to Emblem beginning Q1/20. $160 Recreational Wholesale $140 International Wholesale $120 $100 Medical Direct to Patient $80 $60 $40 Earnings Earnings Profile ($M) $20 $0

Source: Company reports; Scotiabank GBM estimates.

Exhibit 2.22: Aphria’s Key Revenue Drivers We forecast $490 million of recreational sales and $85 million of sales to other Key Assumptions FY19E FY20E FY21E LPs by the end of F2021, growing from Volumes (kg) zero prior to October 17, 2018. Our core Sales to Other LPs 313 20,000 30,000 assumptions include Canadian recreational Recreational Wholesale 32,000 95,000 140,000 sales volumes growing from zero to 140,000 Domestic Medical 5,638 5,862 6,221 kilograms (140 tonnes) and sales to other International 900 1,600 4,500 LPs growing to 30,000 kilograms in F2021. Total 38,851 122,462 180,721 Combined, these quantities imply a ~20% Prices ($/g) share of our legal Canadian recreational Sales to Other LPs nmf $3.01 $2.83 market estimate. We recognize that Aphria Recreational Wholesale $5.00 $3.74 $3.50 will have sufficient capacity for ~45% higher Domestic Medical $7.93 $8.25 $8.25 volumes, but we assume competition and the International $13.50 $13.00 $12.00 size of the market limit sales. We estimate Average Weighted Price $5.68 $3.96 $3.76 initial realized recreational prices (net of the Source: Scotiabank GBM estimates. excise tax) of ~$5/g, falling to $3.50/g in F2021 as competition forces price reductions, offset by the sale of higher- margin products.

This report is not to be distributed outside of Canada under any circumstances. 49

GROWING FOR THE FUTURE October 2018

We assume domestic medical-cannabis sales will grow 17% between F2018 and F2021, reaching $51 million. Aphria will continue to service its estimated 45,000 (and growing) medical patients, selling product direct to consumers. We expect the historical pace of sales growth to slow as some medical users switch to the recreational channel. We assume F2021E medical sales volumes of ~6,200 kilograms, up from ~3,700 kilograms in F2018. We assume medical prices fall from recent levels (~$9.25/g) to $8.25/g after the $1/g excise tax is introduced post-legalization.

We expect international sales to begin soon. As Aphria begins export volumes from Canada to international markets, we forecast revenues from this segment will reach $54 million in F2021. Our assumption is based on sales volumes of 4,500 kilograms, which implies that additional export markets become available, and prices at $12/g. We expect international pricing to fall over time as local production increases and international health insurers resist paying a premium for imported products.

We Expect Lower Recreational Sales Prices to Reduce Margins

We forecast near-term margin compression as the majority of Aphria’s sales shift to the recreational market, where it will capture only a wholesale margin. This is somewhat offset by our assumption of production costs falling to $1.30/g in F2021 from the $1.60/g realized in Q4/F18. We expect efficiencies from higher volumes to more than offset the slightly higher packaging costs for recreational products as a result of the average package size for recreational cannabis being smaller than for medical cannabis. As a result, by F2021, we expect Aphria to earn $2.20/g on recreational wholesale volumes, resulting in gross margin of 63%. The risk to this estimate is more aggressive price declines than we currently forecast. We think Canadian recreational sales will contribute 68% of Aphria’s F2021 gross margin.

Exhibit 2.23: Aphria’s Gross Margin Stepping Up with Volume Growth Sales to Other LPs (LHS) $140 100% Recreational Wholesale (LHS) Forecast 95% $120 International Wholesale (LHS) 90% $100 Medical Direct to Patient (LHS) Gross Margin (RHS) 85% $80 80% $60 75% $40 70% 65%

$20 GrossMargin(%) 60%

$0 55% GrossMargin Profile ($M) -$20 50%

Source: Company reports; Scotiabank GBM estimates.

For Aphria’s sales to other LPs, we assume F2021 realized prices of $2.83/g and production costs of $0.80/g in F2021. We assume Aphria captures 75% of the recreational wholesale margin and that production costs are paid by the wholesale partner. This implies segment gross margin of 75% and a segment contribution of 13% of total gross profit.

We expect medical-cannabis sales, both domestic and international, to account for 19% of F2021 gross profit. We forecast prices in the domestic medical-cannabis market of $8.25/g (net of the excise tax) and $12/g in the international medical-cannabis market and production costs of $1.30/g. These prices imply gross margin for the combined segments of 81%.

This report is not to be distributed outside of Canada under any circumstances. 50

APHRIA INC. October 2018

We Think Aphria Can Earn Long-Term EBITDA Margin of 36%

Near term, we expect EBITDA to be negative. Aphria is in the midst of expanding capacity by a factor of eight. As capacity ramps up, we expect costs to rise ahead of revenue as Aphria increases staffing levels. We assume Aphria will increase spending on advertising and marketing (from $4 million in Q4/F18 to $15 million in Q2/F19E) to drive demand in the early days of the legal recreational market. By Q3/F19, we expect higher volumes to be sufficient to return Aphria to its history of positive EBITDA generation.

Exhibit 2.24: Our Long-Term EBITDA Margin Forecast Reaches 36%

$200 Revenue 100% $180 Adj. EBITDA Forecast $160 Adj. EBITDA margin 80% $140 $120 60% $100 40% $80 $60 20%

$40 EBITDA EBITDA Margin(%) EBITDA EBITDA Profile ($M) $20 0% $0 -$20 -20%

Source: Company reports; Scotiabank GBM estimates.

We forecast sales and marketing expenses in wholesale at 10% of revenue, comprising payroll, brand development, marketing, product development, and education campaigns. We assume G&A costs of $138 million in F2021, supporting a multinational platform.

On an aggregate basis, we think Aphria can generate $243 million of EBITDA in F2021 at a 36% margin. We forecast rapid growth in sales volumes, pushing the company into positive adjusted EBITDA in Q4/F19 and marching higher as sales volumes continue to ramp up.

We assume capex of $174 million in F2019 and $60 million in F2021, with ongoing maintenance capex of $10 million. Capex will support the completion of the Aphria One ($45 million) and Aphria Diamond ($40 million) facilities, as well as the Extraction Centre of Excellence ($55 million). Additionally, we assume $10 million of capital outlays in Africa, Malta, and Avanti, along with two international facilities, for an additional $50 million. Capex may increase as Aphria announces new international projects and business lines.

Aphria has net cash of $258 million, following the close of a $258 million bought deal in June 2018. We expect Aphria to spend the proceeds on completing the capacity that is currently under construction.

No dividends for the foreseeable future; instead, we expect Aphria to use cash flow for M&A activity and to develop high-growth opportunities, including expanding into international markets and developing healthcare products and other recreational cannabis formats.

Biological assets and inventory are rising as Aphria continues to ramp up facilities. Aphria capitalizes pre-harvest plants on the balance sheet and moves harvested plants to inventory by expensing them. As plants grow, a non-cash unrealized gain is booked on the income statement and expensed when moved to inventory The result can be large non-cash movements in unadjusted earnings metrics, with headline numbers obfuscating reality, which is why we use adjusted EBITDA to value Aphria.

Our financial statement estimates are in the “Additional Company Information” section.

This report is not to be distributed outside of Canada under any circumstances. 51

GROWING FOR THE FUTURE October 2018

Valuation and Target Price Rationale Overview

We have initiated coverage on the common shares of Aphria Inc. with a Sector Outperform rating and a one-year target of $25.00 per share. We value Aphria by applying a 15x EV/EBITDA multiple to out-year EBITDA of $450 million, 40% of which is theoretical and based on likely funding capabilities.

How the Street Values Aphria

Simply put, we don’t understand how the Street is ascribing value to Aphria. On FactSet, there is one broker that provides a F2021 EBITDA forecast of $363.6 million, which implies a multiple of 13.5x. In our minds, an implied out-year EV/EBITDA multiple of 13.5x doesn’t make sense given the market’s current approach to valuing cannabis stocks (e.g., the market appears to imply a 56x EBITDA multiple for Canopy).

The Challenge in Valuing Aphria with Conviction

Why has Aphria soared from $6.00 per share to $25.00 in one year and back down to $20.00 when not much has actually happened beyond some de-risking? In our minds, the market is speculating on what the run-rate business will ultimately be able to generate in cash flow on a sustainable basis. While this is fine in theory, the issue is that not even Aphria fully knows what type of company it will be in five years from now. It is still early days. Aphria has aspirations of being a producer, a cultivator, an international player, and, perhaps, involved in the beverage and pharmaceutical industries (although the company hasn’t suggested this last point).

Given the rapid evolution of the cannabis space, it is understandable why Aphria hasn’t fully defined itself. However, until it does, the market won’t really have a good sense of how to value the stock nor will the sell side have a good sense of what reasonable estimates are. This may be why there is only one published out-year EBITDA estimate on FactSet.

How We Justify Our $25.00 Target Price

Exhibit 2.25: S&P Industry Multiples We start with what long-term EV/EBITDA multiple makes sense, which we peg at S&P 500 NTM EV/ 15x. Our support for 15x EBITDA is based Industry EBITDA on the average forward EBITDA multiple of all the industries we think Aphria could Tobacco 12.1x participate in (see Exhibit 2.25). Pharmaceuticals 12.3x Food Products 12.4x Personal Products 13.5x Household Products 14.1x Biotechnology 15.0x Beverages 16.3x Life Sciences 20.9x

Average, rounded 15.0x Source: Bloomberg; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 52

APHRIA INC. October 2018

Exhibit 2.26: Scotiabank GBM Base-Case Valuation Our calculations suggest that $1 of capex (Millions) (or debt) can generate nearly $1 of annual cannabis production EBITDA, assuming full utilization rates (unlikely) and margin contraction over time (very likely). The FY2021E EBITDA 450 appeal of building a business at a cost Multiple 15.0x of 1x EBITDA is exactly why we believe Enterprise Value 6,750 overcapacity is imminent and average Less: Adj. Net Debt 500 utilization rates will be well below 100%. Equity Value 6,250 We have added incremental theoretical FD Shares 246.0 EBITDA of $207 million to our $243 million Per Share, Rounded $25 2021 estimate (for a total of $450 million), Source: Scotiabank GBM estimates. at a cost of 2.5x EBITDA, to adjust for lower utilization rates but also to respect the ability of Aphria to be nimble. We view this as fairly conservative.

Applying 15x to our theoretical out-year $450 million of EBITDA results in a one-year target of $25.00 per share. While we are comfortable with this long-term multiple, as well as the first ~$250 million of EBITDA, we have less conviction in the incremental and theoretical $200 million of EBITDA. We are unable to support this level of EBITDA until Aphria has laid out a multi-year business plan with financial objectives. To reiterate, as the incremental $200 million of EBITDA is based on soft funding parameters and assumes seamless execution, in our view, some will suggest the risk is therefore to the downside.

Building an Upside Case of $34.00 per Share

We think a back-of-the-envelope upper boundary of $34.00 per share could eventually be supported. To be clear, we do not think that stock price is warranted today, and we don’t expect to see it without material de-risking and seamless execution over the next several years. Here is our attempt to justify it: First, let’s start with our $243 million run-rate EBITDA estimate, which we round up to $250 million. For incremental EBITDA above that level, it makes no sense to fall into the trap of over-speculation since we have no idea what businesses Aphria will ultimately end up in. What we do know, however, is that after funding the $250 million of out-year EBITDA, the company will have approximately no net debt. Therefore, we believe incremental EBITDA growth above $250 million will come if Aphria moves toward a balance sheet that is more optimally structured by issuing debt.

As we previously suggested, $1 of capex (or debt) can generate $1 of annual cannabis production EBITDA, assuming full utilization rates (unlikely) and margin contraction over time (very likely). For our base case, we add incremental and theoretical EBITDA of $207 million to our $243 million 2021 estimate (for a total of $450 million) at a cost of 2.5x EBITDA (see Exhibit 2.27) to adjust for lower utilization rates but also to respect Aphria’s ability to be nimble. We view this as quite conservative.

Beyond EBITDA of $450 million, the opportunity set for Aphria should be more challenging and consequently more costly, especially as the industry matures. Accordingly, we think it is prudent to charge Aphria twice the cost of what it paid for the first theoretical jump in EBITDA, or 5x EBITDA from 2.5x. Therefore, to move from $450 million of EBITDA to $650 million should require incremental debt of $1 billion ($200 million x 5x EBITDA). If this is even reasonably accurate, maintaining our 15x EBITDA multiple results in a share price of $34.00 and a normal mid-cycle net debt to EBITDA level of 2.3x.

This report is not to be distributed outside of Canada under any circumstances. 53

GROWING FOR THE FUTURE October 2018

We See Limited Downside for Aphria

In our minds, $15 is a reasonable downside case for Aphria. When thinking of a realistic bear-case scenario, there are four considerations: earnings power, the valuation multiple, use of the balance sheet, and timing. For earnings, let’s assume our 2021 EBITDA estimate of $243 million is correct, but that no incremental EBITDA is ever generated. Let’s also assume industry valuations come back down to reality and that our 15x EBITDA multiple is also reasonable. We also assume Aphria does nothing to add value to its balance sheet, such as never adding debt to capture low-hanging fruit. Finally, we don’t think it is fair to delay EBITDA generation. Aphria doesn’t have mines that need permits; it runs simple greenhouses – so the timing risk is low. Putting it all together yields an equity valuation of $15, not too far from the current stock price.

Exhibit 2.27: Scotiabank GBM Valuation Scenarios for Aphria (Millions) Bear Market Base Bull Case Implied Case Case

FY2021E EBITDA 243 243 +207 450 +200 650 Multiple 15x -5x 20x -5x 15x -0x 15x Enterprise Value 3,650 4,867 6,750 9,750 Less: Adj. Net Debt 0 0 +500 500 +1000 1,500 Equity Value 3,650 4,867 6,250 8,250 FD Shares 246.0 246.0 246.0 246.0 Per Share, Rounded $15 $20 $25 $34

Net Debt to EBITDA 0.0x 0.0x 2.5x 1.1x 5.0x 2.3x

DespiteDespite productionproduction capacity capacity capex costing capex about costing 1x EBITDA, about we1x areEBITDA, “charging” we're Aphria 'charging' a punitive Aphria 2.5x EBITDA a punitive to be conservative2.5x EBITDA and to to be assume lower utilization rates given industry oversupply. We assume the opportunity set to generate EBITDA beyond $400 million will be more costly (i.e., 5x EBITDA rather than 2.5x).

Source: Bloomberg; Scotiabank GBM estimates. How Aphria Stacks Up Against Its Peers

Why Aphria trades in the middle of the pack of Canadian cannabis stocks. Aphria has a large and accelerated production platform, which should allow it to capture significant market share in the critical early days of legal recreational demand. Additionally, the company intends to participate in several segments of the market beyond just domestic production. With a substantial number of supply agreements for future production in place, earnings are set to accelerate, leaving Aphria in prime position to further its first-mover advantage.

Exhibit 2.28: Cannabis Companies – Relative Valuations

EV/Sales EV/EBITDA EBITDA Margin Company: 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Aphria Inc* 11.5x 7.9x 6.7x 38.4x 23.3x 18.4x 30% 34% 36% Aurora Cannabis Inc. 15.1x 7.0x 4.4x 90.7x 21.9x 12.6x 17% 32% 35% CannTrust Holdings, Inc. 5.8x 3.9x N/A 20.1x 10.5x 13.6x 29% 37% N/A Canopy Growth Corporation* 36.7x 24.9x 22.2x 111.6x 71.5x 61.0x 33% 35% 36% Cronos Group Inc 19.7x 12.7x N/A 65.5x 35.9x 17.3x 30% 35% N/A HEXO Corp. 11.0x 4.7x 3.8x 54.3x 12.6x 11.0x 20% 37% 35% OrganiGram Holdings Inc 7.8x 4.1x 2.8x 24.9x 12.1x 7.7x 31% 34% 37% Supreme Cannabis Company Inc 6.3x 2.6x 2.3x 35.9x 7.6x 6.5x 18% 34% 36% Tilray, Inc. 106.7x 49.0x 33.2x 634.0x 189.9x 118.8x 17% 26% 28% Average (ex-Tilray): 14.2x 8.5x 7.0x 55.2x 24.4x 18.5x 26% 35% 36%

* Canopy/Aphria SGBM calendar-year estimates; all others from FactSet.

Source: FactSet; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 54

APHRIA INC. October 2018

Risk Factors

The future size of the global cannabis market is highly uncertain and depends on the regulatory environment in many markets, among other factors. Aphria’s internal forecasts for the size of market demand, as well as our own, are highly dependent on predicting a number of uncertain events, including government policy and changing consumer behaviour. As a result, Aphria may misallocate resources or experience a negative impact on profitability.

Aphria faces a high degree of execution risk while ramping up production. Aphria is ramping up several large-scale cannabis production facilities that could be subject to delays or quality issues. Aphria has a limited history of growing large amounts of cannabis: in F2017, Aphria sold 2,615 kilograms of cannabis and we expect that to increase to ~180,000 kilograms in F2021. There is no guarantee that Aphria will be able to accelerate production as quickly as we expect or that it won’t hit unforeseen production challenges.

Aphria competes for market share with a large number of existing competitors, with more on the way. Cumulative production announcements far exceed the estimated size of the legal market, which means not all competitors will be able to find a home for their products. This may lead to significant pricing pressure in the industry, reducing profitability. In addition, Aphria may not be able to maintain its existing market share as there is uncertainty about which brands will come out on top.

Aphria has a limited operating history, with low revenues and limited earnings.

Aphria has a history of acquiring companies and may struggle to integrate them or encounter unforeseen developments. Additionally, Aphria is likely to continue purchasing companies and may end up biting off more than it can chew in terms of integration and liquidity.

The cultivation and processing of cannabis requires a substantial amount of labour, and Aphria may be unable to appropriately staff its facilities. As an agricultural crop, cannabis is subject to risks, including crop failure, insects, and disease.

International operations will result in increased operational, regulatory, and other risks. Foreign jurisdictions may impose ownership or control restrictions that could have an adverse impact on Aphria. Or Aphria may encounter political and other risks in the emerging markets it operates in.

The company’s common share price has experienced significant volatility and is likely to be subject to further volatility based on market conditions.

Aphria’s ability to operate cannabis operations in Canada depends on maintaining its licence with Health Canada. Failure to comply with regulations or the inability to renew the licence could lead to losing the licence, materially adversely affecting the company.

Aphria has historically issued equity to finance growth; shareholders may face further dilution as Aphria continues to expand. Under Aphria’s articles of incorporation, it is permitted to issue an unlimited number of common shares, and the execution of warrants and options may further dilute shareholders.

Aphria produces a product designed to be ingested by humans that could expose them to product liability claims and regulatory action. Furthermore, Aphria could be subject to a product recall if product defects arise, which could materially adversely affect the business.

This report is not to be distributed outside of Canada under any circumstances. 55

GROWING FOR THE FUTURE

October 2018 FY 2022

Additional Company Information

5

1

4

0

0

2

14

30

68

243

238

-51

243

232

156

208

202

250

138

452

452

226

680

0.64

0.66

2021E

5/31/21

5

1

4

0

0

2

14

19

48

244

239

-34

166

155

107

141

136

182

100

318

318

165

484

0.44

0.45

2020E

5/31/20

5

4

4

2

-5

-1

26

16

33

39

35

18

15

50

69

73

242

237

-10

151

151

146

221

0.14

0.14

2019E

5/31/19

5

0

1

4

4

0

0

0

-4

24

21

14

18

17

43

15

20

60

60

31

91

246

241

0.06

0.06

5/31/19

Q4-19E

5

8

5

2

0

2

0

1

1

4

4

0

0

0

42

15

20

43

43

22

66

246

241

0.01

0.01

2/28/19

Q3-19E

5

2

0

1

4

4

0

0

0

FY 2019

-2

-4

-4

-7

-8

42

15

20

34

34

16

51

246

241

-0.02

-0.02

Q2-19E

11/30/18

5

1

7

3

5

9

4

8

0

4

-4

-6

-4

21

25

34

24

14

13

230

226

-10

-10

0.09

0.09

Q1-19

8/31/18

5

6

5

4

0

9

-6

-6

29

36

43

53

24

12

14

41

10

28

37

166

161

-12

-23

0.18

0.18

2018

5/31/18

7

6

1

4

0

4

5

1

6

1

7

5

0

1

4

-1

-1

19

17

16

20

111

104

0.04

0.04

2017

5/31/17

0

0

0

1

0

0

7

1

0

4

2

6

0

0

6

1

2

8

58

58

-1

-1

-

0.01

0.01

2016

5/31/16

0

0

4

1

0

1

2

1

0

0

1

0

1

45

45

-3

-3

-7

-7

-3

-3

-1

-

-0.14

-0.14

2015

5/31/15

Aphria’s IncomeStatement Aphria’s

: :

2.29

Adj. EBITDA Adj.

EBITDA

Weighted Avg. Shares O/S - O/S Diluted Shares Weighted Avg.

Equity Dilution Equity

Weighted Avg. Shares O/S - O/S Basic Shares Weighted Avg.

Basic Shares Closing Shares Basic

Equity Issuance/Repurchase Equity

Basic Shares Opening Shares Basic

EPS - Diluted EPS

EPS - Basic EPS

Net Income (Loss)

Income Tax (expense) recovery

Gain (Loss) Before Income Tax

Other Nonoperating IncomeOther Nonoperating

Interest Expense

Gain (Loss) From Operations

Operating Expenses

Other Operating Expenses Other Operating

Depreciation & Amortization & Depreciation

Sales & Marketing & Promotion Marketing & & Sales

General & Administration & General

Gross Profit Gross

Unrealized gain/loss in F.V. Biological Assets Biological F.V. in gain/loss Unrealized

F.V. Change to Biological Assets / Inventory Biological to Change F.V.

Gross Profit Gross

Other costs of sales

Less: COGS

Revenue

Exhibit Source: CompanySource: reports;Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 56

FY 2022 APHRIA INC.

October 2018

7

19

22

58

52

76

20

56

10

77

43

35

17

41

352

187

110

525

235

486

618

170

306

1,950

1,764

1,745

1,370

1,950

1,332

2021E

5/31/21

7

19

22

58

52

63

20

43

10

77

43

35

17

41

186

173

110

525

235

506

418

119

157

1,770

1,597

1,578

1,370

1,770

1,352

2020E

5/31/20

7

19

68

22

58

52

50

20

30

10

77

43

35

17

90

41

97

161

110

525

235

465

329

1,641

1,480

1,461

1,370

1,641

1,312

2019E

5/31/19

7

19

68

22

58

52

50

20

30

10

77

43

35

17

90

41

97

161

110

525

235

465

329

1,641

1,480

1,461

1,370

1,641

1,312

5/31/19

Q4-19E

7

19

52

22

58

52

42

20

22

10

77

43

35

17

65

41

152

110

525

235

431

338

131

1,616

1,463

1,445

1,370

1,615

1,277

2/28/19

Q3-19E

7

19

47

22

58

52

50

20

30

10

77

43

35

17

50

41

FY 2019

160

110

525

235

396

376

184

1,619

1,459

1,440

1,370

1,619

1,243

Q2-19E

11/30/18

7

3

19

49

22

58

52

55

20

35

10

77

43

35

17

41

166

110

525

235

361

418

273

1,626

1,460

1,442

1,370

1,626

1,208

Q1-19

8/31/18

7

3

10

27

23

97

68

28

44

12

32

21

46

43

22

14

45

60

140

523

226

303

195

1,314

1,174

1,164

1,114

1,314

1,119

2018

5/31/18

0

4

0

4

6

1

2

2

1

4

5

1

-4

42

31

31

10

33

28

73

87

80

316

274

274

274

316

136

179

2017

5/31/17

0

2

1

0

0

0

1

0

1

0

1

2

4

7

1

1

2

0

2

0

-8

36

35

35

41

36

14

22

16

2016

5/31/16

0

2

1

0

0

0

1

0

1

4

0

0

0

0

4

1

0

2

1

0

0

7

-9

14

13

13

20

14

10

2015

5/31/15

GBM GBM estimates.

Aphria’s Balance Sheet Balance Aphria’s

: :

2.30

Total Equity Liabilities & Shareholders

Total Equity Shareholders

Non-Controlling Interests Non-Controlling

Total Equity Attributable to Canopy Total Attributable Equity

Retained Earnings (Deficit) Earnings Retained

Accum. Other Comprehensive Income

Share Capital Share

Shareholders Equity Shareholders

TotalLiabilities

TotalLong-Term Liabilities

Other Long-Term Liabilities

Long-Term Debt

Long-Term Liabilities

TotalCurrent Liabilities

Other Current Liabilities

Accounts Payable & Accrued Liabilities & Accounts Payable

Current Liabilities

TotalAssets

TotalLong-Term Assets

Other Financial Assets Other Financial

Goodwill

Long-Term Investments

Intangible Assets Intangible

Property, Plant & Equipment & Plant Property,

Long-Term Assets

TotalCurrent Assets

Prepaid Expenses & Other Expenses & Prepaid

Biological Assets Biological

Inventory

Other Current Assets

Accounts Receivable

Marketable Securities

Cash & Cash Cash Equivalents &

Current Assets

Exhibit Source: CompanySource: reports;Scotiabank

This report is not to be distributed outside of Canada under any circumstances. 57

FY 2022 GROWING FOR THE FUTURE

October 2018

0

0

0

0

0

0

0

0

0

10

30

-10

-10

-37

306

157

149

159

156

2021E

5/31/21

0

0

0

0

0

0

0

0

0

97

59

10

19

-60

-60

-17

157

119

107

2020E

5/31/20

0

0

2

4

97

60

38

25

12

17

33

-74

-19

-10

273

246

-161

-174

-100

2019E

5/31/19

0

0

0

0

0

0

0

5

3

4

0

0

97

14

-34

-39

-39

-16

131

5/31/19

Q4-19E

0

0

0

0

0

0

0

3

4

0

0

2

-53

-39

-39

-14

-23

131

184

2/28/19

Q3-19E

0

0

0

0

0

0

0

3

4

0

0

FY 2019

-4

-89

-39

-39

-50

-52

184

273

Q2-19E

11/30/18

0

0

2

5

4

-9

60

25

12

21

-46

-58

-14

-26

-10

273

213

273

246

Q1-19

8/31/18

0

8

7

-8

-5

-6

60

80

10

10

29

-20

-10

-18

-23

206

196

-221

-216

2018

5/31/18

0

5

3

2

0

4

-1

-2

-1

80

16

63

33

24

-66

260

204

-202

-136

2017

5/31/17

7

9

0

0

0

6

1

0

0

0

-6

-2

-4

-1

-2

-1

16

16

10

2016

5/31/16

7

0

7

0

0

0

4

0

0

-2

-3

-1

-2

-5

-2

-1

-7

15

17

2015

5/31/15

Aphria’s Cash FlowStatement Cash Aphria’s

: :

2.31

Cash & Equivalents,End of Period

Cash & Cash Equivalents, Beginning of Period Beginning Cash Cash Equivalents, &

Net Cash Inflow

Net Cash Provided by FinancingNet Provided Cash Activities by

Other Financing Activities Other Financing

Repayment of Long-TermRepayment Debt

Issuance of Long-Term Debt

Proceeds: Exercise of Warrants/Options

Share Issuance Share

Financing Activities:

Net Cash Used in InvestingNet Used Cash Activities

Investments in Other Financial Assets Investments Other Financial in

Purchases of Deposits PP&E and

Investing Activities:

Net Cash Used in OperatingNet Used Cash Activities

Changes in Non-Cash Working in Changes Capital

Other Income Expenses and

Depreciation & Amortization & Depreciation

Unrealized gain/loss in F.V. Biological Assets Biological F.V. in gain/loss Unrealized

F.V. Change to Biological Assets / Inventory Biological to Change F.V.

Net Income (Loss)

Operating Activities:

Exhibit Source: CompanySource: reports;Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 58

October 2018

PERTINENT DATA

Canopy Growth Corporation Rating Sector Perform 1-Yr. Target C$61.00

Superb Story and Outlook, Full Valuation WEED-T C$61.29 CGC-N US$56.89

INVESTMENT HIGHLIGHTS 1-Yr. Return -0.5% Risk Ranking Speculative We have initiated coverage on the common shares of Canopy Growth Div. (NTM) $0.00 Div. (Curr.) $0.00 Corporation (Canopy) with a Sector Perform rating, a one-year target of $61.00 Yield (Curr.) 0.0% per share, and a bear-to-bull range of $26 to $88. Canopy is the dominant Canadian Valuation: 15x achievable out-year EBITDA of player and global leader in the rapidly evolving cannabis space. Its first-mover $1.5 billion advantage has positioned the company to not only be the largest global producer of legal cannabis in the world, but also to capture significant market share in many cannabis-related markets. The recent cash injection of $5 billion from Constellation Brands, Inc. (STZ-N) provides Canopy with ample funding to build out multiple cannabis-based business lines, brands, and, ultimately, earnings streams. We value Canopy by applying a 15x EV/EBITDA multiple to our out-year EBITDA estimate of $1.5 billion, two-thirds of which is theoretical, and based on likely funding capabilities. While we believe the story and outlook are superb, we think the stock is fully valued.

Canopy is targeting market leadership in many segments of the cannabis industry, including (1) production and wholesale sales – both recreational and medical; (2) retail sales through its own network – both recreational and medical; (3) international markets through exports or by building out its international operations; (4) healthcare and pharmaceutical products for humans and animals; and (5) future products such as cannabis-based beverages. In our minds, Canopy’s balance sheet firepower ($5.3 billion of pro forma net cash), first-mover advantage, strong management team, and assistance from Constellation Brands should allow it to capture significant market share in existing and new markets and, more importantly, build sustainable cash flow.

Ultimately, Canopy wants to build brands, not production. In fact, we think Canopy may eventually spin off its production assets and focus on cannabis as an ingredient rather than as a product. Given its relationship with Constellation Brands, we believe Canopy is well positioned to enter the cannabis-based beverage market. We expect Canopy to build a bottling line and invest in developing products that will be ready to hit the shelves when Canada gives the green light for their sale in 2019. While other licensed producers (LPs) will likely sign agreements to supply cannabis to beverage companies such as Coca-Cola, we believe Canopy’s participation in product development and branding will yield significantly more value for investors than simply

an agreement to provide the product to a beverage manufacturer. CAPITALIZATION

EV/Adj. Market Cap. (M) $22,891 Qtly Adj EBITDA (M) (FD) Q1 Q2 Q3 Q4 Year EBITDA Net Debt + Pref. (M) $-5,331 2018A $-5 $-6 $-7 $-23 $-41 (256.7)x Enterprise Value (M) $17,560 2019E $-22A $-40 $62 $63 $63 187.5x Shares O/S (M) 373 $65 $65 $60 $60 $250 67.3x 2020E Volume and Closing Price for WEED-T 2021E $115 $450 38.5x 25 80

(FY-Mar.) 2017A 2018A 2019E 2020E 2021E 70 20 Revenues (M) $40 $78 $378 $816 $1,236 60

EPS $-0.05 $-0.39 $-0.36 $0.46 $0.81 15 50 Net Debt (M) $-56 $-281 $-4,773 $-4,905 $-5,452 Vol (M) Vol 10 40 Sales Volumes (000 kg) 5 9 62 161 261 (CAD) Price 30 Avg. Price per Gram $7.46 $8.19 $5.75 $4.31 $3.99 5 Avg. Cost per Gram $2.73 $2.62 $1.95 $1.49 $1.37 20 0 10 Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated. Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Source: FactSet; company reports; Scotiabank GBM estimates. This report is not to be distributed outside of Volume WEED-T Canada under any circumstances. Source: FactSet.

59 GROWING FOR THE FUTURE October 2018

Investment Highlights (Continued)

 The first earnings inflection is now underway. Historically, all of Canopy’s earnings have come from medical sales and, until recently, only in Canada. The legalization of recreational use in Canada will, in our view, be an inflection point for Canopy’s earnings by creating a market that we estimate will generate 85% of its total revenue by F2021. The foundation of our thesis stems from eight provincial memoranda of understanding (MOUs) that total about 67,500 kilograms annually. On a run-rate basis, we forecast F2021 EBITDA of $450 million, which assumes declining cannabis prices, a 50% capacity utilization rate, and, most importantly, no need to use the approximately $10 billion in available funding ($5.3 billion of cash on hand + cash from operations + potential debt).  Canopy is the largest producer of cannabis in Canada, a lead it plans to maintain as it ramps up Canadian production capacity to an estimated 500,000 kilograms per year (500 tonnes). In Q1/F19 (ending June 30, 2018), Canopy harvested nearly 10,000 kilograms, several times more than the second- largest producer, Aphria Inc., and accounting for nearly one-third of the inventory of all the LPs combined. We believe that Canopy’s high inventories and rapidly increasing production will make it one of the few LPs that are able to sell a significant amount of product in the early stages of the Canadian recreational market. This makes the company an ideal partner for provinces, adding further support to its first-mover advantage. That said, we do not think Canopy will initially use all its capacity as the market likely won’t need it. For now, we model approximately 260,000 kilograms (260 tonnes) of F2021 sales volumes, implying an operating rate of about 50% and a Canadian market share of ~30%.  Up to $10 billion of investment capital. After receiving more than $5 billion in cash from Constellation Brands, Canopy is by far the best capitalized cannabis company in the world. Beyond the $5 billion, we estimate cash flow from operations over the next several years, as well as some debt to optimize its capital structure, will give the company a $10 billion war chest for organic growth and strategic acquisitions. Applying this $10 billion at an investment cost of 5x EBITDA could bring EBITDA to $2.5 billion, which, at a long-term multiple of 15x, yields a price value of $88.  Canopy already has a merger and acquisition (M&A) pipeline of $1 billion, mostly in international markets, as domestic capacity is more than sufficient. Specifically, Canopy intends to build international production in Denmark, Colombia, and Germany. While the federal legalization of cannabis in the United States is not in our base case, we believe Canopy would move very quickly to be involved, with significant capital put to work.  Like most cannabis stocks, Canopy’s valuation can appear lofty without considering the full opportunity set. For example, if one takes only consensus F2021 EBITDA of $309 million (we are at $450 million), Canopy trades at more than 50x EBITDA – clearly not a sustainable valuation if run-rate EBITDA is about $300 million. If we assume Canopy uses the $5 billion in cash available on the balance sheet to generate an incremental $1 billion in EBITDA, for a total of $1.5 billion of EBITDA, our one-year target of $61.00 per share would imply 15x EBITDA. Of course, that also means Canopy is pricing in near-perfect execution over the next several years, which is why we rate the stock a Sector Perform and suggest Canopy is now a “show-me” story.  Key investment risks include the following: (1) uncertain market size that depends on the regulatory environment in many regions; (2) a high degree of execution risk as Canopy ramps up production; (3) the large number of existing competitors and more on the way; (4) Canopy’s limited operating history, with low revenues and a history of losses; (5) integrating acquisitions; and (7) the significant number of the company’s common shares owned by Constellation Brands – if Constellation Brands exercises all its warrants, its ownership would increase to more than 50%, effectively giving Constellation Brands control of Canopy.  In a realistic worst-case scenario, we see a downside target of $26.00 per share. This assumes consensus EBITDA of $309 million at a 15x multiple, no use of the $5 billion of cash, and no optimal capital structure on the balance sheet. To be clear, we do not expect this to be the outcome for Canopy.

This report is not to be distributed outside of Canada under any circumstances. 60

CANOPY GROWTH CORPORATION October 2018

Company Snapshot

Exhibit 3.1: Canopy Growth Corporation Tear Sheet Canopy Growth Corporation WEED-T; CGC-N 1-Year Target: $61 Last Price: $61.29 1-Year Return: 0% Market Cap: $22.9B Rating: SP EV: $17.6B NTM Dividend $0.00 Avg. Volume: 16.7M FY End: Mar-31 FD Shares O/S: 373M Insider Ownership: 6.9% Float: 54.7% Institutional Ownership: 12.6% Valuation: 15x Achievable Out-Year EBITDA of $1,500M Short Interest (% of float) 6.8%

Financial 2018 2019E 2020E 2021E Operational 2019E 2020E 2021E EV/EBITDA -425.7x 278.5x 70.2x 39.1x Domestic Medical Volume (kg) 10,322 11,211 11,899 P/E (Adjusted) -158.1x -170.8x 133.5x 75.8x Domestic Recreational Volume (kg) 50,000 145,000 240,000 P/BV 18.4x 3.4x 3.3x 3.1x International Volume (kg) 1,598 5,000 9,000 Total Sales Volume 61,920 161,211 260,899 Dividend Yield 0.0% 0.0% 0.0% 0.0% Gross Margin 52% 59% 61% 61% Retail Store Locations 20 60 80 Adj. EBITDA Margin -53% 17% 31% 36% Avg. Price Per Gram $5.75 $4.31 $3.99 Adj. EBITDA Growth 774% -253% 297% 80% Avg. Cost Per Gram $1.95 $1.49 $1.37

Income Statement 2018 2019E 2020E 2021E 2021E Adj. EBITDA Sensitivity Δ $M % Net Sales 78 378 816 1,236 Wholesale Sales Volumes (kg) 10,000 $19 4% COGS 38 155 320 484 Avg. Selling Price ($/g) $0.25 $54 12% Gross Profit 40 223 496 752 Adj. EBITDA -41 63 250 450 EPS Estimates 2018 2019E 2020E 2021E Net Income -70 -46 163 300 Q1 -$0.03a -$0.40a $0.12 $0.20 EPS (FD) -$0.39 -$0.36 $0.46 $0.81 Q2 -$0.01a -$0.19 $0.12 $0.20 Q3 $0.01a $0.10 $0.11 $0.21 Balance Sheet 2018 2019E 2020E 2021E Q4 -$0.36a $0.13 $0.11 $0.21 Cash & Equivalents 323 5,424 5,556 6,103 Total -$0.39a -$0.36 $0.46 $0.81 Inventory 102 118 118 118 Consensus -$0.51 $0.23 $0.51 Biological Assets 16 53 53 53 PP&E 304 985 1,015 965 Credit Metrics 2018 2019E 2020E 2021E Total Assets 1,437 7,520 7,729 8,330 Net Debt/Adj. EBITDA 7.6x -76.2x -19.7x -12.2x Short-Term Debt 2 3 3 3 Debt/Total Capital 0.01x 0.08x 0.08x 0.08x Long-Term Debt 7 618 618 618 Total Liabilities 194 822 849 884 Free Cash Flow 2018 2019E 2020E 2021E Shareholders' Equity 1,243 6,698 6,880 7,446 EBITDA -41 63 250 450 Less: Taxes 11 37 82 85 Cash Flow Statement 2018 2019E 2020E 2021E Less: NWC Δ 241 21 68 1 Operating (post-WC) -82 -201 222 332 Less: CAPEX 679 90 30 30 Investing -224 -708 -90 -30 Free Cash Flow -972 -84 70 333 Financing 526 6,010 0 245 All figures are FY and in C$M, unless otherwise noted. Cash Δ 221 5,101 132 547 Source: Company reports; FactSet; Bloomberg; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 61

GROWING FOR THE FUTURE October 2018

Scenario Analysis

Risk/Reward Trade-Off: Canopy Growth Corporation (WEED-T; SP; One-Year Target $61.00) Investment Thesis Canopy Growth Corporation (Canopy) is the dominant Canadian player and global leader in the rapidly evolving cannabis space. Its first- mover advantage has positioned the company to not only be the largest global producer of legal cannabis in the world, but also to capture significant market share in many cannabis-related markets. The recent cash injection of $5 billion from Constellation Brands, Inc. (STZ-N) provides Canopy with ample funding to build out multiple cannabis-based business lines, brands, and, ultimately, earnings streams.

Key Risks What’s Likely Priced In? Key Stock Catalysts Timing Competition pushing prices lower. ~30% market share in Canada. Reported volumes in Quarterly Canada’s recreational Uncertain market sizing. Near-perfect execution. cannabis market. Regulatory risk in multiple jurisdictions. Capture of ~$1 billion of additional long- International sales volume Quarterly term EBITDA growth from international Execution risk on production and strategy. growth. sales and adjacent market opportunities. Uncertainty on long-term growth potential. M&A transactions. Ongoing Regulatory progress in the Ongoing United States and internationally.

Clinical trial results. Ongoing

Bear Base Current Bull Case Case Price Case

$26.00 $61.00 $61.29 $88.00 (-57%) (0%) (44%)

Bear Case: $26.00 Base Case: $61.00 Bull Case: $88.00 Earnings. $309 million of F2021 EBITDA Earnings. $1.5 billion out-year EBITDA, of Earnings. $2.5 billion out-year EBITDA, of (consensus). which $1 billion is low-conviction theoretical which $2 billion is low-conviction theoretical EBITDA. EBITDA. Balance sheet. No value-added investments; $5.3 billion of cash is not Balance sheet. Uses $5 billion of cash on Balance sheet. Generates $10 billion of deployed. hand, cash flow, and debt. funding from cash on hand, cash flow, and debt.

Bear Case Valuation Base Case Valuation Bull Case Valuation 15x F2021 consensus EBITDA of 15x F2021E achievable out-year EBITDA of 15x our F2021E achievable out-year $309 million. $1.5 billion EBITDA of $2.5 billion.

This report is not to be distributed outside of Canada under any circumstances. 62

CANOPY GROWTH CORPORATION October 2018

Company Profile

Canopy is targeting market leadership in many segments of the cannabis industry, including (1) production and wholesale sales – both recreational and medical; (2) retail sales through its own network – both recreational and medical; (3) international markets through exports or by building out its international operations; (4) healthcare and pharmaceutical products for humans and animals; and (5) future products such as cannabis-based beverages. In our minds, Canopy’s balance sheet firepower ($5.3 billion of pro forma net cash), first-mover advantage, strong management team, and assistance from Constellation Brands should allow it to capture significant market share in existing and new markets and, more importantly, build sustainable cash flow.

While Canopy’s revenue has grown exponentially, climbing from just $2.3 million in F2015 to $77.9 million in F2018, we believe there is a lot more to come. Canopy is a first mover in the Canadian medical-cannabis industry, starting out as Tweed Marijuana Inc. in 2014 and rebranding as Canopy Growth Corporation in 2015. Historically, nearly 100% of revenues have been generated from the sale of medical cannabis to Canadian patients; however, in recent quarters, sales in Germany and the Czech Republic have grown, reaching 248 kilograms in Q1/F19 (9% of total volumes). As Canopy ramps up domestic capacity to meet the demands of the recreational market and increases its international sales, we think revenue could pass $1.2 billion by F2021.

Exhibit 3.2: Canopy’s Sales Volumes by Segment Exhibit 3.3: Growth and Consumption of Canopy’s Medical Patients

International (LHS) 70,000 Forecast $12 120 Registered Patients (LHS) Forecast 100 Recreational (LHS) Medical (LHS) Consumption/patient (RHS) 90 60,000 $10 100 Avg. Selling Price (RHS) 80 50,000 70 $8 80 40,000 60 $6 60 50 30,000 40 $4 40

20,000 30 Active Active Patients (000) Avg. Selling Avg. Selling Price($/g) 20 $2 20

Sales Sales Volumesequivalent) (kg 10,000

10 ConsumptionPatient Per (g/quarter) 0 $0 0 -

Source: Company reports; Scotiabank GBM estimates. Source: Company reports; Scotiabank GBM estimates.

Exhibit 3.4: Canopy’s Cannabis Inventory Exhibit 3.5: Canopy’s Earnings Progression – Revenue and EBITDA

25,000 $350 Softgel Capsules Revenue Forecast $300 Adj. EBITDA Cannabis Oils (kg equivalent) 20,000 $250 Dry Cannabis $200 15,000 $150 $100 10,000 $50

Earnings Earnings Profile ($M) $0

Inventory(kg equivalent) 5,000 -$50 -$100 0 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Source: Company reports; Scotiabank GBM. Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 63

GROWING FOR THE FUTURE October 2018

Rapid revenue growth has led to negative EBITDA. In the past three years, Canopy’s quarterly revenue CAGR was 25%. As Canopy focused on growing its business lines and ramped up production, EBITDA was negative and declining nearly as quickly as revenue was increasing. We expect Canopy’s negative EBITDA generation to turn positive in Q3/F19 as recreational sales begin and think adjusted EBITDA will reach $450 million in F2021.

Historical sales volumes and prices aren’t reflective of current economics. In Q1/F19, Canopy sold 2,695 kilograms of cannabis at $8.94/g, generating $26 million in revenue. We believe historical prices will be higher than future prices as sales were direct to consumers, which allowed Canopy to realize better selling prices than what it will earn in its wholesale business. We assume an average selling price of $4/g in F2021, which reflects the bulk of volumes being sold at wholesale prices rather than direct to consumers. This doesn’t mean the consumer will pay less as distributors, retailers, and the government will be taking their cuts. While average prices will be down, higher volumes will more than offset the lower prices. During the first six months of the legalized Canadian recreational market, we think Canopy can sell three times more product in the recreational channel (50,000 kilograms) than it has sold in its entire operating history (~16,000 kilograms).

Capital Markets Profile

Exchanges. Canopy is a dual-listed company, trading on the Toronto Stock Exchange (TSX) as WEED and on the New York Stock Exchange (NYSE) as CGC. Canopy reports financials in Canadian dollars and has a fiscal year-end of March 31.

Market capitalization of $22.9 billion and an enterprise value of $17.6 billion. These figures assume a share count of 373.5 million, which includes the 268 million shares Tim Saunders, Canopy’s Chief Financial Officer, mentioned on the most recent conference call and dilution from Constellation Brands adding 105 million shares, offset by cash received. We note that the company will report a lower average weighted fully diluted share count when it reports Q2/F19, and data providers will not make the same pro forma adjustments as we do.

Exhibit 3.6: Canopy’s Ownership Profile Ownership. Canopy’s largest shareholder is Constellation Brands, holding 38% of the Inst. Ownership shares (including 18.9 million of deep-in-the- 11% money warrants), with additional warrants Unknown 30% that could take ownership above 50%. Others (Hiku, Tweed JA, etc.) Canopy has used its shares as a currency 16% in various transactions, such as with Hiku Brands Company Ltd. (Hiku), BC Tweed, and Canopy Health Innovations. Canopy has a large shareholder base of predominantly Insider Ownership 3% retail investors. Notable insider stakes include Bruce Linton, Canopy’s founder, Constellation Brands Chairman, and Co-Chief Executive Officer, 38% who owns 0.9%, and Canopy Director Murray Goldman, who owns 1.3%, both Source: Company reports; FactSet; Scotiabank GBM. on a fully diluted basis.

This report is not to be distributed outside of Canada under any circumstances. 64

CANOPY GROWTH CORPORATION October 2018

Liquidity. Canopy is one of the most actively traded stocks in the world, with average daily trading volume (ADTV) over the past 180 days of $262 million on the TSX and US$277 million on the NYSE. Short interest across both the TSX and NYSE is ~9% of free float, based on our pro forma fully diluted shares outstanding.

Exhibit 3.7: Canopy’s Share Price and Recent Developments

$80 70 Constellation increases stake to 38% (over 50% with warrants) for $70 60 Canopy offers 5.8M share follow- $5.1B $60 on offering for $201M Canadian senate passes Bill C-45 50 $50 California legalizes recreational

cannabis 40 TSX & & TSX NYSE (M)

$40 - ETF available to U.S. investors 30 $30 goes live

SharePrice ($/sh) 20 $20 Constellation announces 9.9% Canopy begins trading on NYSE stake in Canopy for $245M

$10 10 TradeVolume $0 - Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Apr/18 Jul/18 Oct/18

Source: FactSet; Scotiabank GBM. Management Profiles

Bruce Linton, founder, Chairman and Co-Chief Executive Officer, has been with the company from the beginning (2014). In addition to his current role at Canopy, he has been the President of HBAM Holdings Inc. since 2007 and Chief Executive Officer of the communications company Martello Technologies since 2013. He was also a member of the establishing team at CrossKeys Systems Corporation and the President and Co-founder of webHancer Corporation.

Mark Zekulin, President and Co-Chief Executive Officer, has been with the company since inception. Previously, he provided political and strategic advice to local and international corporate clients, most recently as counsel at the Ottawa-Washington international trade law firm of Cassidy Levy Kent. He has also served as a senior adviser to an Ontario Minister of Finance and worked internationally at the Business and Industry Advisory Committee to the Organisation for Economic Co-operation and Development (OECD). He is a graduate of the University of Waterloo in mathematics, the University of Ottawa in law, and the University of Cambridge in international law.

Tim Saunders, Executive Vice-President and Chief Financial Officer, joined Canopy in June 2015. Previously, he held executive finance positions at Mitel Networks Corporation, Zarlink Semiconductor, Vodafone Group plc, Oskar Mobil AS, and Plasco Energy Group Inc. He earned his CPA, CA designation with PricewaterhouseCoopers; a BBA from Bishop’s University; and an executive certificate from the Ivey Business School at the Western University.

This report is not to be distributed outside of Canada under any circumstances. 65

GROWING FOR THE FUTURE October 2018

Business Strategy and Operations Analysis

Near term, the majority of Canopy’s earnings will be generated by domestic sales in the recreational market, while we believe the longer-term opportunity is in international expansion, value-added formats, and product development. We break down Canopy’s wide scope of operations, both owned and affiliated, in Exhibit 3.8.

Exhibit 3.8: Canopy’s Operations

Canopy Growth Corp.

Production Sales Market Development

-Hybrid Greenhouse -Domestic Medical -Branding Owned by -Indoor -Domestic Recreational -R&D Canopy -Domestic -International Medical -Product Development -International -Retail -Canopy Health Innovations -Hemp

Affiliations & -CraftGrow Collection -Affiliate Brands Partnerships with -Agripharm -Canopy Rivers Canopy -Canopy Rivers -Constellation Brands

Source: Company reports; Scotiabank GBM. Canada’s Largest Cannabis Producer

Following the completion of announced expansions, we expect Canopy to have the largest production platform in Canada. Canopy’s expansion plans in Canada will more than triple the company’s licensed space in 2018 to 3.8 million square feet (sf). If Canopy licenses all its existing expansion plans, we estimate total capacity will reach ~6 million sf, which could produce ~500 tonnes of cannabis. We believe Canopy’s mix of hybrid (~80%) and indoor (~20%) facilities allows it to produce a number of strains for different consumer segments (e.g., discount and premium). Canopy is also developing more than 400,000 sf internationally, which we believe will increase over time as it enters new markets.

Canopy’s diversified production platform could help it move more cannabis to market. Canopy has 13 production facilities in seven provinces, while many competitors have production in only one or two locations. We think this geographic diversification will help Canopy’s bargaining position when negotiating future MOUs with the provinces, which may favour companies that bring jobs (and tax revenue) to their economies. We think its widespread production platform is one of the reasons Canopy managed to secure about one-third of the existing provincial MOUs, more than any other company.

This report is not to be distributed outside of Canada under any circumstances. 66

CANOPY GROWTH CORPORATION October 2018

Exhibit 3.9: Canopy’s Production Facilities

Facility Ownership Description Potential Licensed Production Anticipated Size (sq. ft.) (sq. ft.) Development Project Completion Smiths Falls, ON Wholly owned Indoor 730,000 168,000 CY2018 Cultivation & post-harvest processing Oil extraction GMP-Certified area Dealer’s Licence Area Distribution Centre Advanced Manufacturing Building Visitor Centre Niagara-on-the-Lake, ON Wholly owned Hybrid Greenhouse 1,000,000 350,000 CY2018 Cultivation & post-harvest processing GMP-Certified area Aldergrove, BC Wholly owned Hybrid Greenhouse 1,300,000 1,300,000 CY2018 Cultivation & post-harvest processing Delta, BC Wholly owned Hybrid Greenhouse 1,700,000 1,700,000 CY2018 Cultivation & post-harvest processing Mirabel, QC Controlled Hybrid Greenhouse 700,000 70,000 CY2018 Cultivation & post-harvest processing St. John’s, NL Wholly owned Indoor 150,000 Project Underway CY2019 Cultivation & post-harvest processing Cannabis retail Edmonton, AB Wholly owned Indoor 100,000 Project Underway CY2019 Cultivation & post-harvest processing Fredericton, NB Wholly owned Indoor 50,000 Project Underway CY2018 Cultivation & post-harvest processing Yorkton, SK Wholly owned Indoor 60,000 60,000 Cultivation & post-harvest processing Bowmanville, ON Wholly owned Indoor 75,000 75,000 Cultivation & post-harvest processing Creemore, ON Partnership Indoor 15,000 15,000 Cultivation & post-harvest processing Oil Extraction St. Lucien, QC Wholly owned Indoor 10,000 10,000 Breeding Scarborough, ON Wholly owned Indoor 50,000 50,000 Cultivation & Post-harvest processing Odense, Denmark 85% growing to Hybrid Greenhouse 430,000 Project Underway FY2018 100% Cultivation & post-harvest processing Oil Extraction

Total: 6,370,000 3,798,000 Source: Company reports; Scotiabank GBM.

Canopy isn’t limiting itself to its own production. In addition to the production facilities listed in Exhibit 3.9, Canopy has a number of programs that will add cannabis production capacity and increase the diversity of its product offering. As Canopy opens retail stores, we think being able to offer craft brands to meet a wide range of consumer preferences could be a competitive advantage, although the economics for Canopy may be only slightly better than a retail margin. Additionally, Canopy may look for successful brands to acquire, feeding its M&A pipeline, as brands become more important than capacity in an increasingly competitive market.

 CraftGrow. CraftGrow is a partner program that gives LPs access to Canopy’s platform, including its quality-assurance program, its online marketplace, customer care, call-centre capabilities, and its customer base. We think this platform is a win-win for Canopy and its partner LPs as CraftGrow reduces the resources new entrants need to get a product to market. Canopy benefits by having a greater selection of craft brands to offer its customers. To date, CraftGrow has signed nine LPs and brought one (Canada’s Island Garden) to market with products available for sale on the Tweed Main Street website.

This report is not to be distributed outside of Canada under any circumstances. 67

GROWING FOR THE FUTURE October 2018

 Agripharm. Canopy owns 40% of Agripharm and is entitled to purchase at least 75% of its production. Agripharm has a 15,000 sf licensed facility in Ontario and exclusive rights to use the Green House Seeds and Organa brands. This agreement gives Canopy access to extraction technologies, genetics, and intellectual property (IP) that could help it maintain market leadership as demand evolves and new products gain market share.  Canopy Rivers Corporation (RIV-V): Canopy Rivers is tasked with finding strategic counterparties and operates similar to a venture capital company. It was initially established to invest in and support LPs in exchange for a stream on future production, but it has grown into something larger. Canopy Rivers has established a diversified portfolio of cannabis investments across the value chain, with investment structures that can include a mix of equity, debt, royalty, and profit-sharing agreements. Canopy has 89% voting rights and a 35% economic interest in Canopy Rivers. Canopy Rivers had its IPO in September 2018, and the stake is currently valued at $204 million, or $0.55 per share of Canopy. Aside from potential upside in the Canopy Rivers share price, we believe Canopy will benefit by getting early access to a wide variety of companies and technologies across the value chain, some of which may eventually become M&A targets.

Canada’s Largest Cannabis Seller

Exhibit 3.10: Canopy’s Provincial Supply Agreements We think Canopy can obtain the largest market share of Canada’s recreational Total Supply Canopy Supply Term market. This view is predicated on (1) first- Province Agreements Agreements (Years) % Canopy Quebec 62,000 12,000 one 19% mover advantage, (2) production assets in NF & Labrador 8,000 8,000 two 100% several provinces, (3) the largest volume of P.E.I. 3,000 1,000 two 33% New Brunswick 15,500 4,000 two 26% provincial supply agreements to date, (4) a Alberta 88,490 30,000 one 34% wide selection of brands, and (5) participation B.C. 14,875 5,700 one 38% Ontario in both the wholesale and retail markets. Nova Scotia We view these supply outlets as critical to Manitoba 6,500 6,500 one 100% Saskatchewan Canopy’s success as we expect the market Yukon 300 300 three 100% will be oversupplied in the medium term. Total: 198,665 67,500 34% Consequently, the ability to sell product will Source: Company reports; Scotiabank GBM. become more important than the ability to produce it.

Canopy has secured about one-third of the announced provincial MOUs, more than any other producer. While MOUs do not guarantee demand (its 100% up to the province), they are indicative of Canopy’s strong position in the industry. Canopy’s head start over other LPs, provinces’ concerns over initial supply availability, and production assets in several provinces are all reasons Canopy has had success establishing supply agreements. We believe Canopy will need to maintain its current momentum in future provincial supply deals so it doesn’t cede early market-share gains, but the consumer will have a vote, too.

Canopy is targeting multiple consumer segments with a variety of brands. This approach allows the company to engage with several demographic groups and offer products in different formats and for other uses. We think Canopy’s approach is a wise one since there is no guarantee any particular brand will succeed.

This report is not to be distributed outside of Canada under any circumstances. 68

CANOPY GROWTH CORPORATION October 2018

Exhibit 3.11: “Under the Canopy” Canopy’s “house” brands include Spectrum Cannabis, targeting the medical market, and Tweed and Vert, both targeting the recreational market. It will also integrate several brands from the acquisition of Hiku in September 2018 and market a number of affiliate brands. We expect the brand portfolio to be dynamic,

with Canopy using market data to develop new brands and potentially acquiring popular brands as it becomes clearer which ones are the winners.

 Spectrum Cannabis is the company’s international medical brand. The word “spectrum” refers to the trademarked colour-coded cannabis strain classification Source: Company reports; Scotiabank GBM. system that simplifies strength and dosage dialogue by categorizing cannabis by Exhibit 3.12: The Spectrum – THC vs. CBD Dosage the level of tetrahydrocannabinol (THC, the psychoactive compound of cannabis) and cannabidiol (CBD, the non-psychoactive compound of cannabis) – see Exhibit 3.12. Spectrum Cannabis will replace the Bedrocan brand when its licensing agreement ends later this year. User reviews for the Spectrum Cannabis brand on the Lift & Co. website are positive (four out of five stars).  Tweed is the company’s flagship brand, targeted at Canopy’s medical patients. Post-legalization, Tweed will be marketed as an adult lifestyle brand, and Canopy expects it to become its core brand for the recreational market. Tweed has more than 1,000 reviews on the Lift & Co. website, Source: Company reports. scoring 4.1 out of 5.0.  Hiku brands include Van der Pop, targeted at women; Maïtri Group Inc. (Maïtri), which is sold in Quebec; and DOJA, aimed at the premium market. Hiku also has Tokyo Smoke, an established lifestyle brand that has coffee shops selling accessories and clothing. Where permitted, Tokyo Smoke stores will begin selling cannabis in Canada after legalization, and we expect Canopy to add more retail locations over time.  Affiliated brands include (1) Leafs By Snoop, a partnership with the rapper Snoop Dogg; (2) DNA Genetics, which leverages award-winning breeding and growing strains; (3) Green House Seed Company, a leader in cannabis genetics and recipient of multiple awards; and (4) Organa Brands, focused on cannabis extraction. Canopy recently filed to trademark the Chronic by Dre brand name; however, we note that Canadian regulations will not allow brands to be named after celebrities after recreational use is legalized.

This report is not to be distributed outside of Canada under any circumstances. 69

GROWING FOR THE FUTURE October 2018

Canopy’s brand development strategy will help drive demand in the medical channel and the wholesale and retail recreational channels. Ultimately, it is the consumer’s wallet that will determine which brands win and lose and by extension which producers are able to sell product to consumers. This relationship is the glue that connects the production side of the story to the customer side, because without it, companies are simply pushing a commoditized product.

Domestic Medical Sales Are Lucrative but Declining in Importance

Historically, Canopy has captured about one-third of all domestic medical sales, a trend we think it can maintain. Canopy will continue to service its 85,000+ medical patients, selling product via its online Spectrum Cannabis website, but we forecast slower sales growth as some medical users switch to the recreational channel.

Exhibit 3.13: Canopy’s Domestic Medical Sales Margins in the domestic medical business are better than what we expect them to 3,500 Cannabis Sales Volumes Forecast $10 Avg. Price/gram $9 be in the recreational market as there is 3,000 $8 no intermediary; sales are direct to the 2,500 $7 consumer. As a result, Canopy was able

2,000 $6 to achieve a gross margin of 68% in Q1/F19. $5 We assume margins fall as Canopy absorbs 1,500 $4 the excise tax ($1/g and 10% on sales over 1,000 $3 $10) on medical sales and sets a maximum

$2 Cannabis Sales Price($/g)

Sales Sales Volumesequivalent) (kg 500 price of $8.50/g. While margins are healthy, $1 increasing recreational sales volumes will 0 $0 make the segment less important overall. We think the medical segment will be just 5%

of total volume by F2021. Source: Company reports; Scotiabank GBM estimates.

Canada’s Recreational Wholesale Market Will Quickly Become the Dominant Earnings Driver

Exhibit 3.14: Canopy’s Recreational Sales The medical market was only a warm-up;

the real show began on October 17, 2018. 70,000 International (LHS) Forecast $12 As shown in Exhibit 3.14, we believe Recreational (LHS) earnings are set to leap higher as Canopy Medical (LHS) 60,000 $10 Avg. Selling Price (RHS) begins selling into the much larger legal 50,000 $8 recreational market. We think Canopy can 40,000 achieve 30% market share in the legal $6 Canadian recreational market, based on 30,000 $4 (1) accounting for about one-third of historical

20,000 Canadian medical sales volumes, (2) having Avg. Selling Avg. Selling Price($/g) $2

Sales Sales Volumesequivalent) (kg 10,000 acquired about one-third of existing provincial MOUs, (3) its significant first-mover 0 $0 advantage, (4) its solid portfolio of brands, and (5) its participation all along the value chain. Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 70

CANOPY GROWTH CORPORATION October 2018

We expect average recreational pricing to fall to $3.50/g (net of the excise tax) by F2021 as wholesale volumes ramp up, from more than $5/g initially. The decline is largely due to the wholesale business capturing only the margin between the cost of production and the price sold to the distributor (the provinces). We also think some pricing compression will occur as oversupply hits the industry. In our view, not only will Canopy more than offset a lower average price with much higher volumes, it will also recapture some of the margin on the retail side of the business.

Retail Will Soon Contribute to Earnings and Drive Overall Sales Volumes

We expect Canopy to participate in the Exhibit 3.15: Canopy’s Plan for a Canadian Retail Rollout physical retail market where possible to capture the retail margin in addition to the wholesale margin; to advocate for and sell its own products, increasing wholesale volumes; and to improve brand development. Since several provinces will not allow private retail stores, getting shelf space will be important, and branding and a sales force will help. Source: Company reports. We think Canopy could open 80 stores Exhibit 3.16: Canopy’s Retail Sales by the end of F2021, maybe more. To date, Canopy has secured retail locations 90 # of Locations Forecast $10 80 EBITDA $9 in Newfoundland and Labrador (eight), 70 $8 Manitoba (15), and Saskatchewan (five) $7 and is likely to get more than a dozen in 60 $6 Alberta. In addition, Canopy has licences 50 $5 to sell recreational products online in 40

$4 Locations(#) EBITDA EBITDA ($M) Newfoundland and Labrador, Manitoba, 30 $3 and Saskatchewan. With Ontario’s 20 $2 announcement that LPs will be limited to a 10 $1 single on-premise store, we expect Canopy 0 $0 to seek a joint venture partnership or a franchise through which it can play a meaningful role in Ontario’s retail market. Source: Company reports; Scotiabank GBM estimates. Hiku acquisition paves the way for Canopy’s retail rollout. Hiku has a national retail footprint through several popular cannabis brands, including Tokyo Smoke, Van der Pop, and Maïtri. In addition, Hiku owns two B.C. production facilities and has been conditionally awarded one of four master retail licences in Manitoba. Hiku also operates a network of retail stores selling coffee, clothing, and curated accessories in British Columbia, Alberta, and Ontario. We think the addition of Hiku’s well-regarded brands, retail footprint, and understanding of the retail market should help keep Canopy at the front of the pack in retail.

We think high-quality retail stores can earn EBITDA margins in the mid-teens, perhaps even higher. Precedents from U.S. dispensaries (average net income margins of 15% to 20%) indicate cannabis stores could be even more profitable than our estimates. In fact, the annualized revenue per square foot of MedMen Enterprises, a U.S. cannabis company, reached a staggering US$6,541/sf in Q2/18, even higher than Apple stores at US$5,546/sf, according to CoStar. While we don’t expect many stores to perform as well in Canada, particularly as the number of outlets increases, we forecast Canopy averages $1,350/sf annually by F2021.

This report is not to be distributed outside of Canada under any circumstances. 71

GROWING FOR THE FUTURE October 2018

International Opportunities Are Still Small but Heating Up

Exhibit 3.17: Canopy’s International Sales International sales began only recently, when Canopy sold its first kilograms in 3,000 Sales Volumes Forecast $14.00 Germany in Q3/F18. In Q1/F19, international Avg. Price 2,500 $13.50 sales reached 248 kilograms, and we expect them to continue to rise as more 2,000 $13.00 patients sign on in Germany and as other

1,500 $12.50 international export opportunities arise. Initial pricing has been more than $13/g, compared

1,000 $12.00 with an average of just $8.50/g for medical Avg. Selling Avg. Selling Price($/g) 500 $11.50 products in Canada. Our international sales

International Sales Volumes (kg) expectations capture our Canadian export 0 $11.00 volume projections but not the added production hubs that Canopy plans to set up around the world, which may be a bigger Source: Company reports; Scotiabank GBM estimates. opportunity down the line. We expect international pricing to fall over time as local production increases and health insurers resist paying a premium for imported product.

Canopy continues to expand its global footprint as international markets open. For now, the international opportunity is limited to the couple of dozen countries that have legalized medical consumption, but longer term, we believe other recreational markets may open up. Canopy sees three buckets it can tap into for international opportunities: advisory services, cannabis exports, and owning cannabis cultivation and sales facilities. To date, Canopy has signed the necessary agreements to export cannabis to Australia, Brazil, the Czech Republic, Denmark, Germany, and Spain. Longer term, we expect many countries will favour local production rather than imports. As such, the export opportunity is a near-term foot in the door, but we don’t expect it to lead to a large seaborne traded cannabis market.

Canopy’s existing international Exhibit 3.18: Canopy’s International Footprint operations are small, but they have the potential to service significant medical markets in the future. Exhibit 3.19 outlines the countries where Canopy currently has business activities; however, we expect its footprint to expand significantly in the coming months and years as additional opportunities arise. We expect Canopy to tap into its pile of cash to develop these opportunities, seeking a first-mover advantage, but competition will be fierce as several Source: Company reports. competitors have also begun buying and building international platforms.

This report is not to be distributed outside of Canada under any circumstances. 72

CANOPY GROWTH CORPORATION October 2018

Exhibit 3.19: Canopy’s International Operations

Agreements to Country Operating Unit Ownership Import Market Opportunity / Description Czech Annabis Medical 100% Yes Acquired in April 2018, Annabis is the leader in the Czech Republic's medical cannabis industry. It Republic holds licences to import and distribute medical cannabis products, with products sold into pharmacies across the country. Denmark Spectrum Denmark 65% growing Yes In partnership with Danish Cannabis, Spectrum Denmark holds a licence to produce and distribute to 100% medical cannabis in Denmark. Spectrum has purchased a 430,000 sq. ft. greenhouse in Denmark and received an uncapped licence to produce cannabis flower and oil for domestic consumption. Germany Spektrum Cannabis GmbH 100% Yes Spektrum has necessary approvals in place to export medical cannabis from Canada to Germany, with Spektrum distributing products to more than 1,200 pharmacies across Germany. In Q1/F19 Spektrum sold 248 kg. Spain Spektrum GmbH 100% Yes Supply licence with Alcaliber, a leading pharmaceutical company based in Spain. Alcaliber has a licence to cultivate, produce, manufacture, export, import, and commercialize cannabis for medical and scientific purposes by the Spanish Agency of Medicinal Product and Medical Devices. Canopy transferred Alcaliber 1,500 clones to get cultivation started. Alcaliber exported 20% of the world's Narcotic Raw Materials to 40 countries last year. Jamaica Tweed JA 49% No Received a provisional licence to cultivate and sell medical cannabis, with a greenhouse facility currently under construction. Tweed JA will serve the Jamaican medical cannabis market and longer term could be used as a hub to promote Jamaica's well-known cannabis products. Brazil Canopy LATAM 100% Yes Bedrocan Brazil imports cannabis into the Brazilian market and Entourage Participações conducts Bedrocan Brazil S.A. 40% R&D in Brazil. Canopy LATAM has its headquarters in Brazil. Entourage Participações 40% Chile Canopy LATAM 100% No Chile serves as Canopy LATAM's regional R&D hub, with a pain-management clinical trial having Spectrum Chile S.A. 100% received both Phase I and Phase II approvals. Focus remains on developing additional evidence to support the use of cannabis-based medicines. Colombia Canopy LATAM 100% No Acquired Colombian Cannabis in July 2018, which will be incorporated under the Canopy LATAM umbrella. The acquisition brings with it all required national licences for the production, manufacture, and export of cannabis derivatives. Colombia is expected to serve as a regional production and processing hub for Canopy LATAM. Construction commenced at the end of the summer in 2018 and is expected to be complete within 12 months. Southern Highlands 100% No Operating out of the Kingdom of Lesotho, Highlands has a licence to cultivate, manufacture, supply, Africa hold, import, export, and transport cannabis and resin. Australia Spectrum Australia 100% Yes Spectrum Australia will include a cultivation and production facility in Victoria that is expected to AusCann 10% serve both the domestic Australian market and act as a hub for sales to other Asia-Pacific countires. An R&D facility will also be operated.

In exchange for strategic advisory services, Canopy received a 15% stake in AusCann (diluted to 10%). Canopy will act as AusCann's exclusive supplier of medical cannabis.

U.S. None N/A N/A Despite having partnerships with U.S.-based companies, these are one-way relationships with licensing, etc., flowing from the U.S. to Canada. Canopy has no plans to have any operations in any federally illegal state, but it will likely to keep some of its war chest available in case the market does open up.

Source: Company reports; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 73

GROWING FOR THE FUTURE October 2018

New Products Taking Cannabis Mainstream

The initial Canadian rollout of recreational cannabis will exclude many popular cannabis products, such as vape pens, edibles, and beverages. The federal government has indicated these will be legal to sell within a year, although there is a risk that it could take longer or that the products are legalized on a staggered basis. We expect Canopy will move quickly on acquiring a building, installing a bottling line, and developing IP to have beverages in cannabis stores ready for day 1.

The beverage category moved into the spotlight after Constellation Brands invested in Canopy. Still, Canopy likely won’t have end-markets for beverages for at least a year, when Canada may allow additional product types into the retail market. While beverages have begun gaining market share in several U.S. states, Canopy will not be participating in markets where cannabis is federally illegal (i.e., the United States). Without changes in regulations, we think beverage sales will be constrained to a share of the cannabis wallet as sales will be limited to cannabis stores.

Beyond beverages, value-added products such as vape pens and edibles are gaining popularity. As regulations change, we expect Canopy will be involved in each product segment by developing the products, licensing the technology, or making an acquisition. Beyond simply taking existing cannabis market share, these new product types may dip into larger sources of incremental demand, particularly alcohol, tobacco, and pharmaceuticals.

The Constellation Brands Investment in Canopy Woke Up the Industry

The two-stage strategic investment by Constellation Brands validates the market opportunity that cannabis represents. The deal combines the expert capabilities of Constellation Brands in marketing, brand building, and large-scale production with Canopy’s entrepreneurial approach, industry-leading production assets, and best-in-class knowledge and expertise in the emerging cannabis market.

Deal details. The initial investment of Constellation Brands (October 2017) of $245 million bought 9.9% of Canopy, which Constellation Brands increased to 35% in August 2018 for $5.1 billion. Constellation Brands also received enough warrants to push ownership over 50%. Constellation Brands has the right to nominate four of the seven directors on Canopy’s board: two independent directors and the Chief Operating Officer (Bill Newlands) and Chief Financial Officer (David Klein) of Constellation Brands. With Canopy’s minimal trailing profits and dispersed estimates on near-term profitability, the investment was a clear indicator of the opportunity cannabis represents in the long term, rather than what it is at now.

This report is not to be distributed outside of Canada under any circumstances. 74

CANOPY GROWTH CORPORATION October 2018

Exhibit 3.20: Timeline of Investments by Constellation Brands

1. Reflects fully diluted shares outstanding. 2. See Exhibit 3.21 for details supporting pro forma ownership.

Source: Company reports.

Exhibit 3.21: Structure of Investments by Constellation Brands

1. Reflects fully diluted shares outstanding. Convertible debenture of C$600 million is not included in fully diluted shares outstanding and assumed to be cash settled. 2. Premium to Canopy’s five-day VWAP on the TSX as of August 14, 2018, close. 3. CAD/USD exchange rate of 0.764 as of August 10, 2018. 4. Five-day VWAP of Canopy common shares on the TSX immediately prior to exercise.

Source: Company reports.

Tapping Into the Medical Opportunity with Canopy Health Innovations

Canopy Health Innovations (CHI) is a fully owned cannabis research incubator focused on the research and development (R&D) of cannabis drug formulations and dose delivery systems. Canopy acts as the supplier of cannabis for CHI clinical research and has the right of first refusal on any IP. As of August 2018, CHI had filed 39 patent applications with the United States Patent and Trademark Office for its significant IP portfolio.

This report is not to be distributed outside of Canada under any circumstances. 75

GROWING FOR THE FUTURE October 2018

Canopy is targeting large addressable medical markets. Notably, CHI has submitted a Phase IIb “in- human” clinical trial application with Health Canada to evaluate using medical cannabis to treat insomnia. CHI received approval for the trial, in the form of a No Objection Letter, and will proceed with clinical trials. Some think the global sleep aids market could be $100 billion or larger, while the anxiety market could be two to three times larger. Of course, how big a role cannabis will play in either market is still to be seen, but efficacy in clinical trials is an important first step.

Also under the CHI umbrella is Canopy Animal Health (CAH), which focuses on cannabinoid science for pets and is a fully owned subsidiary of CHI. In August 2018, CAH announced its first Canadian-approved veterinarian trial to study anxiety in mammals and how cannabis can relieve or remedy the problem. Canopy expects animal health to be a big category as research efforts on effective cannabis formulations and dose delivery systems for animals reach the point where they can be monetized.

Hemp-Based CBD Could Be an Attractive Opportunity

CBD is becoming more accepted by consumers seeking anti-anxiety and anti-nausea effects without the high. Hemp is a low-cost source of CBD. Canopy participates in the hemp industry via the Mettrum Originals and Groupe Hemp brands, which have decades of experience. Canopy has 28 hemp products in more than 1,500 stores across North America. In a world where CBD has earned a place on the spectrum, hemp may become increasingly strategic. The Canadian government views industrial hemp as relatively low risk and LPs will be permitted to use hemp to provide a source of low-THC, high-CBD cannabis products. If the hemp-based CBD market takes off, we think Canopy is well positioned to take advantage, particularly if beverage production ramps up.

M&A Has Been Critical As Canopy Moved Quickly into New Markets

Canopy has undertaken M&A transactions to maintain market leadership, grow production space, build brands, and enter international markets and has primarily used shares as currency. Canopy has been a part of about two dozen M&A transactions since 2014; we highlight key acquisitions in Exhibit 3.22.

We think Canopy’s pace of M&A deals could accelerate after receiving $5.1 billion from Constellation Brands. Canopy already has a $1 billion M&A pipeline, which we expect will focus on international opportunities and other product formats as we don’t expect Canopy to pursue domestic production assets. We believe Canopy may seek to lock in additional domestic supply, possibly by acquiring a large cannabis retailer or some of the brand winners once it becomes clear who those winners are.

Exhibit 3.22: Key M&A Transactions

Announced Purchase Price & Milestones At Time Target Date Status of Purchase Market Opportunity / Description Bedrocan Canada 24-Jun-15 Closed $61M via 33.9M shares Brought Bedrocan's brand and experience operating in the legal Netherlands market, along with 50k sq. ft. of indoor production space in Canada. The merger gave Canopy a dominant position in the nascent industry. MedCann GmbH Pharma and 28-Nov-16 Closed $12M via 675k shares + 491k shares in MedCann was a German pharmaceutical distributor, giving Canopy the ability to export cannabis Neutraceuticals milestones from Canada to Germany's growing medical market. Mettrum Health Corp. 1-Dec-16 Closed $342M via shares exchanged at 0.71 per Mettrum was the second-largest Canadian LP, with 100k sq. ft. The acquisition furthered Canopy's Mettrum share lead as number one. The acquisition also gave Canopy Mettrum's brands and colour-coding classification system and was set up to be the foundation for Canopy's medical brand. Green Hemp Industries Ltd. 27-Nov-17 Closed $1.6M via 25k shares + 25k shares in Hemp field operations, scaling from 600 acres in 2018 to 2,500 acres in 2019. Custom-built milestones extraction infrastructure will be installed at Canopy’s Tweed Grasslands facility. The acquisition brought a key hire, Jason Green, who took on the role of Head of Agriculture in Canopy's hemp division. BC Tweed 14-May-18 Pending $374M via 12.5M shares subject to Canopy purchased the remaining 33% of the company it did not own. BC Tweed brings 3M sq. ft. of milestones greenhouse capacity, with 1.7M sq. ft. already licensed. Daddy Cann Lesotho Pty Ltd 30-May-18 Closed $29M via 666k shares + 333k shares in Canopy enters Africa with the Daddy Cann (Highlands) purchase. Highlands is a seed-to-sale LP in milestones the Kingdom of Lesotho, Southern Africa. Spectrum Cannabis Colombia 6-Jul-18 Pending $61M via 1.2M shares + 2.0M shares in Colombian Cannabis holds all required national licences for production and export. Canopy will use SAS milestones Colombia as a production base to serve the LATAM region. Hiku Brands Co. Ltd. 10-Jul-18 Closed $269M via ~6.5M shares exchanged at Brings Hiku's well-recognized Tokyo Smoke retail brand, which has one of four master retail 0.046 per Hiku share licences in Manitoba. Also adds popular cannabis brands Tokyo Smoke, DOJA, and Van der Pop.

Source: Company reports; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 76

CANOPY GROWTH CORPORATION October 2018

Financial Analysis and Outlook Revenue Is Growing Exponentially

Canopy’s revenue has grown from just $2.3 million in F2015 to $77.9 million in F2018. Historically, all revenue was generated from the sale of medical cannabis to Canadian patients. However, in recent quarters, international sales in Germany and the Czech Republic have begun (9% of total volumes). With Canopy ramping up domestic capacity, the onset of the recreational market, and increasing international sales, we estimate revenue will reach nearly $1.2 billion by F2021.

We don’t model Canopy’s green-shoot opportunities, such as pharmaceuticals, animal health, and cosmetics, because much work remains to convert them into significant revenue drivers.

Exhibit 3.23: We Expect Canopy's Revenue to Take Off Once Recreational Use Is Legalized in Canada

Canadian legalization begins $350 Retail Forecast Q3/F19. $300 Recreational Wholesale $250 International Wholesale $200 Medical Direct to Patient $150 $100

Revenue Profile RevenueProfile ($M) $50 $0

Source: Company reports; Scotiabank GBM estimates.

Exhibit 3.24: Canopy’s Key Revenue Drivers We forecast ~$840 million of recreational sales by the end of F2021, growing from Key Assumptions FY19E FY20E FY21E zero prior to October 17, 2018. Our core Wholesale Volumes (kg) assumptions include Canadian recreational Recreational Wholesale 50,000 145,000 240,000 sales volumes growing from zero to 240,000 Medical Direct to Patient 10,322 11,211 11,899 kilograms (240 tonnes), which implies ~30% International Wholesale 1,598 5,000 9,000 of the legal Canadian recreational market Total 61,920 161,211 260,899 (according to our estimates). We recognize that Canopy will have sufficient capacity to Wholesale Prices ($/g) produce more than double this volume, but Recreational Wholesale $5.00 $3.74 $3.50 Medical Direct to Patient $7.68 $7.75 $7.75 we expect competition will limit sales. We International Wholesale $13.52 $13.00 $12.00 estimate initial recreational pricing of ~$5/g Average Weighted Price $5.75 $4.31 $3.99 (net of the excise tax), falling to $3.50/g in 2021 as competition increases. Retail: Store Count (#) 20 60 80 Revenue Per Square Foot 1,350 1,350 1,350 Source: Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 77

GROWING FOR THE FUTURE October 2018

We assume domestic medical sales grow slowly, reaching $92 million in F2021E, up from $68 million in F2018. Canopy will continue to service its 85,000 (and growing) medical patients by selling product direct to the consumer. However, we expect the historical pace of sales growth to slow as some medical users switch to the recreational channel. We assume F2021 sales volumes of ~12,000 kilograms, up from 8,500 kilograms in F2018. Historical prices in the medical segment have averaged $7.60/g, rising in Q1/F19 to $8.47/g with the sale of higher-margin products. We expect medical prices will fall to $7.75/g as competition increases and Canopy absorbs the $1/g excise tax. In our view, Canopy may be able to offset some price pressure by shifting to higher-margin products.

International sales are small but growing. In Q1/F19, sales of 248 kilograms generated $3.4 million of revenue (13% of total), up from zero the previous year. We assume Canopy can increase export volumes from Canada to international markets, growing revenue for this segment to $108 million in F2021. This forecast is based on sales volumes of 9,000 kilograms, assuming additional export markets become available, and an average price of $12/g (down from $13.60/g in Q1/F19). We expect international pricing to fall over time as local production increases and health insurers resist paying a premium for imported product.

Retail sales are starting. By the end of F2019, we assume Canopy will have 20 locations, initially in Newfoundland and Labrador, Manitoba, Saskatchewan, and Alberta. We forecast a total of 80 retail locations in F2021, although that number could move higher as provinces’ retail plans become better understood. For example, Ontario announced LPs will be limited to one on-premise store, which means Canopy will need to find a workaround to have a meaningful retail role in Canada’s largest market. We assume retail store sizes will average 2,000 sf and generate annual revenue of $1,350/sf per year ($2.7 million). Based on our estimate of 80 retail outlets, Canopy’s F2021 retail revenue would reach a run rate of $216 million.

Volume Growth Driving Margin Improvement

We forecast near-term margin expansion as Canopy’s unit costs benefit from higher sales volumes. We assume wholesale production costs fall below $1/g, and we add $0.50/g for packaging and shipping costs. As a result, by F2021, we expect Canopy to earn $2/g on recreational wholesale volumes, resulting in gross margin of 63%. The risk to this estimate is further declines in pricing, which could potentially be offset by the sale of higher-margin product formats (e.g., beverages and edibles). We think Canadian recreational sales will contribute 70% of Canopy’s F2021 gross margin.

Exhibit 3.25: Gross Margin Stepping Up with Volume Growth

$250 Retail (LHS) Forecast 120% Recreational Wholesale (LHS) $200 International Wholesale (LHS) 100% Medical Direct to Patient (LHS) 80% $150 Gross Margin (RHS) 60% $100

40% GrossMargin(%) GrossMargin ($M) $50 20%

$0 0%

Source: Company reports; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 78

CANOPY GROWTH CORPORATION October 2018

We expect medical margins to be even stronger. In Canada, Canopy will continue to sell product direct to customers, which means it gets the entire margin (wholesale + distribution + retail). Additionally, international sales pricing has been very high, demonstrated by exports to Germany. Combined, we expect the wholesale and international markets to generate gross margin in the upper 70% range and represent 21% of Canopy’s total gross profit in F2021.

In retail, we assume 35% gross margin on product purchased from provincial distributors. We think Canopy will generate 9% of its total gross margin from retail, but the risk is to the upside as our store count assumptions may prove conservative. We Think Canopy Can Generate Long-Term EBITDA Margin of 35%

We forecast sales and marketing expenses will represent 10% of wholesale revenue in F2021, comprising payroll, brand development, marketing, product development, and education campaigns. In retail, we estimate SG&A will be ~20% of revenue as the business will require substantial staffing.

On an aggregate basis, we think Canopy can generate $450 million of EBITDA in F2021 and 35% EBITDA margin. We expect the rapid growth in sales volumes to push the company into positive adjusted EBITDA territory in Q3/F19, marching higher as sales volumes continue to ramp up. We estimate the production and sale of wholesale medical and recreational cannabis products will drive 94% of Canopy’s F2021 EBITDA, with the remainder from retail. Near term, we expect Q2/F19E adjusted EBITDA to fall to negative $40 million as Canopy staffs up its facilities as it ramps up production.

Exhibit 3.26: Long-Term EBITDA Margin Could Reach 35%

$350 Revenue Forecast 250% $300 Adj. EBITDA 200% $250 Adj. EBITDA margin 150% $200 100% 50% $150 0% $100 -50%

$50 -100% EBITDA EBITDA Margin(%) EBITDA EBITDA Profile ($M) $0 -150% -$50 -200% -$100 -250%

Source: Company reports; Scotiabank GBM estimates.

We assume capex of $679 million in F2019 and $90 million in F2020, with ongoing maintenance capex of $30 million. Capex will support the completion of existing capacity builds, 80 retail stores, and the beginning stages of the international strategy. Capex may increase as Canopy announces new international projects and business lines.

Canopy has net cash of $5.3 billion, on a pro forma basis, after the Constellation Brands purchase closed and Constellation Brands exercised its 18.9 million warrants. Cash injections into Canopy include (1) the Constellation Brands October 2017 9.9% stake for $245 million; (2) a January 2018 follow-on offering for $201 million (8.8 million shares); (3) a $600 million June 2018 senior convertible notes issuance at 4.25%; and (4) the September 2018 Constellation Brands stake increase to 38% for $5.1 billion. If Constellation Brands exercises its warrants to reach 50% ownership, Canopy would receive an additional $5.5 billion or more.

This report is not to be distributed outside of Canada under any circumstances. 79

GROWING FOR THE FUTURE October 2018

No dividends for the foreseeable future; instead, we expect Canopy to use its cash for M&A activity and to develop high-growth opportunities, such as expanding in international markets and healthcare and exploring other product formats.

Biological assets and inventory are rising as Canopy prepares for legalization and continues to ramp up facilities. Similar to many agriculture companies, Canopy capitalizes pre-harvest plants on the balance sheet and moves harvested plants into inventory by expensing them. As plants grow, a non-cash unrealized gain is booked on the income statement and expensed when it moves to inventory. As production ramps up, unrealized gains exceed inventory drawdowns, creating a positive non-cash impact on unadjusted earnings. When the run rate is reached, the two items should fully offset one another on an annual basis. We do not model biological assets given they are non-cash items. The result can be large non-cash movements in unadjusted earnings, with headline numbers obfuscating reality, which is why we use adjusted EBITDA to value Canopy.

Our financial statement estimates are in the “Additional Company Information” section.

This report is not to be distributed outside of Canada under any circumstances. 80

CANOPY GROWTH CORPORATION October 2018

Valuation and Target Price Rationale Overview

We have initiated coverage on the common shares of Canopy Growth Corporation with a Sector Perform rating and a one-year target of $61.00 per share. We value Canopy by applying a 15x EV/EBITDA multiple to out-year EBITDA of $1.5 billion, two-thirds of which is theoretical and based on likely funding capabilities.

How the Street Values Canopy

We believe the market is paying 56x 2021 Exhibit 3.27: How the Street Values Canopy consensus EBITDA of $309 million. Of Implied Implied course, if the market is using the previous Street SGBM share count of 200 million (instead of Per Share, Rounded ($/sh) $61 $61 373.5 million), it is paying “only” 23x 2021 FD Shares (M) 373.5 373.5 Total Equity Value 22,783 22,783 consensus EBITDA. Why the difference in Less: RIV Stake -194 -194 share counts? Since the company reported Equity Value 22,589 22,589 Q1/F19, the Constellation Brands deal has Add: Adj. Net Debt -5,331 -5,331 Enterprise Value 17,258 17,258 added 105 million shares, on top of the F2021E Sales 1,440 1,236 268 million Mr. Saunders, Canopy’s Chief Implied EV to F2021 Sales 12x 14x Financial Officer, mentioned on the most recent conference call, for a total of 373.5 Per Share, Rounded ($/sh) $61 $61 million. So, 56x EBITDA appears to be FD Shares (M) 373.5 373.5 Total Equity Value 22,783 22,783 right or 38x our Street-high 2021 EBITDA Less: RIV Stake -194 -194 estimate of $450 million. Equity Value 22,589 22,589 Add: Adj. Net Debt -5,331 -5,331 Enterprise Value 17,258 17,258 On a P/E basis, the market is paying 120x F2021E EBITDA 309 450 2021 consensus EPS of $0.51 or 75x Implied EV to F2021 EBITDA 56x 38x our $0.81 forecast. In our view, investors shouldn’t rely on consensus estimates Per Share, Rounded ($/sh) $61 $61 F2021E EPS ($/sh) $0.51 $0.81 for two reasons: there are only four or five Implied Price to F2021 Earnings 120x 75x estimates and the variability is high. For Note:All Figures All figures in $M in Unless $M unless Otherwise otherwise Stated stated. example, of the four brokers providing 2021 Source: FactSet; Scotiabank GBM estimates. EPS estimates, the range is $0.16 to $1.18, with two brokers in the mid-$0.30s.

It is a similar story on an EV to sales basis, where the range of estimates for 2021 sales is between $1.2 billion and $2.2 billion. Taking the average of $1.44 billion suggests the market is applying ~12x sales to value Canopy, more than triple what the market is paying for alcohol and tobacco companies.

Keep in mind that the market currently values Canopy at $61.00 per share. With some broker targets at $95, $100, etc., the implied valuation multiples become questionable.

This report is not to be distributed outside of Canada under any circumstances. 81

GROWING FOR THE FUTURE October 2018

The Challenge Valuing Canopy with Conviction

Why has Canopy’s share price soared from $12 to $74 (currently at $61.29) in one year when not much has actually happened? In our minds, the market is speculating on what run-rate cash flow will ultimately be generated on a sustainable basis. While this is fine in theory, the issue is that not even Canopy fully knows what type of company it will be in five years from now. Will it be a producer of cannabis, a retailer, a beverage manufacturer, perhaps a quasi-pharmaceutical, a niche provider of animal health products, or even an international exporter. Maybe it will be all of the above.

Given the continued rapid evolution of the cannabis space, it is understandable why Canopy hasn’t fully defined itself. However, until it does, the market won’t (and shouldn’t) really have a good sense of how to value the stock, nor will the sell side have a good sense of what reasonable estimates are. This is why estimates vary widely and why the stock is volatile – moving +/-5% per day without any meaningful change in fundamentals.

Is the Canopy Bubble About to Burst?

Is Canopy’s valuation reflective of a bubble? To some, it certainly may feel that way, with calendar-year 2021E EV/EBITDA and P/E multiples greater than 50x and 100x, respectively. The buy side certainly shouldn’t have any better information than the sell side, and if EBITDA estimates of $300 million to $500 million are the best the Street can come up with, then on what basis are multiples and the stock price justified? In our minds, the answer to this is that the Street isn’t modelling all the potential businesses Canopy could pursue. This is a fair and valid point, but at what point should these new businesses be priced in? Imagine if Canadian Tire came out with a press release stating that it planned to start manufacturing trains or mining potash or building retirement communities – would the market eat this up by giving near- full credit for the potential?

Remember the dot-com bubble in the early 2000s? As widespread adoption of the Internet took off, many publicly traded Internet-based companies took off as well. Valuations of many companies were nearly impossible to justify and almost appeared irrelevant at times. Many of these companies incurred net operating losses as they spent heavily on growth over profits. Traditional metrics, such as P/E, EV/EBITDA, etc., were overlooked, with the investment community focused on measures such as value per click, value per eyeball, and even multiples of the rate of cash burn. For many companies, such as Pets.com, Geocities, and Infospace, the high stock valuations were wiped out over time. Other companies, such as ones with real business models (e.g., Amazon.com, Inc.), eventually grew into their valuations. While cannabis equity valuations are certainly not reflective of the dot-com bubble, some parallels exist with respect to speculative hype. In our view, Canopy’s wholesale and retail business model is real, as is the funding for significant future EBITDA growth.

Our Approach to an Upper Boundary of $88 per Share

We think a back-of-the-envelope upper boundary of $88 per share could eventually be supported. To be clear, we do not think that stock price is warranted today and shouldn’t be without material de-risking and seamless execution over the next several years. Here is our attempt to justify it: First, let’s start with our $450 million run-rate EBITDA estimate, which we round up to $500 million. Since we have no insight into what specific businesses Canopy will end up in, it makes no sense to speculate. What we do know, however, is that Canopy has $5 billion of cash on hand, it will generate a few billion of cash over the next several years, and it will likely be able to raise a few billion dollars of debt over time. To be generous, let’s call this total funding ability $10 billion.

This report is not to be distributed outside of Canada under any circumstances. 82

CANOPY GROWTH CORPORATION October 2018

While some of Canopy’s $10 billion in theoretical funding would be used to build, the remainder would be used to buy. As we don’t know what business lines Canopy will invest in, it is hard to know what valuation multiples it will pay to build those businesses. On the low end of the range, we know that production capacity can be built for about 1x EBITDA, depending on utilization rates. On the high end, we think Canopy could be willing to spend 10x EBITDA – or the long-term forward multiple of the TSX and S&P 500. Of course, Canopy could spend much more than 10x EBITDA, but it wouldn’t make much sense if the company will eventually trade at 15x – our view. Given our view that Canopy is more likely to build than to buy, we have taken a 5x EBITDA average. We note that 5x EBITDA is twice as punitive as the 2.5x assumption we use for Aphria given Aphria’s ability to be more nimble in its EBITDA build-out.

If we spend only Canopy’s excess cash of about $5 billion, its run-rate EBITDA could climb to $1.5 billion, or ~$1 billion of incremental EBITDA. Some may argue that if Canopy were to spend all its growth capital on building (versus buying), incremental EBITDA would far exceed $1 billion. It is certainly plausible, but then that would imply the market is undervaluing Canopy right now, which no institutional investor we have spoken to believes. Going one step further, by layering in an appropriate amount of debt on the balance sheet, Canopy could, in our view, generate another $1 billion of EBITDA. Therefore, it is possible that Canopy could one day generate $2.5 billion of EBITDA, with net debt of $5 billion, or 2x net debt to EBITDA, although this scenario is not in our forecasts.

As Canopy executes on the build-out of our theoretical and incremental $2 billion of EBITDA, investor speculation in the stock should wear off. Why? The company’s earnings parameters and run- rate outlook will be better defined as it matures. At that time, some may be able to justify giving Canopy a generous EV/EBITDA multiple of 20x (the highest multiple in the GICS industry that Canopy could eventually be placed in – S&P 500 Life Sciences), which would result in a $120 share price. We think this is aggressive and prefer to use 15x EBITDA (justified below), supportive of an $88 price value. So, if $88 per share is the upper boundary, what is reasonable today?

How We Justify Our $61.00 Target Price

We could show how many large cap cannabis companies trade in the mid-teen EV to sales and therefore attempt to justify how Canopy should trade somewhat higher. We don’t think this is the right long- term way to approach valuation, however, since many of Canopy’s peers with real operating businesses, such as tobacco, beer and wine, and retail companies, all trade in the 3x to 5x sales range.

We prefer to start with what long-term EV/EBITDA multiple makes the most sense, which we peg at 15x. Our support for 15x EBITDA is based on the average forward EBITDA multiple of all of the industries we think Canopy could participate in (see Exhibit 3.28).

Exhibit 3.28: S&P Industry Multiples Applying 15x to our theoretical out-year EBITDA of $1.5 billion results in a one-year target of S&P 500 NTM EV/ $61.00 per share. Remember, while we are Industry EBITDA comfortable with this long-term multiple, as well Tobacco 12.1x as with the first ~$500 million of EBITDA, we have Pharmaceuticals 12.3x low conviction in the incremental and theoretical Food Products 12.4x $1 billion of run-rate EBITDA. Specifically, we are Personal Products 13.5x unable to support this level of EBITDA until Canopy Household Products 14.1x has laid out a multi-year business plan with financial Biotechnology 15.0x objectives. To reiterate, since the incremental Beverages 16.3x $1 billion of EBITDA is based on soft funding Life Sciences 20.9x parameters executed with perfection, some may suggest the risk is to the downside. Average, rounded 15.0x Source: Bloomberg; Scotiabank GBM.

This report is not to be distributed outside of Canada under any circumstances. 83

GROWING FOR THE FUTURE October 2018

The Downside Could Be Ugly

When thinking of a realistic bear-case scenario, there are four considerations: earnings power, the valuation multiple, use of the balance sheet, and timing. For earnings, let’s assume that consensus is correct at $309 million for 2021 EBITDA. Let’s also assume the market calms down and eventually places a 15x EBITDA multiple on the stock. We will also assume Canopy does not add any incremental value through the use of its $5 billion in cash (i.e., it just sits there forever). For timing, we could suggest out-year EBITDA of $309 million doesn’t come until 2023, rather than 2021, but that premise simply isn’t realistic, in our view. Canopy doesn’t have mines that need permits; it runs simple greenhouses – so timing risk is low. Putting it all together yields an equity valuation of $26 per share, about half the current stock price.

Exhibit 3.29: Scotiabank GBM Valuation Scenarios for Canopy

(Millions) Bear Market SGBM Base Bull Case Implied Implied Case Case

FY2021E EBITDA 309 309 450 +1050 1,500 +1000 2,500 Multiple 15x -42x 57x +18x 39x -24x 15x 15x Enterprise Value 4,635 17,613 17,550 22,500 37,500 Less: Adj. Net Debt -5,000 -5,000 -5,000 +5000 0 +5000 5,000 Equity Value 9,635 22,613 22,550 22,500 32,500 Add: RIV Stake 204 204 204 204 204 Total Equity Value 9,839 22,817 22,754 22,704 32,704 FD Shares 373.5 373.5 373.5 373.5 373.5 Per Share, Rounded $26 $61 $61 $61 $88

Net Debt to EBITDA nmf nmf nmf ~5.0x 0.0x 5.0x 2.0x Despite production capacity capex costing about 1x EBITDA, we are “charging” Canopy a punitive 5x EBITDA to be conservative and to assume lower utilization rates given industry oversupply.

Source: Bloomberg; Scotiabank GBM estimates. How Canopy Stacks Up Against Its Peers

The largest cannabis companies are trading at multiples that are at a premium to companies in similar consumer discretionary industries. We attribute this delta to the following: (1) cannabis is a nascent industry, with significant potential for earnings growth; (2) several potential sources of cash flow are likely not included in consensus estimates; and (3) the sector may be incorporating a takeout premium in the price of many cannabis stocks after Constellation Brands purchased a large equity stake in Canopy. Canopy has one of the largest and most accelerated production platforms in the market, with multiple channels to take product to market. This should allow it to capture significant market share in the critical early days of legal recreational demand. Additionally, Canopy intends to participate in nearly all segments of the market, unlike some of its peers. With more than $5 billion in cash from the Constellation Brands deal, Canopy is in prime position to further its first-mover advantage. We think Canopy is a smart but pricey way to stay at the forefront of future market opportunities.

Exhibit 3.30: Cannabis Companies – Relative Valuations

EV/Sales EV/EBITDA EBITDA Margin Company: 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Aphria Inc* 11.5x 7.9x 6.7x 38.4x 23.3x 18.4x 30% 34% 36% Aurora Cannabis Inc. 15.1x 7.0x 4.4x 90.7x 21.9x 12.6x 17% 32% 35% CannTrust Holdings, Inc. 5.8x 3.9x N/A 20.1x 10.5x 13.6x 29% 37% N/A Canopy Growth Corporation* 36.7x 24.9x 22.2x 111.6x 71.5x 61.0x 33% 35% 36% Cronos Group Inc 19.7x 12.7x N/A 65.5x 35.9x 17.3x 30% 35% N/A HEXO Corp. 11.0x 4.7x 3.8x 54.3x 12.6x 11.0x 20% 37% 35% OrganiGram Holdings Inc 7.8x 4.1x 2.8x 24.9x 12.1x 7.7x 31% 34% 37% Supreme Cannabis Company Inc 6.3x 2.6x 2.3x 35.9x 7.6x 6.5x 18% 34% 36% Tilray, Inc. 106.7x 49.0x 33.2x 634.0x 189.9x 118.8x 17% 26% 28% Average (ex-Tilray): 14.2x 8.5x 7.0x 55.2x 24.4x 18.5x 26% 35% 36%

* Canopy/Aphria SGBM calendar-year estimates; all others from FactSet.

Source: FactSet; Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 84

CANOPY GROWTH CORPORATION October 2018

Risk Factors

The future size of the global cannabis market is highly uncertain and depends on the regulatory environment in many markets, among other factors. Canopy’s internal forecasts on the size of market demand, as well as our own, are highly dependent on predicting a number of uncertain events, including government policy and changing consumer behaviour. As a result, Canopy may misallocate resources or experience a negative impact on profit.

Canopy faces a high degree of execution risk while ramping up production. Canopy is ramping up several large-scale cannabis production facilities, which could be subject to delays and quality issues. Canopy has a limited history of experience growing large amounts of cannabis: in Q1/F19, Canopy harvested 9,650 kilograms, but we forecast that number will increase to 260,000 kilograms in F2021. There is no guarantee Canopy will be able to avoid unforeseen production challenges and accelerate production this quickly. Cannabis is a consumed product and could face product recalls or even lawsuits.

Canopy competes for market share with a large number of existing competitors, with more on the way. Cumulative production announcements far exceed the actual size of the market, which means not all competitors will find a home for their production. This overproduction may lead to significant pricing pressure in the industry, reducing profitability. In addition, Canopy may not be able to maintain its existing market share, and there is no guarantee its brands will be winners.

Canopy has a limited operating history, with low revenues and significant losses. Furthermore, Canopy has never operated in most of the international markets it is currently targeting, in a legal recreational cannabis market, or multiple retail stores.

Canopy has a history of acquiring companies and may struggle integrating them into the overall organization or encounter unforeseen developments. Additionally, Canopy is likely to continue purchasing companies and may end up biting off more than it can chew in terms of integration and liquidity.

The cultivation and processing of cannabis requires a substantial amount of labour, and Canopy may be unable to appropriately staff its facilities.

A significant number of the company’s common shares are owned by Constellation Brands (through Greenstar Canada Investment Corporation). If Constellation Brands exercises all the warrants it owns, its ownership would increase to more than 50%, effectively giving it control of Canopy.

International operations will result in increased operational, regulatory, and other risks. Foreign jurisdictions may impose ownership or control restrictions that could have an adverse impact.

Canopy’s share price has experienced significant volatility and is likely to be subject to significant volatility in the future as a result of market events.

This report is not to be distributed outside of Canada under any circumstances. 85

GROWING FOR THE FUTURE

October 2018 FY 2022

Additional Company Information

0

0

0

0

33

371

-82

450

430

300

300

300

383

350

402

120

120

163

752

752

484

0.81

0.81

1,236

2021E

3/31/21

0

0

0

0

29

355

-37

250

230

163

163

163

199

170

326

100

120

106

496

496

320

816

0.46

0.46

2020E

3/31/20

-3

63

46

20

77

78

79

26

271

-11

-46

-57

-57

-11

-46

-63

-57

234

254

223

155

378

-0.36

-0.36

2019E

3/31/19

0

0

7

0

0

63

58

46

46

46

57

49

54

15

20

19

62

355

-11

104

104

166

0.13

0.13

3/31/19

Q4-19E

0

0

0

0

-5

62

57

31

31

31

45

50

51

14

20

17

58

302

-15

101

101

159

0.10

0.10

Q3-19E

12/31/18

FY 2019

0

0

7

0

0

7

-5

12

56

12

20

25

20

27

226

-40

-45

-42

-42

-42

-54

-49

-0.19

-0.19

9/30/18

Q2-19E

3

0

73

36

20

17

42

26

11

15

26

200

-22

-24

-11

-80

-91

-91

-94

-63

-31

-57

-0.40

-0.40

Q1-19

6/30/18

0

-2

16

30

74

44

38

74

66

40

38

78

177

-41

-62

-70

-54

-54

-53

-82

156

-100

-0.39

-0.36

2018

3/31/18

0

3

4

0

-5

-8

-8

-8

-8

53

23

17

13

39

35

25

15

40

119

-10

-14

-49

-0.05

-0.04

2017

3/31/17

0

0

0

0

0

8

8

6

77

-3

-3

-3

-3

-3

-7

22

19

13

20

13

-22

-39

-0.03

-0.02

2016

3/31/16

0

0

0

0

3

6

3

3

2

6

2

32

-8

-9

-9

-9

-9

-1

-8

-9

-3

11

-0.29

-0.22

2015

3/31/15

Income Statement Income

Canopy’s Canopy’s

: :

1

xhibit3.3

Adj. EBITDA Adj.

EBITDA

Weighted Avg. Shares O/S - O/S Diluted Shares Weighted Avg.

EPS - Diluted EPS

EPS - Basic EPS

Non-controlling Interests Non-controlling

Canopy Growth Corp. Growth Canopy

Net Loss Attributable to: Net Loss Attributable

Net Income (Loss)

Income Tax (expense) recovery

Gain (Loss) Before Income Tax

Other Expenses

Interest Income (Expense)

Gain (Loss) From Operations

Operating Expenses

Other Operating Expenses Other Operating

General & Administration & General

Sales & Marketing & Sales

Gross Profit Gross

Unrealized gain/loss in F.V. Biological Assets Biological F.V. in gain/loss Unrealized

F.V. Change to Biological Assets / Inventory Biological to Change F.V.

Gross Profit Gross

Less: COGS

Revenue

($M)

E Source: CompanySource: reports;Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 86

CANOPY GROWTH CORPORATION

October 2018

FY 2022

3

87

39

31

36

53

380

146

884

757

109

618

127

123

740

965

118

314

8,330

7,446

7,359

6,794

8,330

1,705

6,625

6,103

2021E

3/31/21

3

87

60

39

31

91

88

36

53

146

849

757

109

618

740

118

211

7,729

6,880

6,793

6,549

7,729

1,755

1,015

5,974

5,556

2020E

3/31/20

3

87

39

31

65

62

36

53

146

822

757

109

618

740

985

118

164

-123

7,520

6,698

6,611

6,549

7,520

1,725

5,795

5,424

2019E

3/31/19

3

87

39

31

65

62

36

53

146

822

757

109

618

740

985

118

164

-123

7,520

6,698

6,611

6,549

7,520

1,725

5,795

5,424

3/31/19

Q4-19E

3

87

39

31

60

57

36

53

146

818

757

109

618

740

843

118

157

-174

7,464

6,647

6,560

6,549

7,464

1,583

5,881

5,517

Q3-19E

12/31/18

3

87

39

31

93

90

36

53

27

FY 2019

146

851

757

109

618

740

675

623

118

389

-209

2,038

1,187

1,100

1,124

2,038

1,415

9/30/18

Q2-19E

3

87

39

31

36

53

28

146

888

757

109

618

131

127

740

480

893

118

658

-172

2,112

1,224

1,137

1,124

2,112

1,220

Q1-19

6/30/18

7

2

84

46

61

34

92

90

20

16

21

-92

127

194

102

955

651

304

482

102

323

1,437

1,243

1,159

1,077

1,437

2018

3/31/18

0

1

9

2

6

16

23

63

45

36

18

15

96

10

46

15

-21

703

640

640

622

703

524

428

179

102

2017

3/31/17

0

1

6

9

0

3

7

1

6

1

5

1

20

12

99

54

45

45

22

15

-14

143

124

124

131

143

2016

3/31/16

0

0

2

6

2

0

0

2

5

0

4

1

1

4

2

0

48

41

41

50

48

18

18

29

21

-10

2015

3/31/15

Canopy’s Balance Sheet Canopy’s

: :

2

xhibit3.3

Total Equity Liabilities & Shareholders

Total Equity Shareholders

Non-Controlling Interests Non-Controlling

Total Equity Attributable to Canopy Total Attributable Equity

Retained Earnings (Deficit) Earnings Retained

Accum. Other Comprehensive Income

Other Reserves

Share Capital Share

Shareholders Equity Shareholders

TotalLiabilities

TotalLong-Term Liabilities

Other Long-Term Liabilities

Deferred Debt

Long-Term Debt

Long-Term Liabilities

TotalCurrent Liabilities

Other Current Liabilities

Accounts Payable & Accrued Liabilities & Accounts Payable

Current Liabilities

TotalAssets

TotalLong-Term Assets

Other Assets Intangibles &

Property, Plant & Equipment & Plant Property,

Long-Term Assets

TotalCurrent Assets

Prepaid Expenses & Other Expenses & Prepaid

Inventory

Biological Assets Biological

Accounts Receivable

Cash & Cash Cash Equivalents &

Current Assets

($M)

E Source: CompanySource: reports;Scotiabank GBM estimates.

This report is not to be distributed outside of Canada under any circumstances. 87

FY 2022 GROWING FOR THE FUTURE

October 2018

0

0

0

0

0

0

0

0

0

20

80

-30

-30

-68

547

245

245

332

300

6,103

5,556

2021E

3/31/21

0

0

0

0

0

0

0

0

0

0

0

20

60

-90

-90

-21

132

222

163

5,556

5,424

2020E

3/31/20

0

2

1

-4

26

26

-16

-26

-57

-57

323

600

101

-708

-679

-201

-241

5,424

5,101

6,010

5,424

2019E

3/31/19

0

0

0

0

0

0

0

0

0

5

0

0

8

-3

57

46

-93

-150

-150

5,424

5,517

3/31/19

Q4-19E

0

0

0

0

0

0

0

5

0

0

7

31

389

-175

-175

-121

-163

5,517

5,128

5,424

5,424

Q3-19E

12/31/18

0

0

0

0

0

0

0

0

0

5

0

0

5

FY 2019

-69

-36

-42

389

658

-269

-200

-200

9/30/18

Q2-19E

0

2

1

0

6

-4

86

26

-16

-26

-68

-38

-57

-91

658

323

335

586

600

-183

-154

Q1-19

6/30/18

0

1

-2

11

55

15

66

20

-28

-26

-82

-29

-54

323

102

221

526

461

-224

-169

-100

2018

3/31/18

4

0

7

0

0

5

6

-1

-4

-8

15

86

11

35

-19

-29

-27

-61

102

132

122

2017

3/31/17

0

8

0

0

0

5

0

2

-6

-2

-8

-4

-3

15

21

19

13

22

-11

-14

-39

2016

3/31/16

2

0

2

0

1

0

0

3

4

0

1

-5

-9

-9

21

46

42

-15

-10

-11

2015

19.356

3/31/15

GBM GBM estimates.

Canopy’s Cash Flow Statement Cash Canopy’s

: :

3

xhibit3.3

Cash & Equivalents,End of Period

Cash & Cash Equivalents, Beginning of Period Beginning Cash Cash Equivalents, &

Net Cash Inflow

Net Cash Provided by FinancingNet Provided Cash Activities by

Other Financing Activities Other Financing

Issuance of Long-Term Debt

Proceeds: Exercise of Warrents

Proceeds: Exercise of Stock Options

Proceeds: Canopy Rivers Share Issuance Share Rivers Proceeds: Canopy

Share Issuance Share

Financing Activities:

Net Cash Used in InvestingNet Used Cash Activities

Other

Investments Associates in

Purchases of Deposits PP&E and

Investing Activities:

Net Cash Used in OperatingNet Used Cash Activities

Changes in Non-Cash Working in Changes Capital

Other

Unrealized gain/loss in F.V. Biological Assets Biological F.V. in gain/loss Unrealized

F.V. Change to Biological Assets / Inventory Biological to Change F.V.

D&A

Net Income (Loss)

Operating Activities:

($M)

E Source: CompanySource: reports;Scotiabank

This report is not to be distributed outside of Canada under any circumstances. 88

October 2018

Pertinent Data

Aphria Inc. (APH-T)

Valuation: 15x achievable out-year EBITDA of $450 million Key Risks: Competitive environment, market demand and size, execution risk on production and supply chain, and changing regulatory policy

Canopy Growth Corporation (WEED-T)

Valuation: 15x achievable out-year EBITDA of $1.5 billion Key Risks: Competitive environment, market demand and sizing, execution risk on production and supply chain, and changing regulatory policy

89 October 2018

Appendix A: Important Disclosures

Company Disclosures (see legend below)*

Aphria Inc. V140, VS0568 Canopy Growth Corporation V140, VS0569

We, Oliver Rowe and Ben Isaacson, certify that (1) the views expressed in this report in connection with securities or issuers that we analyze accurately reflect our personal views and (2) no part of our compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by us in this report. This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst. All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date, unless otherwise explicitly stated. All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director and Co-Head, Global Capital Markets, who is not and does not report to the Head of the Investment Banking Department. Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public information across internal information barriers, such as between Investment Banking and Research. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets, and the revenues generated from its various departments, including investment banking, trading fees and other types of transactions. Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with subject company, public appearances and trading securities held by the analysts. For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit gbm.scotiabank.com/disclosures. Scotiabank, Global Banking and Markets Research, 20 Queen Street West, 4th Floor, Toronto, Ontario, M5H 3R3.

Time of dissemination: October 17, 2018, 04:43 ET. Time of production: October 16, 2018, 18:13 ET. Note: Time of dissemination is defined as the time at which the document was disseminated to clients. Time of production is defined as the time at which the Supervisory Analyst approved the document.

*Legend

V140 This report is not to be distributed outside of Canada under any circumstances. VS0568 Research Associate Oliver Rowe visited Aphria One and Aphria Diamond, greenhouse cannabis cultivation sites both existing and under construction, on October 5, 2018. No payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site. VS0569 Research Associate Oliver Rowe visited the Tweed site, a greenhouse cannabis cultivation site both existing and under construction, on October 10, 2018. No payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.

90 October 2018

Rating and Price Target History

Aphria Inc. (APH-T) as of October 16, 2018 (in CAD)

10-16-2018 Price: 18.69 Rating: SO Target: 25.00

25

20

15

10 (CAD) Price

5

0 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

*Represents the value(s) that changed. Ratings Legend: FS=Focus Stock; SO=Sector Outperform; SP=Sector Perform; SU=Sector Underperform; T=Tender; UR=Under Review; CS=Coverage Suspended; DC=Discontinued Coverage Source: Scotiabank GBM estimates/Scotia Howard Weil estimates; FactSet.

Canopy Growth Corporation (WEED-T) as of October 16, 2018 (in CAD)

10-16-2018 Price: 68.70 Rating: SP Target: 61.00

80 70 60 50 40

30 (CAD) Price 20 10 0 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

*Represents the value(s) that changed. Ratings Legend: FS=Focus Stock; SO=Sector Outperform; SP=Sector Perform; SU=Sector Underperform; T=Tender; UR=Under Review; CS=Coverage Suspended; DC=Discontinued Coverage Source: Scotiabank GBM estimates/Scotia Howard Weil estimates; FactSet.

91 October 2018

Definition of Scotiabank, Global Banking and Markets Equity Research Ratings We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst’s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings

Focus Stock (FS) Other Ratings The stock represents an analyst’s best idea(s); stocks in this Tender – Investors are guided to tender to the terms category are expected to significantly outperform the average of the takeover offer. 12-month total return of the analyst’s coverage universe or an index identified by the analyst that includes, but is not limited to, Under Review – The rating has been temporarily stocks covered by the analyst. placed under review, until sufficient information has been received and assessed by the analyst. Sector Outperform (SO) The stock is expected to outperform the average 12-month total Risk Ranking return of the analyst’s coverage universe or an index identified As of June 22, 2015, Scotiabank, Global Banking by the analyst that includes, but is not limited to, stocks covered and Markets discontinued its Low, Medium, and High by the analyst. risk rankings. The Speculative risk ranking reflects exceptionally high financial and/or operational risk, Sector Perform (SP) exceptionally low predictability of financial results, The stock is expected to perform approximately in line with and exceptionally high stock volatility. The Director the average 12-month total return of the analyst’s coverage of Research and the Supervisory Analyst jointly universe or an index identified by the analyst that includes, but make the final determination of the Speculative risk is not limited to, stocks covered by the analyst. ranking. Sector Underperform (SU) The stock is expected to underperform the average 12-month total return of the analyst’s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*

Distribution by Ratings and Equity and Equity-Related Financings* 60% Percentage of companies covered by 48.0% 48.2% Scotiabank, Global Banking and Markets Equity Research within each rating category. 40% Percentage of companies within each rating category for which Scotiabank, Global Banking

20% and Markets has undertaken an underwriting liability or has provided advice for a fee within 3.9% the last 12 months. 40.1% 31.0% 5.9% 0% Sector Outperform Sector Perform Sector Underperform

* As of September 30, 2018. Source: Scotiabank GBM.

For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “buy,” “hold/neutral” and “sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.

92 October 2018

General Disclosures

This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “globally branded research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringent standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced. The frequency of reports is determined by the analyst on a case-by-case basis, driven by external market factors and issuer announcements. Analysts will endeavour to review and publish such estimates and recommendations as soon as possible after the release of material information by the issuer or the occurrence of other relevant events. This will typically involve, at a minimum, a summary of quarterly earnings releases. This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. If you are affected by MiFID II, you must advise us in writing at [email protected] Past performance or simulated past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness. Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as of the date of this report, unless otherwise specified. Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any transaction may be or could have been effected at those prices. Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates. Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Equity research reports published by Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research or who wish to access the proprietary model used to produce this report should contact Scotiabank at 1-800-208-7666. A list of all investment recommendations in any financial instrument or issuer that have been disseminated during the preceding 12 months is available at the following location: gbm.scotiabank.com/disclosures This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of Scotiabank, Global Banking and Markets.

Additional Disclosures

Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia. Colombia: This report is distributed in Colombia by Banco Colpatria Multibanca Colpatria S.A. as authorized by the Superintendencia Financiera de Colombia to The Bank of Nova Scotia (“Scotiabank”) by Resolution 058 of 2014 and to Scotia Capital Inc. by Resolution 0226 of 2015. Said Resolutions authorize Scotiabank and Scotia Capital Inc. to promote and advertise their products and services through Banco Colpatria Multibanca Colpatria S.A. This report is prepared by analysts employed by The Bank of Nova Scotia and certain of its affiliates including Scotia Capital Inc. Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.

93 October 2018

Japan: This report is provided simply as advice and investment decisions shall be made at each investor’s own risk. Scotia Securities Asia Limited and any of its affiliates shall not provide compensation for any loss incurred by the reader. Mexico: The information contained in this report is for informational purposes only and is not intended to influence the decision of the addressee in any way whatsoever with respect to an investment in a certain type of security, financial instrument, commodity, futures contract, issuer, or market, and is not to be construed as an offer to sell or a solicitation of an offer to buy any securities or commodities futures contracts. Scotiabank Inverlat Casa de Bolsa, S.A. de C.V. is not responsible for the outcome of any investment performed based on the contents of this research report. Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia. Singapore: For investors in the Republic of Singapore, this document is provided via an arrangement with BNS Asia Limited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Chapter 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact BNS Asia, located at 1 Raffles Quay, #20-01 North Tower, One Raffles Quay, Singapore 048583, telephone: +65 6305 8388. This document is intended for general circulation only and any recommendation that may be contained in this document concerning an investment product does not take into account the specific investment objectives, financial situation, or particular needs of any particular person, and advice should be sought from a financial adviser based in Singapore regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation, or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. United Kingdom and the rest of the European Economic Area: Except as otherwise specified herein, this report is distributed by Scotiabank Europe plc, a subsidiary of The Bank of Nova Scotia. Scotiabank Europe plc complies with all requirements under the EU Market Abuse Regulation concerning investment recommendations. United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc. Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets entity in their local jurisdiction unless governing law permits otherwise. ™ Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with "Global Banking and Markets," is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc., Scotia Capital (USA) Inc., Scotiabanc Inc., Citadel Hill Advisors L.L.C., The Bank of Nova Scotia Trust Company of New York, Scotiabank Europe plc, Scotiabank (Ireland) Designated Activity Company, Scotiabank Inverlat S.A., Institución de Banca Múltiple, Scotia Inverlat Casa de Bolsa S.A. de C.V., Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank Group and authorized users of the mark. The Bank of Nova Scotia is incorporated in Canada with limited liability. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and regulated by the Investment Industry Regulatory Organization of Canada. Scotia Capital (USA) Inc. is a broker-dealer registered with the SEC and is a member of FINRA, NYSE, NFA and SIPC. Scotiabank Europe plc is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

© The Bank of Nova Scotia 2018 This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without prior express consent.

94 October 2018

Scotiabank, Global Banking and Markets Equity and Commodity Research Teams

HEAD OF EQUITY RESEARCH Transportation & Aerospace REAL ESTATE & REITS John Henderson, P.Eng...... (416) 945-7393 Turan Quettawala, CFA ...... (416) 863-7065 Mario Saric, CPA, CA, CFA..... (416) 863-7824 [email protected] [email protected] [email protected]

HEAD OF BUSINESS MANAGEMENT INFORMATION TECHNOLOGY Pammi Bir, CPA, CA, CFA ...... (416) 863-7218 Erika Osmond ...... (416) 945-4529 [email protected] [email protected] Software & Services Paul Steep ...... (416) 945-4310 U.S. REITS CONSUMER DISCRETIONARY [email protected] Nicholas Yulico, CFA ...... (212) 225-6904 [email protected] Cable Hardware Jeff Fan, CPA, CA, CFA ...... (416) 863-7780 Paul Steep ...... (416) 945-4310 Trent Trujillo ...... (212) 225-6907 [email protected] [email protected] [email protected] Media LATIN AMERICA Greg McGinniss ...... (212) 225- 6906 Jeff Fan, CPA, CA, CFA ...... (416) 863-7780 [email protected] [email protected] LatAm Cement, Construction, Real Estate, and Airports TELECOMMUNICATION SERVICES CONSUMER STAPLES Francisco Suarez …...... 52 (55) 9179 5209 [email protected] Jeff Fan, CPA, CA, CFA ...... (416) 863-7780 Retailing [email protected] Patricia Baker, Ph.D...... (514) 287-4535 LatAm Consumer Products [email protected] Rodrigo Echagaray...... (416) 945-4405 COMMODITY RESEARCH [email protected] Consumer Products Energy Strategy George Doumet ...... (514) 350-7788 LatAm Financials Michael Loewen, CFA ...... (416) 863-7985 [email protected] Jason Mollin ...... 1 (212) 225 5039 [email protected] [email protected] ENERGY ECONOMICS LatAm Food & Beverages Jean-François Perrault ...... (416) 866-4214 Oil & Gas – Integrated and E&P Felipe Ucros ...... (212) 225-5098 Derek Holt ...... (416) 863-7707 Jason Bouvier, CFA ...... (403) 213-7345 [email protected] [email protected] PORTFOLIO ADVISORY GROUP (PAG) LatAm Industrials (SCOTIAMCLEOD) Oil & Gas – International E&P Francisco Suarez …...... 52 (55) 9179 5209 Chief Investment Officer & Co-Head of PAG Gavin Wylie ...... (403) 213-7333 [email protected] [email protected] Shane Jones ...... (416) 945-5332 LatAm Metals & Mining Trading Oil & Gas – E&P Alfonso Salazar, MSc ...... 52 (55) 5123 2869 Elliott Fishman ...... (416) 863-7860 Patrick Bryden, CFA ...... (403) 213-7750 [email protected] [email protected] Dave Stephens ...... (416) 863-7521 LatAm Telecom & Media Arnold Prashad ...... (416) 863-7515 Cameron Bean ...... (403) 218-6786 Andres Coello...... 52-55-5123-2852 Edward Leung ...... (416) 862-3098 [email protected] [email protected] Portfolio Managers Energy & Equipment Services LatAm Utilities Shane Jones ...... (416) 945-5332 Vladislav C. Vlad, P.Eng...... (403) 213-7759 Ezequiel Fernández López. ... 56-9-9991-9152 Caroline Escott, CFA ...... (416) 860-1538 [email protected] [email protected] Advisory ENERGY INFRASTRUCTURE MATERIALS Warren Hastings, CFA ...... (416) 865-6354 Robert Hope, CFA ...... (416) 863-7798 Joel Beriault ...... (416) 863-5912 [email protected] Global Fertilizers Chelsea Campbell ...... (416) 863-7149 Ben Isaacson, CFA ...... (416) 945-5310 FINANCIALS [email protected] Fixed Income Advisory Andrew Mystic, CFA ...... (416) 863-7685 Banks Gold & Precious Minerals Andrew Edelberg, CFA ...... (416) 863-7685 Sumit Malhotra, CFA ...... (416) 863-2874 Tanya Jakusconek, M.Sc ...... (416) 945-4083 [email protected] [email protected] INSTITUTIONAL EQUITY SALES & TRADING Diversified Financials Trevor Turnbull, M.Sc ...... (416) 863-7427 Phil Hardie, CFA, P.Eng...... (416) 863-7430 [email protected] Toronto ...... (416) 863-2885 [email protected] ...... 1-888-251-4484 Ovais Habib ...... (416) 863-7141 Montreal ...... (514) 287-4513 Insurance [email protected] New York ...... (212) 225-6605/04 Sumit Malhotra, CFA ...... (416) 863-2874 ...... 1-800-262-4060 [email protected] Metals & Mining Boston...... (617) 330-1477 Orest Wowkodaw, CPA, CA, CFA. (416) 945-4526 Mexico City, MX ...... 011-52-55-9179-5181 Phil Hardie, CFA, P.Eng...... (416) 863-7430 [email protected] (Scotia Inverlat Casa de Bolsa) [email protected] London, U.K...... 011-44-207-826-5919 Forest Products & Diversified Industries Singapore ...... (65) 6305-8350 INDUSTRIALS Benoit Laprade, CPA, CA, CFA(514) 287-3627 ...... (65) 6305-8347 [email protected] Diversified Industrials Mark Neville, CFA ...... (514) 350-7756 PORTFOLIO & QUANTITATIVE STRATEGY [email protected] Hugo Ste-Marie, CFA ...... (514) 287-4992 [email protected] Michael Doumet, CFA ...... (514) 350-7778 [email protected]

95 ™ Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets,” is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc. Scotia Capital Inc. is a Member of the Canadian Investor Protection Fund.