Canada Leads the Global Cannabis Paradigm Shift Initiating Aphria and Canopy at Outperform

May 2018

Tamy Chen, CFA Peter Sklar, CPA, CA Cannabis Analyst Retailing/Consumer Analyst BMO Nesbitt Burns Inc. BMO Nesbitt Burns Inc. (416) 359-5501 (416) 359-5188 [email protected] [email protected]

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets is strictly prohibited. This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including Analyst’s Certification, please refer to pages 50 to 53. 16:00 ET~ Table of Contents

Initiating BMO Cannabis Coverage ...... 2 Executive Summary ...... 4 Legal Environment Favours Canadian LPs ...... 6 Initial Recreational Market Outlook ...... 7 Current Medical Market in Canada: Opaque ...... 13 Near-Term International Medical Opportunity: Germany ...... 15 Long-Term Industry Outlook ...... 16 Company Snapshot: Our Current Coverage Universe ...... 24 Company Coverage: Aphria ...... 25 Company Coverage: Canopy ...... 35 Comparable Companies - Cannabis ...... 46 Comparable Companies – Alcohol & Tobacco ...... 47 Glossary ...... 48

Aphria: We are initiating coverage of Aphria (APH-TSX) with an Outperform rating.

First Mover Advantage: We believe Aphria will be one of the few licensed producers (LPs) with sufficient product to supply the initial recreational demand and we believe such a “first mover” advantage should enable the company to quickly capture significant share and generate attractive unit economics in an undersupplied market.

Leading Low-Cost Producer: We believe Aphria could emerge as a leading low-cost cannabis producer given the significant commercial-scale greenhouse cultivation expertise held by the management team, and the infrastructure and greenhouse culture that is inherent in the Leamington, Ontario community.

Scale Is Critical to Long-Term Growth: We believe Aphria’s scale will facilitate meaningful investment in long-term growth opportunities such as brand development, value-add format manufacturing, the gradual legalization of international medical markets, and advanced pharmaceutical applications.

Valuation: Our target price of $17 is based on a projected enterprise value that is about 17x our Base Case fiscal 2020 EBITDA estimate. We note that our Base Case fiscal 2020 EBITDA estimate assumes that Aphria’s facility expansions are only at 65% of full ramp potential versus management’s expectation that the facilities will be close to 100% ramp by that time. If these facilities were to reach full ramp by fiscal 2020 and Aphria experiences firmer selling prices, our implied target multiple would be in the high-single-digit range. See Aphria company section for details.

Canopy: We are initiating coverage of Canopy (WEED-TSX) with an Outperform rating.

First Mover Advantage: We believe Canopy will be one of the few LPs with sufficient product to supply the initial recreational demand and we believe such a “first mover” advantage should enable the company to quickly capture significant share and generate attractive unit economics in an undersupplied market.

Head Start in International: We consider the company’s current international operations to be more advanced versus most other players, and Canopy appears to be laying the groundwork in markets where medical is not yet legalized, but may soon be. The approach to develop cultivation in “hub” regions like Denmark for export to Germany and eventually Australia for export to the Asia-Pacific region provides the company longer-term access to these markets.

Long-Term Global Branded Leader: Canopy could emerge as a leader over the long term given that the company’s scale will facilitate meaningful investment in long-term growth opportunities such as brand development, value-add format manufacturing, the gradual legalization of international medical markets, and advanced pharmaceutical applications. We believe Canopy’s strategic alliance with Constellation Brands (STZ-NYSE; US$216.81; Outperform rated by Amit Sharma, BMO Capital Markets Corp.) could prove to be a significant advantage as the industry evolves into value-add formats, and particularly, into cannabis-infused beverages.

Valuation: Our target price of $45 is based on a projected enterprise value that is about 20x our Base Case fiscal 2020 EBITDA estimate. Our target multiple reflects our view that Canopy has a relative head start in brand development and international expansion, and could emerge as a leading global-branded company in the long term. We note that our Base Case fiscal 2020 EBITDA estimate assumes that Canopy’s facility expansions are only at 65% of full ramp potential versus management’s expectation that the facilities will be close to 100% ramp by that time. If these facilities were to reach full ramp by fiscal 2020 and Canopy experiences firmer selling prices, our implied target multiple would be 11x. See Canopy company section for details.

Canopy Growth Aphria

• Could emerge as a large, • Could emerge as a leading low- cost contract cultivator branded player • Potential to gain “first • Strategic alliance with mover” advantage in • Continues to establish strategic Constellation Brands could prove initial recreational relationships in international to be a significant advantage as market markets, but appears slightly behind compared to Canopy the industry evolves into value- • Scale should facilitate add formats meaningful investment • Supply agreement with • Current international operations in long-term Shoppers Drug Mart broadens appear more advanced versus opportunities medical distribution reach other LPs; strategy to develop • Pressure on the stock following cultivation hubs abroad for controversy with Nuuvera international export could acquisition, resulting in lower provide longer-term market valuation vs. other LPs and access provides better return opportunity

Source: BMO Capital Markets.

Near-Term Outlook

 First Mover Advantage for Larger LPs: Initially, demand/supply dynamics will favour the larger LPs. Anticipated demand from the initial recreational market in Canada is expected to considerably exceed industry production as only a handful of the larger LPs will have sufficient cannabis output at that time to meaningfully fill the distribution channels. As a result, this “first mover” advantage should enable the larger LPs to benefit from the favourable pricing dynamics expected in an initially undersupplied market. See Exhibit 3.

 In addition, this “first mover” advantage should enable the larger LPs to initially dominate retail shelf space in the recreational market, which would provide a head start for brand development.

 Value-Add Formats Will Mitigate Dried Flower Price Compression: We anticipate in year two of our forecast that supply will begin to catch up to demand, which will result in some pricing pressure on dried flower. However, our Base Case projections anticipate that in year two, federal regulators will begin legalizing value-add product formats, which should carry much higher pricing on a grams-equivalent basis and mitigate the pricing pressure that arises in dried flower (see Exhibits 3 and 4).

 Our Base Case forecast assumes that the industry growth rate for medical patient acquisition slows when the recreational market is legalized. Some existing medical patients, and potential future patients, could prefer the recreational market when legalized. However, this may be more than offset if more employers begin to include medicinal cannabis under insurance coverage plans.

 Near-Term International Opportunity Favours Larger LPs: For the international export opportunity, we expect that only a handful of the larger LPs will be able to secure the licensing and certification requirements, and develop the necessary distribution infrastructure in those regions.

Longer-Term Outlook

 Supply Catches Up in Year Two of Recreational Legalization: We project that dried flower supply will begin to catch up with demand in year two, and potentially exceed demand in the third or fourth year following recreational legalization in Canada.

 It is not clear if this projected supply/demand imbalance will weigh on the cannabis prices realized by the LPs as there will be the opportunity to export increasing volumes of medical cannabis to international markets, and the introduction of additional value-add product formats should provide higher pricing to compensate for price compression in dried flower.

 Evolution Into Either Branded Players or Low-Cost Cultivators: As dried flower prices continue to settle, we believe the Canadian market will rationalize into a handful of larger, branded players and a handful of low-cost contract cultivators. Beyond the branded companies and low- cost contract growers, it is not clear to us how the many other LPs, outside of niche brands, will survive under this pricing environment.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 4 May 28, 2018  Near-Term International Export Opportunity Is Temporary: We believe the current international opportunity for Canadian LPs, which is the ability to export products into other markets at favourable economics, will prove to be transitory. As a result, we believe the long-term global opportunity for Canadian LPs is developing intellectual property and brands.

 Long-Term Medical Market Opportunity in Pharmaceutical Applications: We believe the distribution model for medical cannabis in Canada will eventually expand beyond the current channel of direct-to-patient. In addition, we consider that Canadian LPs could eventually be in a position to make efficacy claims that are supported by clinical trials. At that point, medical cannabis could qualify for a Drug Identification Number, which we believe would be a significant catalyst to accelerate growth of the medical market.

 Scale Is Critical to Long-Term Growth: Over the long term, we anticipate that only a handful of LPs will be attributed a premium valuation. These long-term industry leaders will be those that capture sizable shares of the near-term recreational market, and possess the scale and resources to invest in the long-term opportunities such as brand development, value-add format manufacturing, the gradual legalization of international medical markets, and advanced pharmaceutical applications.

 It is also possible that these LPs could ultimately be acquired by large CPG players in the beverage and tobacco industries or pharmaceutical companies given the potential disruption cannabis-infused products could present.

 The Blue Sky Scenario Beyond Our Forecasts: An additional long-term upside would be if other jurisdictions consider recreational legalization, and we understand that Malta is currently drafting legislation to legalize recreational use. If Malta establishes and implements a framework legalizing the recreational market, we believe this could set a precedent that encourages potential recreational legalization in other European countries. Under such a scenario, Canadian LPs would have to establish cultivation in those markets in order to participate as UN treaties prevent international trade of cannabis for non-medical purposes.

In Canada, medical cannabis was legalized in 2001, following court decisions, with the Marihuana Medical Access Regulations (MMAR). Under this framework, approved individuals could grow cannabis or appoint a designated person to grow for them. The MMAR framework was replaced by the Marihuana for Medical Purposes Regulation (MMPR), which only permitted Health Canada approved commercial licensed producers (LPs) to grow cannabis. Following a court ruling in 2016, the MMPR was replaced by the Access to Cannabis for Medical Purposes Regulation (ACMPR), which is the current regulation governing Canada’s medical market. The ACMPR framework allows patients to either purchase medical cannabis from LPs or grow a limited amount on their own.

Following the election of the Trudeau government in 2015 and the report of the McLellan Task Force on Legalization in December 2016, Bill C-45 was drafted as the proposed regulatory framework to legalize recreational cannabis. On June 7, 2018, the Senate is scheduled to hold a final vote on Bill C-45. However, there are a number of issues that could delay legalization. Provincial governments will receive a period of eight to twelve weeks following the effective date of Bill C-45 in order to secure supply and establish retail locations. In addition, some members of the Senate are recommending the federal government delay Bill C-45 for up to a year to address concerns related to Indigenous communities, although Prime Minister Trudeau has indicated that there will be no delay. We believe it is unlikely that the recreational market will be legalized before the fall.

In the U.S., cannabis is considered by the federal government as a Schedule 1 narcotic, although several states have legalized medical and recreational use. This federal-state conflict exists, in part, as a result of the Ogden and Cole memoranda issued by the U.S. Department of Justice during the Obama administration that deprioritized enforcement of the U.S. federal cannabis prohibition in certain instances. These memoranda were rescinded pursuant to a memorandum issued by Attorney General Jeff Sessions on January 4, 2018. As a result of the federal status of cannabis, U.S. cannabis companies in legalized states are unable to supply international markets.

The international flow of cannabis, which is considered a controlled substance, is governed by three United Nations treaties, and only permitted for medical purposes by countries with a legal federal framework. Several countries have legalized medical cannabis, including Germany, Denmark, Netherlands, Italy, and Australia, and more countries are expected to progress towards medical legalization over the next several years. However, we note that Canada is the only developed country with a comprehensive regulatory framework, permitting both medical consumption and domestic cultivation. The lack of domestic production in many countries with legalized medical use has created the opportunity for Canadian LPs to supply international markets.

Sizing Up the Industry in Canada

No. of Licenses1 104 Industry production in 20171 81k kg Industry revenue in 20171 $239 mm

Prices in medical market4 $8 to $9 / g Prices in illicit market4 $7 to $9 / g

Avg. annual yield for indoor3 100 to 300 g / sq. ft. / yr. Avg. annual yield for greenhouse3 60 to 120 g / sq. ft. / yr. Cost of production5 $1 to $2 / g

Note (1): Statistics Canada. Note (2): Deloitte. Note (3): BMO Capital Markets. Note (4): Statistics Canada, company filings. Note (5): Company filings. Excludes shipping & packaging.

Market Cap. Company Ticker C$ mm Overview Canopy Growth WEED $8,697 Facilities across Canada and a portfolio of medical and recreational targeted brands. Constructing three hybrid facilities in Alberta and Northern Europe. Aurora Cannabis ACB $4,793 Announced acquisition of MedReleaf. Aphria APH $3,198 Operating greenhouses in Leamington, focused on becoming a leading low cost producer. MedReleaf LEAF $2,809 A premium-branded medical supplier. Announced it will be acquired by Aurora. Cronos CRON $1,673 Indoor facilities in Ontario, recently established facility in Israel. Hydropothecary THCX $1,179 Quebec-based, signed 5-yr Quebec supply agreement. Early-stage. Developing first facility to grow organic cannabis. The Green Organic Dutchman TGOD $1,040 Signed uptake agreement with Aurora. CannTrust TRST $877 Licensed producer. A leading player in the medical market. Organigram OGI $788 NB-based, has a partnership with Colorado-based The Green Solution. Cannabis investment company. Cannabis Wheaton CBW $716 Provides LPs with resources in exchange for financial or product uptake.

Source: BMO Capital Markets, company filings, FactSet. Note: BMO Capital Markets is restricted on Aurora Cannabis

Initial Recreational Market Outlook

We believe initial demand in the legal recreational market will likely be below many industry estimates. This is based on our view that several factors will initially temper the level of illicit market displacement (see Exhibit 2 below). For example, several provinces are only establishing a modest number of retail stores in the first year of legalization, and it is not clear to us how prevalent e-commerce sales will be initially. In addition, we are concerned that many of these stores will be situated in locations that are too far from convenient urban centres (i.e., Ontario’s first four sites). Finally, we note that initial recreational legalization will only permit three product formats: dried flower, oils, and gel capsules, which is relatively limited compared to the breadth of categories available in the illicit market.

We believe meaningful displacement of the illicit market will take several years, but over the long term, we expect consumers will participate in the recreational market due to the legality, safety, and convenience of product formats that will be offered.

Exhibit 2: Key Factors Influencing Illicit Market Conversion

The uptake in demand from existing illicit market users could be lower than expected if: -There is an insufficient number of stores initially -Stores are in inconvenient locations (such as the first four sites in Ontario) -Other formats in the illicit market (edibles, concentrates) will not be permitted initially -If retail prices are not competitive with the illicit market

Slower illicit market displacement could be countered by: -New users who did not want to participate in the illicit market -The migration of some medical patients whose underlying use was recreational

Source: BMO Capital Markets.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 7 May 28, 2018 We have developed three forecast scenarios for initial recreational market demand: Base, Upside, and Downside cases. Our demand forecast is based on detailed assumptions and demographic data regarding the size of the illicit market by province (as provided by StatsCan). For year one of recreational legalization, our Base, Upside, and Downside scenarios assume 40%, 50%, and 20% illicit market displacement to the legal market, respectively. In year two, our Base, Upside, and Downside scenarios assume 60%, 80%, and 35% illicit market displacement, respectively. We have made assumptions regarding the frequency of cannabis occasions and typical per-occasion cannabis consumption levels based on a number of factors, including the type of user (existing illicit market user versus new participant) and the scenario we are considering (Base, Upside, and Downside). For example, in year two of recreational legalization, for a user displaced from the illicit market, we are assuming two and a half occasions per week and one gram per occasion on average. See Exhibit 3 below.

Exhibit 3: BMO’s Forecast of Initial Recreational & Ongoing Medical Demand

Year 1 of Rec. Legalization Year 2 of Rec. Legalization Base Upside Downside Base Upside Downside

Medical Market in Canada # of Patients 325,000 350,000 250,000 375,000 390,000 300,000 Avg. Grams per Patient per yr. 240 240 240 240 240 240 Annual Demand (kg) 78,000 84,000 60,000 90,000 93,600 72,000

vs. Current # of Patients 269,502 Volume Sold in Apr. to Dec. 2017 (kg) 41,280

Recreational Market in Canada Est. Illicit Market Users in Canada (mm) 5.6 5.6 5.6 5.6 5.6 5.6 Illicit Market Displacement1 40% 50% 20% 60% 80% 35% Est. New Market Participants in Canada (mm) 0.8 1.4 0.3 1.4 2.0 0.8 Total Participants in Legal Market (mm) 3.1 4.2 1.4 4.8 6.5 2.8

Annual Demand (kg)2 259,402 477,278 95,456 477,278 749,085 185,247

Vs. Deloitte Forecast (kg) 600,000 Vs. Govt of Canada Forecast (kg) 378,000 to 1,000,000

Total Canadian Demand (kg) 337,402 561,278 155,456 567,278 842,685 257,247

BMO's Production Outlook - Base Case "Big Three" (kg)3 ~125,000 ~540,000 We believe the other 100+ LPs will contribute minimal production in year one and a modest amount in year two.

Pricing Scenarios Oversupply of Dried Flower? No No No No No Yes More Product Formats Legal? No No No Yes Yes No New Formats Share of Market Modest Modest None Flower + Oil Share of Market Majority Majority All Net Effect on Pricing from Year 1 - - -   

Blended Wholesale Price for LPs ($/g)4 $4.50 - 4.75 $5.00 $4.00 - 4.40 $5.50 $6.00 $4.00 - 4.40

Source: BMO Capital Markets. Note (1): The percentage of the illicit market that will transition to the legal market. Note (2): See section immediately preceding this chart for details regarding usage assumptions for participants. Note (3): Aphria, Aurora and Canopy. Assumes MedReleaf is acquired by Aurora. Note (4): See Exhibit 4 following. Note: BMO Capital Markets is restricted on Aurora Cannabis

Despite Our Conservative Demand Outlook, We Still Expect a Supply Shortage in the Near Term

We note there is significant execution risk across the industry as LPs have never cultivated cannabis on a mass commercial scale. We understand that all the phases of the cultivation process cannot be initiated in a new facility at the same time and that there is a natural ramp schedule that will take at least a number of months before the entire facility is up and running. In addition, based on our recent visits to most of the larger Canadian LPs’ facilities, we have determined that ramping an indoor or greenhouse (see Glossary for definitions) cultivation facility is a highly sophisticated process. Areas of complexity include securing the genetics and appropriate soils and fertilizers, developing a suitable nutrient and water delivery system, establishing a robust climate (heat, lighting, humidity, carbon dioxide, etc.) to optimize the plant’s development, and processing the plant materials post-harvest (drying, trimming, oil extraction). At the same time, these environments are highly susceptible to contamination from mould,

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 8 May 28, 2018 mildew, and bugs. As a result, we believe the majority of LPs, many of which are still developing their facilities or waiting for licenses, will not have the inventory or production capacity to meaningfully supply the initial recreational market.

Notwithstanding that our projection for demand is lower than other industry expectations, we would expect that provincial governments will seek to fill the retail channel with a meaningful inventory level, and on balance, we believe the initial recreational market will experience a supply shortage. We are also concerned that some LPs that have been awarded supply contracts could experience difficulties meeting their supply obligations in the near term. As a result, our view anticipates that the select few LPs with sufficient inventory will be able to sell all that they can produce in the near term.

After the initial fulfillment of the provincial retail channels, our industry supply and demand outlook for both medical and recreational markets indicate that total domestic demand will still exceed industry supply in the second year post recreational legalization. As a result, we believe the LPs should be able to continue to sell all that they can produce and pricing should be firm. We anticipate in year two of our forecast that industry supply will begin to catch up to demand, which will result in some pricing pressure on dried flower. However, our Base Case projections anticipate that federal regulators will begin to legalize expanded product formats, such as vape pens, edibles, and beverages, which should carry much higher pricing on a grams-equivalent basis. As a result, our Base Case scenario projects that blended pricing per gram for the LPs will improve modestly in the second year of our forecast period (see Exhibit 4 below).

Exhibit 4: Product Mix on Blended Pricing

Dried Oil & Gel Other Value-add Flower Capsules Formats Blended

Year 1 of Rec. Legalization % of Market 90% 10% Not Legal 100% Est. Wholesale Price (per gram) $4.50 $6.00 Not Legal $4.65 BMO Base Case from Exhibit 3 $4.50 - 4.75

Year 2 of Rec. Legalization % of Market 70% 20% 10% 100% Est. Wholesale Price (per gram) $4.00 $6.00 $15.00 $5.50 BMO Base Case from Exhibit 3 $5.50

Source: BMO Capital Markets.

Provincial & Territorial Supply Contracts Are Critical to Participate in the Recreational Market

Overseeing the distribution of recreational cannabis will be the responsibility of the provincial/territorial governments. Most provincial/territorial governments will purchase cannabis from LPs on a wholesale basis to distribute into the retail channel, which includes both e-commerce and physical stores. As a result of this regulated supply chain, securing provincial/territorial supply contracts will be critical for LPs to access recreational markets.

We understand that there will be two typical avenues for LPs to access the provinces/territories: either with a direct supply agreement with the province/territory, or by wholesaling to another LP that has a provincial/territorial supply contract. We would assume that wholesaling to another LP generates lower economics relative to a direct supply agreement, but we believe the majority of LPs will ultimately need to wholesale to other LPs in order to participate in the provinces’/territories’ recreational markets. This is based on our view that in the near term, provincial/territorial governments are primarily focused on securing sufficient inventory and scope of product offerings to meet initial demand, a criterion that should favour the larger LPs. We also believe the contractual wholesale price in these provincial/territorial supply agreements could vary among the signed LPs as we understand that pricing is determined through a negotiated process.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 9 May 28, 2018 Certain regional LPs could also be well positioned to secure direct supply agreements in their home province/territory as a result of the economic development created from their operations. However, these regional LPs may be challenged to secure direct supply contracts in other provinces/territories, which would limit their ability to grow on a national scale. The announced LP suppliers for Quebec, Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and Yukon appear to support our view that the LPs best positioned to secure direct supply agreements with the remaining provinces/territories are likely to be the ones that can demonstrate an ability to supply a significant amount of volume and/or are contributing to economic development in that province/territory. See Exhibit 5 following.

The largest recreational markets should be Ontario and Quebec given the significant population in these two provinces. However, we believe the opportunity to access the Quebec market through a direct supply contract is now unavailable over the next few years for LPs other than the six that have entered into agreements with the province: Aphria, Aurora (Restricted), Canopy, Hydropothecary, MedReleaf, and Tilray. Only Hydropothecary has disclosed additional details of its supply agreement (see Exhibit 6 following). We also note that only Hydropothecary has a five-year contractual term to supply the province, with an optional sixth year renewal at the government’s discretion.

Exhibit 5: Hydropothecary’s Expected Economics in Quebec

Term 5-year Frequency of purchases 4 orders / year Product Offering Full range1 SKUs 63 initially Expected Product Mix - initial 80% flower Expected Product Mix - Later 30% flower

Per Gram Economics Wholesale price2 $5.40 Less excise tax (1.00) Revenue to Hydropothecary $4.40

All-in Cost - now $2.60 Margin Est. EBITDA - now $1.80 41%

All-in-Cost - mgmt's outlook $2.00 Est. EBITDA - mgmt's outlook $2.40 55%

Source: Company press release. Note (1): Dried flower, oils, Elixir spray product, capsules. Note (2): Weighted average by product mix. Pricing could change in later years depending on demand.

Unlike other provinces, the Ontario Cannabis Store (OCS) will secure supply through periodic product calls, whereby the OCS will select LPs to purchase SKUs under contractual terms. On April 11, the OCS announced the commencement of its first product call process. Selected LPs will be eligible to participate in the OCS’s product calls over a contractual two-year term, but the OCS will not make any volume commitments. Pricing will be set at a predetermined amount for the term.

British Columbia Alberta Manitoba Saskatchewan Ontario Quebec Newfoundland

Private. Regulated by Govt (OCS) via product Private. LPs will sell Distribution Govt (BC LDB) Govt (AGLC) Govt (LGA) Govt (SAQ) govt (SLGA). calls. directly to stores.

Aphria, Aurora, Canopy, First product call Hydropothecary (QC- Announced Suppliers None announced None announced None announced None announced Canopy process under way based), MedReleaf, Tilray Retail

Govt. Partnered with Online Govt. Govt. Private. Private. Govt. Govt. Shopify. Private. Licenses issued Govt. 150 stores by Govt and private. Private. 250 licenses lottery-style. Only 51 2020. 40 openings in Private. Announced 41 Stores Unlimited private expected in the first Private. licenses in 32 2018, 40 in 2019. Govt. Initially 15 stores. licenses. licenses. year. municipalities, which can Announced first 4 opt-out (5 have). locations.

New Brunswick Nova Scotia PEI Yukon North West Nunavut

Distribution Govt (NB Liquor) Govt (NSLC) Govt (PEI LCC) Govt. Govt. Only NWTLC. No info yet.

Aphria, Canopy, Canada's Island Garden Hydropothecary, Announced Suppliers None announced (PEI-based), Canopy, Canopy, Tilray None announced None announced Organigram (NB-based), Organigram Zenabis (NB-based) Retail

Online Govt. Govt. Govt. Govt. Govt. Will have online platform.

Govt. Allow co-location Govt. Initially inside Govt. All 20 initial with alcohol. 9 sites in At least 1 govt-run Govt and private. No existing liquor stores. Stores locations have been urban hubs announced. Govt. 4 sites only. location. May allow physical stores expected Stand-alone stores are announced. More stores possible in private. in 2018. possible in the future. future.

Source: Government websites. Note: BMO Capital Markets is restricted on Aurora Cannabis

 In the near term, we believe the retail price (pre-HST) for dried flower will generally range between $7 and $9 per gram and the wholesale price to LPs will range between $4 and $5 per gram.

 We believe the provinces will need to make several significant adjustments over the near term in the quantity and type of products they purchase as they develop a better understanding of consumer preferences as a result of actual point-of-sale purchases. This presents a risk to LPs if demand for their product SKUs is materially lower than anticipated.

Who Will Win in the Near Term? Will Branding Help?

Heading into the recreational market, we note that the strategy being adopted by most LPs is to establish brands through “lifestyle” associations to experiences such as the outdoors, health and wellness, music, art, or to specific celebrities. There is a view among LPs that branding, particularly if communicated to consumers before legalization, will create brand recognition and encourage in-store purchase when the market is legal.

However, we believe federal regulations will restrict the marketing reach of products intended for the recreational market. For example, we note that MedReleaf cancelled the Quebec launch of its San Rafael ’71 brand in April 2018 following concerns from the provincial government that the brand’s lifestyle positioning may be in violation of proposed Bill C-45 regulations. In addition, recent proposals from Health Canada, if enforced, would materially impair the LPs’ ability to convey their brand in-store via packaging (see Exhibit 7 below). Finally, federal regulations will limit the ability to advertise brands via various media platforms.

Exhibit 7: Health Canada’s Proposed Packaging Format

Source: Health Canada.

If there is limited product packaging differentiation in-store and limitations on marketing initially, having more shelf space may be the key driver to gaining a greater share of the initial demand and to establish a head start in brand development. As a result, we believe the LPs that have adequate inventory and production will be best positioned to generate significant revenue and earnings by participating in an undersupplied market at favourable unit economics. There would be further potential upside for these LPs if others are unable to meet the volume commitments stated in their provincial/territorial supply agreements.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 12 May 28, 2018 It is also likely that restrictions on marketing and packaging could cause a large portion of consumers to simply seek the highest-potency strains (i.e., high in THC and/or CBD). In this scenario, LPs with more product offerings in high-potency strains could be better positioned to capture more demand. If Canadian consumers focus on specific strains, the recreational market will be comparable to Colorado, where dried flower branding is at the strain level and differentiation is based on qualities of that strain, including efficacy, potency, and consistency. We note that popular strains in those states are able to command premium pricing. If differentiation in the Canadian recreational market is based on strains, it could undermine the branding strategies of many LPs.

On the other hand, there is a view that strain-level branding is unique to Colorado due to the state’s fragmented landscape of regional producers specializing in specific strains and regulations that facilitate a “deli-style” retail environment. Dried flower is not pre-packaged and instead, is placed in containers for customers to purchase, much like a deli counter. In Washington, where dried flower is pre-packaged, there are company-level brands, similar to ones being developed by Canadian LPs. As well, we believe strain-level branding will become less relevant as value-add products with cannabis extracts, such as vape pens and consumables, are introduced.

Branding Power May Be Limited In-Store; Can Budtenders Bridge the Gap?

While brands could develop consumer awareness and influence in-store purchasing, we believe branding power may be limited if it is not communicated or promoted by the in-store sales staff (also known as budtenders). When we visited cannabis dispensaries in Denver and LA, we found that budtenders play a crucial role in consumer education and product recommendations, which are based on personal experiences and third-party user feedback.

Specific to Canada, where packaging designs could be limited and consumers may be focused on specific strains, it would be the budtender’s role to differentiate the products, and in particular, highlight the variances of otherwise genetically similar strains grown by different LPs. We note that several LPs could be cultivating the same strain for the recreational market and while the strain’s core genetic profile is the same, qualities such as potency, efficacy, and consistency may differ as a result of the particularly environment it is grown in (also known as the plant’s phenotype).

We are concerned that initially, budtenders may not have sufficient knowledge to effectively communicate the differences between products and segment them based on perceived quality. In addition, we believe there is a risk that provinces/territories could limit the channels in which LPs can establish partnerships with the sales staff. For example, we understand that Ontario’s regulations will prohibit budtenders from making brand recommendations, although they will be permitted to provide factual information about the product such as the terpene profile and potency level. As a result of the restrictive regulations on marketing, branding, and budtenders, we believe the initial successful LPs will be companies with sufficient products to fill the retail channel and maximize shelf space.

Current Medical Market in Canada: Opaque

According to Statistics Canada, there are currently 269,500 registered medical cannabis patients in the country. A widely disclosed metric by LPs is the number of patients they have onboarded as there is a perception that the number of patients registered with an LP is indicative of the company’s share of the Canadian medical market. However, we believe this metric alone is a misleading measure for market share as patients can register with more than one LP, a patient may be registered with the LP but not actively ordering products, or a LP could have fewer registered patients but higher average consumption per patient. In addition, we believe there is currently no standardized definition of an “active” patient.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 13 May 28, 2018 As a result, we believe it is important to consider the volume sold, reported revenues, number of registered patients, and implied average consumption per patient (see Exhibit 8 below).

Exhibit 8: Key Publicly Traded Players in the Canadian Medical Cannabis Market

Last Quarter Last Quarter Volume Sold Share of Share of Grams per Avg. Selling (kg) Volume # Patients Patients patient Price ($ / g) Canada 15,616 269,502 58

Canopy 2,330 15% 69,919 26% 33 $8.30 Aurora 1,353 9% 45,776 17% 30 $7.99 MedReleaf 1,263 8% n.a. n.a. $8.64 Aphria1 ~1,000 6% ~40,000 15% 25 $8.30 CannTrust 982 6% 40,000 15% 25 $7.63

Source: Company filings. Note (1): Excludes wholesale to other LPs. Note: BMO Capital Markets is restricted on Aurora Cannabis

We find the current Canadian medical market to be opaque with respect to patient acquisition and churn. Physicians can either directly prescribe their patients for medical cannabis or refer them to a cannabis clinic. In the former, the physician will prescribe a specific dosage, and can also provide product recommendations. Alternatively, the physician can refer the patient to a cannabis clinic where the patient can access further information about which products would be most suitable for their needs.

We understand that both prescribing physicians and cannabis clinics are typically receiving “education fees” from LPs. This may prove to be an inappropriate payment that will eventually be addressed by medical regulators. The challenge in assessing the prevalence of this fee is the lack of disclosure, including the amount typically charged by clinics and physicians. Our view is that since cannabis is closer to an alternative natural health product than a pharmaceutical drug and has no clinical trials, the primary channel for LPs to acquire patients is to encourage physicians through strategic partnerships and cannabis clinics. As a result, we believe these education fees likely represent significant patient acquisition costs for LPs and we have heard anecdotally that they can represent about 15% of the LP’s selling price.

We also consider churn to be a key metric in assessing the competitive dynamics of the medical market. However, there is a lack of disclosure by LPs on this measure and any approximation is challenged by the continued growth in the overall Canadian medical market. Based on our understanding of the industry, we believe churn could be quite high as cannabis products have a wide range of efficacy depending on the individual, and it is likely that patients are trialing numerous LPs’ products to determine the best one(s) for their needs.

Supply & Demand in the Medical Market When Recreational Is Legal

We believe there could be some material changes in both the level of supply and demand in the medical market when the recreational market is legalized. Some existing patients, and potential future patients, could prefer the recreational market given that the latter provides relatively easier access to cannabis than the medical prescription process. However, this may be more than offset if more employers begin to include medicinal cannabis under insurance coverage plans. In addition, medical expenses are tax deductible above a certain threshold. Overall, our Base Case forecast assumes that the industry growth rate for medical patient acquisition slows when the recreational market is legalized. On the supply side, we believe there will likely be a tighter market for medical cannabis in the near term as we expect that most LPs will prioritize their inventory to gain a share of the recreational market.

There is considerable focus on the international opportunity for Canadian LPs as the country’s tenured federal medical framework, expected national legalization of the recreational market, large number of LPs with cultivation experience, and access to capital markets puts Canada at the forefront of the global cannabis opportunity.

In the near term, we believe Germany’s medical market is the primary international opportunity for the Canadian LPs due to its medical legalization, size of population, and a favourable insurance coverage outlook. In a recent report by Prohibition Partners, a cannabis-focused market intelligence firm, the long-term German medical cannabis market opportunity was estimated at €10 billion.

We understand that prior to medical legalization there were only about 1,000 German citizens with permission to use cannabis for serious medical conditions. Since medical legalization in 2017, the country’s three large insurance companies disclosed that there have been 20,000 medical cannabis claims, of which 13,000 were approved for reimbursement. In addition to these claims, there are also private cannabis prescriptions where the patient covers the expense. We understand that German law requires health insurance coverage for medical cannabis, although we have heard that the associated paperwork is onerous and often a grounds for a patient to not qualify for coverage.

Germany’s current medical cannabis framework does not permit domestic cultivation. As a result, the country relies on imports to meet demand. Initially, Germany imported exclusively from a Dutch producer called Bedrocan, but a few Canadian LPs are now focusing on the country. Canadian LPs must wholesale their exports to the pharmacy distributors as only pharmacies are permitted to dispense medical cannabis prescriptions. Currently, retail and wholesale prices (the price shared by distributors and Canadian LPs) in Germany can be as high as $25 and $15 per gram, respectively, due to the supply shortage from a lack of domestic cultivation and prior administrative issues that delayed international companies from being able to import into the country. As a result, Canadian LPs exporting into Germany are receiving much higher wholesale prices than they are receiving in the Canadian medical market. See Exhibit 9 below for LPs that have secured the licenses, Good Manufacturing Process (GMP) certification and distribution partners, and are either already or will begin exporting into Germany.

Exhibit 9: Current Players in the German Medical Market

Canadian LPs Distributors

Aurora Pedanios MedReleaf CannaMedical

Canopy Growth SpektrumCannabis

Cronos Group Pohl Boskamp

Maricann Maricann GmbH GmbH

Tilray Noweda Paesel + Lorei

Dutch LP Dutch Bedrocan Government

Source: Company filings. Note: Aphria is awaiting GMP certification. Note: BMO Capital Markets is restricted on Aurora Cannabis

Notwithstanding these favourable dynamics, we believe the German market opportunity for Canadian LPs should be evaluated carefully. We expect only a handful of the larger LPs will be able to secure the licensing and certifications requirements, and develop the necessary distribution infrastructure in the country. Canadian LPs need an export license from Health Canada, be GMP-certified, and have a distributor partner to supply the fragmented German pharmacy landscape.

We note that achieving GMP certification is a significant undertaking for an LP. In addition, there are varying forms of the GMP standards, some of which may not be recognized in certain jurisdictions. We believe the challenges associated with GMP certification represent a significant hurdle in terms of capital and other investments for the smaller LPs to meet.

We also understand that unlike the Canadian medical market, cannabis producers and distributors are not permitted to communicate directly with patients and education fees are prohibited. In Germany, the prescribing doctor has sole discretion in selecting the LP for the patient, and pharmacies cannot substitute for another producer’s product when dispensing the prescription. As a result, we consider the focus by some Canadian LPs on the number of German pharmacies their distributor partner has relationships with is somewhat misleading as these distributors can supply to any German pharmacy, and it is the doctor who ultimately determines which LP’s product will be prescribed. We believe establishing relationships with doctors is critical in order to become a meaningful player in the German medical market, and such an investment presents another hurdle for the smaller LPs. We understand that there are about 100,000 doctors and 27,000 pharmacies in Germany.

Finally, it appears that favourable economics from German sales have yet to materially contribute to earnings for the participating Canadian LPs. Current exports into the German medical market only represent a modest portion of sales for the handful of Canadian LPs that are able to sell products there.

Long-Term Industry Outlook

Oversupply Expected in the Long Term but Impact on Pricing for LPs Is Uncertain

Based on our outlook for industry demand in Exhibit 3 and our forecast for production output by the Big Three LPs, which we believe will represent the majority of industry supply, we project that supply will catch up with demand in year two and potentially begin to significantly exceed demand likely in the third or fourth year following recreational legalization. It is not clear if this projected supply/demand imbalance will weigh on the cannabis prices realized by the LPs as by then there will be the opportunity to export increasing volumes to international markets, such as Germany, and the introduction of additional product formats (such as vape pens, edibles, and beverages) should provide higher pricing and margins per gram equivalent to compensate for price compression in dried flower.

The analysis in Exhibit 10 following outlines our view that in the long term, the Canadian market will shift from a supply shortage to significant oversupply of dried flower as Canadian LPs complete their facility build-outs. Exhibit 10 highlights that just the production capacity currently being developed by the Big Three LPs will account for eight million of the estimated 11 million square feet of production space required to satisfy total Canadian demand. We note that the eight million square feet does not consider the facility expansions of the other LPs, many of which we understand are also undertaking significant facility developments.

Potential long-term demand in Canada1 (kg) 1,000,000

Avg. Annual Yield from Greenhouse1 (g / sq.ft.) 90

Industry Production Capacity Needed (mm sq. ft.) 11

Big Three Production Capacity2 (mm sq. ft.) 8 (not incl. other 100+ LPs)

Source: BMO Capital Markets. Note (1): Long-term estimates. Long-term demand includes recreational and medical. Note (2): Estimated cultivation space (excludes corporate space). Assumes Aurora acquires MedReleaf. Note: BMO Capital Markets is restricted on Aurora Cannabis

Over the very long term, as dried flower prices continue to settle, and as margins are eroded from the agricultural growing aspect of cannabis, we believe the Canadian market will rationalize into the handful of larger, branded players capable of generating earnings and cash flow through strong brands and quality value-add product formats. In addition, as the industry rationalizes, we believe a number of low-cost producers will evolve into contract cultivation and will supply the large, branded companies. Beyond the large, branded players and low-cost contract cultivators, it is not clear to us how the many other LPs, outside of niche brands, will survive under this pricing environment.

In terms of the types of grow facilities, our view is that indoor cultivation will be challenged in a long- run environment with significant pricing headwinds in dried flower. We understand from our industry discussions that both capital and operating costs of a greenhouse could be substantially less than those of indoor facilities.

Further Long-Term Scenarios

Over the long term, we believe consumers will develop a better understanding of cannabis and be able to segment products based on perceived quality. As a result, although a strong brand may encourage initial trial, there must be perceived product quality and a consistent user experience to validate the brand and generate repeat purchases.

Although we believe the majority of the dried flower category will become a commodity, we highlight some potential industry developments over the long term that we believe could mitigate some of the pricing headwind from an oversupply of dried flower:

 If many LPs experience challenges in ramping their facilities, it would delay the onset of an industry oversupply and enable LPs participating in the early recreational market to continue earning favourable unit economics for a longer period of time.

 If LPs are able to establish strong brands and consumers perceive their products to be high quality, these LPs could potentially have some leverage on pricing.

 The eventual legalization of value-add formats such as vape pens, edibles, and beverages would create areas for more product differentiation. In addition, additional formats could appeal to new cannabis users and expand the size of the recreational market. See “New Product Formats” section following.

 Demand from international markets could alleviate some, and potentially all, of the anticipated oversupply in Canada. Several EU countries with a legal medical framework are already importing products from Canada. In addition, there are other jurisdictions progressing towards legalizing cannabis for medical use. See “The Path to Global Legalization…” section following.

In Washington, for example, while dried flower still remains a sizable portion of the market in terms of sales, the value-add product formats (derived from cannabis extracts) have experienced notable growth and are capturing a greater share of industry sales (see Exhibit 11 below). There is a view that current product mix in U.S. states may not fully reflect the potential of the future Canadian market as many value-add formats in the U.S. are generally considered poor quality, which may be limiting uptake.

Exhibit 11: Product Mix in Washington (% of Sales)

Source: Analysis of WA LCB seed-to-sale. Carnegie Mellon University Heinz College.

We believe the Canadian industry’s investment in large-scale greenhouses is both a strategy to reduce production costs and also a belief that consumer demand will shift significantly from dried flower to value-add formats derived from cannabis extracted oils. If these product derivatives ultimately capture a sizable of the market, most dried flower will be extracted and under such a scenario, the aesthetic features of dried bud would become less important, and cannabis cultivation in greenhouses would be more cost effective than indoor.

An opportunity from legalizing these formats is the potential for a significant expansion in the user base of the recreational market. We note that vape pens have become a fast-growing category in U.S. markets as novice and first-time users prefer the product for its discrete and easy-to-use format. As well, there could be a further broadening of the recreational market to non-users of the traditional flower format if mainstream product mediums, such as cannabis-infused beverages, are legalized.

Value-add formats could also potentially offset the decline in dried flower pricing on LPs’ profitability by allowing more market segmentation and premium branding, and those with perceived better quality could command premium pricing, which we found to be the case in Denver and LA. We believe this price differential arises from the level of processing know-how and innovation required to manufacture these formats and the resulting ability to develop stronger brands.

However, we note there are some risk factors associated with the value-add product categories:

 If Canadian regulatory delays preclude these formats from the recreational market for longer than expected, it would exacerbate the scope of dried flower oversupply as LPs would be unable to divert excess dried flower to be extracted and processed into these other formats.

 Relative to the proliferation of formats in the U.S. markets, the legal Canadian market has only been permitted to produce and sell dried flower and oils. As a result, we believe there is a risk that the level of expertise and technology possessed by Canadian LPs to develop quality value- add formats is limited, which could result in poorly made formats that discourage consumer adoption for some time.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 18 May 28, 2018  We observed in Denver and LA that packaging was a key branding tool for companies to differentiate their value-add product formats. We believe Health Canada’s proposals, if enforced, would materially impair Canadian LPs’ ability to communicate their branding and their products’ features to consumers.

The Path to Global Legalization and Potential Impact for Canada

Currently, the international flow of controlled substances is governed by three United Nations treaties: the Single Convention on Narcotic Drugs, the Convention on Psychotropic Substances, and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. As a result of these treaties, international trade of cannabis is only permitted for medical purposes and countries must have a legal federal framework in order to participate. Countries that legalize recreational use must satisfy demand with domestic production.

Although the pace for global legalization is unclear, there is a view that medical legalization will continue to take place across various jurisdictions, particularly in the European Union. Some industry forecasts have sized the global cannabis market opportunity at about $55 billion by 2025. We understand that in addition to Germany, other European countries with a legalized medical framework implemented are Denmark, Italy, the Netherlands, and Poland. However, only a few European countries such as Denmark and the Netherlands have permitted domestic production and exporting under certain circumstances. Outside of Europe, we note that Israel has a significant history in cannabis research and cultivation, but the Israeli government has not yet permitted exports from the country.

We believe the current international opportunity for Canadian LPs, which is the ability to export products into other markets at favourable economics, will prove to be transitory. Over the medium term, countries where Canadian LPs are currently exporting to could establish domestic cultivation. We note that Germany recently undertook a tender process to issue cultivation licenses and we understand that a number of Canadian LPs were involved in the process. However, on March 28, a German court temporarily halted the process. In the interim, Canadian LPs can continue to export products into the German medical market without the potential for displacement from domestic production. However, a negative read-through from the German court ruling is that a new tender process could favour German companies over Canadian LPs. If a new tender process results in most or all of the licenses being awarded to German LPs, we believe there could still be an opportunity for Canadian LPs as strategic partners given that German companies would have limited experience in cannabis cultivation and processing. This partnership approach may become the avenue in which Canadian LPs participate in the growth of domestic production in international markets given their significant expertise in cultivation, processing, etc.

Over the long term, we believe there will be countries with favourable climates and lower wage rates (such as Colombia, Jamaica, and Israel) that emerge as the low-cost growers of dried flower for medical export. The potential for Israel to become a competitor to Canada in the international export market could be a near-term risk if the Israeli government permits exports from the country. As a result, we believe the long-term global opportunity for Canadian LPs is developing intellectual property in areas such as the development of new strains through genetic modification, cannabinoid isolation and formulation for advanced medical applications, and new technological innovations for value-add formats. As well, the current environment is providing Canadian LPs with the unique opportunity to develop the first global brands.

Although there are several state-level medical and recreational markets, the classification of cannabis as a Schedule 1 drug by the U.S. federal government confines the operations of U.S. cannabis companies within their state. As a result, U.S. cannabis companies lack scale and are restricted from participating in international markets, all of which have created a favourable competitive environment for Canadian LPs. We believe there would be significant disruption to Canadian LPs if the U.S. legalizes cannabis on a

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 19 May 28, 2018 federal level. Such a scenario would see increased competition to supply international markets. In addition, we believe this scenario would exacerbate Canada’s domestic oversupply issue and LP margins would erode further if Canada was to permit imports of dried flower from the U.S., where wholesale prices are as low as $2 per gram.

Finally, we note that our discussion only considers the global medical market. The additional long-term upside would be if other jurisdictions consider recreational legalization and we understand that Malta is currently drafting legislation to legalize recreational use. If Malta establishes and implements a framework legalizing the recreational market, we believe this could set a precedent that encourages potential recreational legalization in other European countries. Should other countries legalize recreational cannabis, Canadian LPs must establish cultivation in those markets in order to participate as suppliers as the UN treaties prevent international trade of cannabis for non-medical purposes.

Evolution of the Canadian Medical Market

Over the long term, we believe the Canadian distribution model for medical cannabis will expand beyond the current channel where LPs ship product directly to the patient. We note the industry generally expects that regulations will eventually permit pharmacies to dispense medical prescriptions. Pharmacy chains including Shoppers Drug Mart and Pharmasave have already signed supply agreements with several LPs (see Exhibit 12 below).

Exhibit 12: Notable LP Supply Agreements With Pharmacies

Shoppers Drug Mart Pharmasave Aphria CanniMed Aurora Delta 9 Cannabis MedReleaf Tilray Tilray Zenabis Source: Company Press Releases Note: BMO Capital Markets is restricted on Aurora Cannabis

If pharmacies are permitted to dispense prescriptions, we believe the potential uplift to Shoppers’ same-store sales (SSS) could be significant as a result of higher pricing for medical cannabis relative to other prescriptions. For medical cannabis, average retail pricing is around $7.50 per gram for dried flower with average daily consumption of just under a gram, compared to generic drug prescriptions where prices per day can be as low as the pennies range. We believe there is also potential upside for Shoppers’ front-of-store sales as a result of increased traffic from medical cannabis patients. The following Exhibit 13 illustrates our scenario on the potential impact to Shoppers.

However, we believe the same pricing headwind that will ultimately pressure the recreational market due to anticipated oversupply will also impact the medical market. Based on this consideration, our analysis of the financial impact to Shoppers may be overstated if prices decline by the time regulations allow pharmacies to dispense prescriptions.

Prescription assumptions Canadian population (mm) 37 % with medical marijuana prescriptions 2.0% Canadian population with marijuana prescriptions (mm) 0.7

Shoppers' current prescriptions / year (000s) 124,085 Total Canadian prescriptions / year 000s) 366,611 Implied market share 33.8%

Shoppers' share of population with marijauna prescriptions (mm) 0.25 Prescription duration (months) 9 Prescriptions per person year 1.33 Prescriptions per year (mm) 0.333

Grams per prescription 230 Selling price per gram $7.50 Selling price per prescription $1,721 Pharmacist pays to manufacturer (1,721) Professional allowance (12.5%) 215 Mark-up at 8% of selling price 138 Dispensing fee (fixed $) $8.83 Pharmacy pays first $2 of co-pay ($2.00) Revenue per script $2,083 Incremental marijuana revenue per year (mm) $693

Impact on SSS Shoppers 2019E prescription revenue (mm) $6,265 Pharmacy SSS 2.5% Marijauna revenue (mm) 693 Shoppers 2019E prescription revenue incl. marijauna (mm) $6,958 Implied pharmacy SSS 13.8%

Source: BMO Capital Markets.

Currently, medical cannabis is closer to a natural health product than a pharmaceutical drug as there are no clinical trials, only circumstantial anecdotes from patient feedback. We believe there have been limited clinical trials thus far partly due to cannabis’ classification as a controlled narcotic substance in most countries. In addition, although Canada has legalized the medical market for some time, the framework that initiated the emergence of commercial-scale LPs was only implemented in mid-2013. We also believe the classification of cannabis as a Schedule 1 substance by the U.S. federal government has precluded the large pharmaceutical companies from entering the industry in a meaningful way up to this point.

Over the long term, we believe Canadian LPs could eventually be in a position to make efficacy claims that are supported by clinical trials. At that point, medical cannabis could qualify for a Drug Identification Number (DIN), which we believe would be a significant catalyst to accelerate growth of the medical market. We believe the current reluctance by many physicians to prescribe cannabis is the lack of clinical evidence on efficacy, safety, etc. A DIN would transition cannabis towards becoming considered a pharmaceutical drug and encourage more physicians to prescribe. In addition, a DIN would qualify medical cannabis for broader insurance coverage.

The Potential Role of Hemp

Although hemp is genetically a variety of cannabis, its legal definition makes it distinct from cannabis. Hemp is a cannabis variety with THC content below 1%; in Canada, the THC content threshold to qualify as hemp is below 0.3%. In addition, in Canada, the cultivation of hemp is only permitted for industrial applications, such as the manufacturing of paper, textiles, rope or twine, and construction materials. Grain from industrial hemp can be used in food products, cosmetics, plastics, and fuel.

We believe the cultivation of hemp for CBD extraction, if legalized, could be eventually modified to yield higher CBD potency, which could potentially disrupt the growing of cannabis for CBD. In such a scenario, low-THC cannabis strains grown by LPs in indoor facilities or greenhouses could become uneconomic

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 21 May 28, 2018 given the cost advantage of hemp, which can be grown outdoors at a materially lower cost. Furthermore, if hemp cultivation for CBD extraction is legalized, we believe the products from this channel could fall under the natural health product category. Such an opportunity could attract a company like Jamieson Wellness (JWEL-TSX; $24.05; Outperform) into the space, whether as a producer of such products or as a strategic partner to a LP, given the company’s leading position in the Canadian natural health industry. However, the potential for disruption in CBD extracted from hemp may be limited as we understand that current CBD yields from hemp are modest, which if unchanged over the long term, would limit the scope of cannabis strains that could be displaced by the extraction of CBD from hemp.

Evolution of Canadian LPs’ Business Model

Currently, the LP medical business model is vertically integrated from cultivation to direct-to-consumer sale. The recreational business model will also be relatively integrated from cultivation to wholesale, and in some provinces, LPs will also be able to own and operate retail stores.

Over the long term, we believe cannabis cultivation will become a low-margin, commoditized part of the supply chain and will be taken up by agriculturalists. Furthermore, if cannabis is legalized on a global basis, we would expect that there will be other countries emerging as the low-cost cultivator of dried flower. As a result, we believe many Canadian LPs will exit the cultivation business over time. However, it is unclear to us what the exit strategy would be as these companies have made significant capital investments into their large cultivation facilities.

Canadian LPs have a unique opportunity to become global leaders in this evolution due to the comprehensive legal framework for both medical and recreational cannabis in Canada, and due to LPs’ access to funding in Canadian capital markets.

We believe the Canadian LP business model will eventually evolve to focus on intellectual property and branding. The areas for intellectual property development could include the technology and expertise in manufacturing value-add formats, pharmaceutical innovation that could be patented and/or receive a DIN, and genetic modification to create custom cannabinoid formulations and new strains with better efficacy to address specific needs and ailments (see Exhibit 14).

Exhibit 14: Potential Transformation of the LP Business Model in the Long Term Present Long-term

Cultivation Farming Licensed Producer

Licensed Producer Cultivation

Intellectual Property Branding Extraction

Wholesale & Retail Value-add format Pharmaceuticals Formulation & genetic manufacturing modification

Source: BMO Capital Markets.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 22 May 28, 2018 It is also possible that the larger, branded LP companies could ultimately be acquired by large CPG players in the beverage and tobacco industries, or pharmaceutical companies given the potential disruption cannabis-extracted products could present for these legacy sectors.

Assessing Valuations: Are We in a Bubble?

We believe current valuations in the industry reflect three key expectations:

 That the Canadian recreational market is a sizable and untapped market.

 Constellation Brands’ investment in Canopy established a view that there will be significant upside when new product formats, such as beverages, are developed and legalized and displace incumbent industries, such as the alcohol sector. These value-add products should have higher price points and offer the possibility of much higher margins.

 That there will be a rapid legalization of medical cannabis across numerous countries and Canadian LPs will be able to fulfill this demand through exported products.

In the near to medium term, we believe valuation multiples among the LPs could potentially expand as all the provinces/territories announce their supply chains, LPs ramp to fill the distribution channels, and the level of legal demand emerges. Over the long term, we anticipate that only a handful of companies will be attributed a premium valuation. These long-term industry leaders will be the companies that win the initial supply agreements and capture sizable shares of the near-term recreational market, and possess the scale and resources to invest in brand development and value-add format manufacturing and also capitalize on the gradual legalization of international medical markets.

Track Record of LPs’ Management Teams

The legalization of medical and recreational cannabis in Canada has created a new industry with many unprecedented developments. The sizable opportunities in the industry, such as the gradual legalization of international medical markets and a sizable domestic adult-use market, have attracted a large number of entrepreneurs. We note that there is a wide range of background experiences among the founders and CEOs of these LPs, from former illicit market operators, financial professionals, and small businessmen to serial technology entrepreneurs. The entrepreneurial track records for some of the management teams have been uneven. Although there is inherently a degree of volatility in managing entrepreneurial ventures, we believe management track record will be a key aspect for investors to consider when assessing the level of execution risk for these companies.

Exhibit 15 below outlines the key metrics in which to assess LPs. However, we add the caveat that several of the KPIs, particularly cost of production, are not as meaningful at this stage as the LPs are not yet at scale. In addition, we note that most LPs have grown primarily in indoor facilities and are just beginning to build out and ramp their greenhouses.

Exhibit 15: Benchmarking Analysis

Aphria3 Canopy

Production Capacity1 sq. ft. Currently Fully Ramped 126,000 560,000 Total Capacity In Future 2,055,000 3,961,600

Components of COGS - Last Q $ / g Cash Cost to Produce Dried Cannabis2 $0.96 $1.03 Depreciation Related to Cultivation $0.33 In D&A expense Packaging Packaging, Fulfillment $0.26 Packaging, Fulfillment, Shipping $1.50 What's in Sales & Marketing expense? Shipping None

Medical Market Share # of Registered Patients 40,000 69,919 Last Q Volume Sold3 kg 1,000 2,330 Last Q Per Patient Use g / patient 25 33

Last Q Industry Volume kg 15,616 15,616 Share of Market by Volume3 % 6% 15%

Last Q Cannabis Sales3 $ mm ~$8,300 $19,340

Last Q Avg. Selling Price3 $ / g $8.30 $8.30

Distribution Agreements QC, NB, Nfld, Provinces signed so far QC, NB PEI, Yukon Pharmacies signed so far Shoppers None

Source: BMO Capital Markets, company filings. Note (1): BMO's estimate of total cultivation space. Excludes non-cultivation space. Note (2): Cash cost from cultivation to trimming and drying into bulk dried flower form. Note (3): Excludes wholesale to other LPs.

Our Investment Thesis

We are initiating coverage of Aphria with an Outperform rating.

Near-term market leader in recreational market: In an industry where restrictive marketing and packaging regulations may significantly limit product differentiation, we believe the key near-term success factor for LPs will be to secure in-store shelf space for their products. However, based on our visits to most of the larger Canadian LPs’ facilities, where many are still under construction or waiting for licenses, we are concerned that the majority of companies will not have the inventory or production capacity to meaningfully participate in the near-term market. Following our recent visit to the Aphria One facility in Leamington, Ontario, we believe the company will be one of the few LPs with sufficient product to supply the initial recreational demand and we believe such a “first mover” advantage should enable the company to quickly capture significant share and generate attractive unit economics in an undersupplied market.

Potential to be a leading low-cost producer: In the long term, we believe cannabis cultivation will become a commoditized activity. We note that the majority of LPs intend to counter this through brand development and/or an expectation that they will be the low-cost producer. Our view is that most LPs will not be able to generate sustainable margins from cultivation at scale, but we believe Aphria could emerge as a leading low-cost cannabis producer given the significant commercial-scale greenhouse cultivation expertise held by the management team and the infrastructure and greenhouse culture that is inherent in the Leamington, Ontario community. Following our recent visit to the company’s Leamington facility, we were impressed with the level of innovation and know-how behind the construction and design of the greenhouse, as well as the cultivation best practices being implemented.

Potential upside through participation in long-term opportunities: We believe Aphria could emerge as an industry leader over the long term based on our view that the company’s scale will facilitate meaningful investment in areas such as brand development, value-add formats, and the gradual legalization of international medical markets.

Current valuation relative to peers: As a result of the perceived issues associated with Aphria’s recent acquisition of Nuuvera, we believe there has been pressure on Aphria’s stock, resulting in a lower valuation relative to many of the other larger LPs, and thus, provides the opportunity for a better potential return. A further discussion of the Nuuvera transaction is found later in this report.

Our target price of $17 is based on a projected enterprise value that is about 17x our Base Case fiscal 2020 EBITDA estimate. We believe the forward multiple of 17x is appropriate based on a number of considerations:

 This is within the valuation range attributed to Canadian consumer discretionary stocks, with Dollarama (DOL-TSX; $150.91; Market Perform) at the high end.

 We note that our Base Case fiscal 2020 EBITDA estimate assumes that Aphria’s facility expansions are only at 65% of full ramp potential versus management’s expectation that the facilities will be close to 100% capacity by that time. In our Upside Case, we assume that the facilities achieve 75% of full ramp and Aphria experiences firmer selling prices, and based on that scenario, our $17 target price would represent a multiple of 12x our Upside fiscal 2020 EBITDA estimate. If the Upside scenario were to unfold, our implied target multiple would generally be towards the lower end of the valuation range for Canadian consumer stocks.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 25 May 28, 2018  If these facilities reach full capacity by fiscal 2020, which is above and beyond our Upside scenario, Aphria’s EBITDA generation would be even higher and under these circumstances, our implied target multiple would be in the high-single-digit range.

BMO Base BMO Upside Management

Production as 65% 75% 100% % of Full Ramp Target Price $17 $17 $17 Implied Target Multiple (off fiscal 17.0x 12.0x 9.0x 2020 EBITDA)

Source: BMO Capital Markets.  The 17x forward multiple (based off our Base Case fiscal 2020 EBITDA estimate) is generally higher than the valuation multiples attributed to the brewery and tobacco stocks, although in the context of spirits companies (see “Comparable Companies – Alcohol & Tobacco”). We believe the cannabis industry offers substantially higher growth opportunities and potentially higher EBITDA margins as the Canadian recreational market expands, value-add product formats are legalized, and more international jurisdictions establish medical regulatory frameworks.

Possible Scenarios

Our forecast horizon in terms of earnings estimates consists of fiscal 2019 and fiscal 2020. We have three scenarios: Base, Upside, and Downside. See Exhibit 16 below.

Our outlook for Aphria’s ramp over the next two fiscal years is below that of management’s expectations as we believe all LPs will likely encounter challenges to ramp their significant grow facilities. We believe initial aggregate demand from the Canadian medical and recreational markets will satisfy industry supply and Aphria will be able to sell all that it can produce in the near term. Our demand projections assume that international sales during this period are minimal; however, if international sales were to develop at a faster rate than we anticipate, then overall demand could be even stronger than we are forecasting.

Exhibit 16: BMO Research’s Scenarios for FY2020

($ mm unless otherwise stated) Base Upside Downside

Total Production (kg) 144,075 161,625 118,250

Avg. Selling Price - Medical $8.50 $8.50 $8.50 Blended Wholesale Price - Recreational $5.00 $5.50 $4.00

Cost of Production ($ / g) Cash cost to produce $0.85 $0.80 $1.00 Packaging + fulfillment $0.25 $0.25 $0.25 Depreciation $0.30 $0.30 $0.30

Total Revenues $740 $908 $494

Adj. EBITDA to Aphria S/Hs1 $283 $404 $147

Source: BMO Capital Markets. Note (1): After deducting minority interest in Aphria Diamond.

Risks to Consider

In terms of risks that are common to the larger LPs, we note that Aphria is in the process of undertaking a dramatic increase in production. In fiscal Q3/18, Aphria produced just under 1,700 kg of cannabis. However, based on our Base Case projections, we estimate that the company’s current expansion plans will provide Aphria with 29,000 kg of production in fiscal 2019, and 144,000 kg of production in fiscal 2020. We believe an expansion plan of this magnitude is subject to considerable execution risk, and hence our more conservative ramp projections versus management’s expectations.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 26 May 28, 2018 In addition, many LPs are establishing brands for the recreational market. At this time, the LPs (including Aphria) have only provided limited details surrounding their brand development and marketing strategies. In addition, we note that there is a strong possibility of significant regulatory restrictions on the scope of marketing and branding activities that can be undertaken by the LPs. As a result, it is difficult for us to assess which brands, including those of Aphria’s, will ultimately emerge with adequate market share.

Overview of Aphria

Aphria is a Canadian-based licensed cannabis producer with two operational facilities in Ontario and British Columbia. The company is currently expanding both facilities. In addition, the company has a strategic relationship with Double Diamond Farms, a Leamington-based greenhouse grower, to operate a 1.3mm sq. ft. greenhouse. See Exhibit 17 below.

Exhibit 17: Current and Future Production Facilities

Current Annual Production Future Annual Production Base Case Long-term 1 1 Total Size Est. Annual Total Size Production in Potential Annual 2 2 2 Facility Location Type (sq. ft.) Production (kg) (sq. ft.) FY2020 (kg) Production (kg)

Aphria One Ontario Greenhouse 100,000 10,000 1,000,000 65,750 85,000

Aphria Diamond Ontario Greenhouse 1,300,000 71,825 110,500

Broken Coast B.C. Indoor 26,000 2,600 100,000 6,500 10,000

International Operations

Exhibit 18: Overview of International Operations

Aphria's Presence Corporate Import & Strategic Domestic Country Legal Status of Cannabis Entity Distribute Investment Production R&D Overview of Operations Joint exclusivity on a supply agreement with an Argentina Legal medical  Argentinan pharmaceutical importer and distributor. 33% investment in Althea, a licensed Australian medical producer. Althea intends to import product from Aphria until construction of its facility is complete.

Supply agreement with Medlab Clinical. First Australia Legal medical    Aphria shipment in October 2017. Medlab intends to use the product for trials on oncology patients.

Supply agreement with an undisclosed company that will conduct clinical trials focused on animal health.

Exclusive supply agreement with Colcanna SAS, a Colombia Legal medical  pharmaceutical importer and distributor.

Nuuvera: supply agreement to export 1,200 kg to Germany Legal medical  CC Pharma GmbH, a pharmaceutical distributor. 25% stake in Berlin-based Schöneberg Hospital.

Italy Legal medical  Nuuvera: holds one of seven import licenses.

Nuuvera: supply agreement with Verve Dynamics Lesotho Legal medical  for THC and CBD isolates.

Acquired ASG Pharma, a GMP-certified lab that Malta Legal medical    will be a production hub for Europe.

Majority interest in a licensed, GMP-certified laboratory in Alicante. Spain Limited legal medical    Also a 30% stake in CAFINA to purchase cannabis and hemp for CBD extraction.

Agreement to import pharma-grade CBD isolate United Kingdom Controlled substance  (up to 30kg / month).

Source: Company filings.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 27 May 28, 2018 As we noted in the industry section of this report, we believe Germany’s medical market is the primary near-term international opportunity for the Canadian LPs. However, we note there are several hurdles a Canadian LP must meet in order to be able to export product into the German medical market: have an export license from Health Canada, GMP-certification, and a distributor partner with supply relationships in the fragmented German pharmacy landscape.

We note that Aphria is currently in the process to receive GMP certification and after the company has met all the regulatory hurdles, it can begin to fulfill the 1,200 kg order received from CC Pharma GmbH.

Brand Development

Currently, Aphria has publicly announced two brands as part of the company’s go-to-market strategy for the recreational market. The company indicated that additional house-brands will be developed. See Exhibit 19 below.

Exhibit 19: Portfolio of Brands

Positioned to Premium brand Medical brand demystify the cannabis experience for existing and novice users alike

Source: Company filings.

Nuuvera Acquisition

Aphria recently closed the acquisition of Nuuvera, a Canadian cannabis company holding the only cannabis GMP-certified lab in Canada (Avanti). In addition, Nuuvera has made progress in securing joint ventures and supply agreements in many international markets, which made it an appealing acquisition for Aphria. The transaction was initially valued at about $800 million, but largely due to the decline in the sector’s valuation, and to a lesser extent due to renegotiation, the transaction value was about $450 million by the time of the closing. The acquisition caused considerable controversy as a number of the senior officers and directors of Aphria were also shareholders of Nuuvera through their participation in the early financing of Nuuvera and owned under 1% (740,000 shares) of the company. This senior officer/director group included four executives and three other directors, including the CEO and CFO of Aphria. The Aphria senior officer/director group was legally under no obligation to report their holdings as shareholders of Nuuvera, and as the transaction was structured as a Plan of Arrangement as opposed to a takeover bid, the holdings of the group were not disclosed in the transaction documents.

Our view is that the senior management teams of most of the LPs are inherently highly entrepreneurial, and as a result, we were not that surprised to find that Aphria’s officers had invested in the early financing rounds of another cannabis company. We would not be surprised if there are other instances in the sector of senior managements investing in the early financing rounds of other companies, as typically there is a “President’s List” to provide shares for persons close to the company. The acquisition value of the shares owned by the senior officer/director group was about $4 million in aggregate (of which the benefit was lower as they would have had some cost). After considering the relative magnitude of the modest benefit that accrued to the senior officer/director group compared to the sizeable potential value creation from their holdings in Aphria, the fact that the transaction was structured so the group took mostly stock in Aphria, and that the cash component was negotiated down

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 28 May 28, 2018 from $1.00 to $0.62 per Nuuvera share, we do not believe that the Aphria group’s intention with respect to the Nuuvera acquisition was contrary to the best interest of the company. However, we believe the group did not fully appreciate the potential level of sensitivity that could be directed towards these developments.

Other Notable Strategic Investments

Exhibit 20: Overview of Select Strategic Investments Joint venture between Aphria (51%) and Double Diamond (49%). Aphria Diamond Construction of 1.3mm sq. ft. greenhouse.

HIKU Brands 7.5% (just under 10% diluted) interest. Aphria is listed as a preferred (HIKU-CNSX) supplier to HIKU.

33% interest. Althea is an Australian licensed medical producer. Althea Company Althea will import from Aphria until construction of its facility is complete.

Under 10% interest. Joint distribution of medical cannabis to the Tetra Bio-Pharma Maritimes and Quebec; Aprhia will supply cannabis to Tetra for (TBP-CSE) packaging and formulation at Tetra's New Brunswick facility. Tetra is also conducting clinical trials.

Under 10% interest. Resolve is developing a medical device system Resolve Digital that delivers a metered dosage of cannabis oil or bud through a pre- package single use Smartpod.

Cumulative investment by Aphria: $1.2mm (total commitment of Green Acre Capital $2mm). Green Acre Capital is a private investment fund focused on the Canadian cannabis sector.

Source: Company filings.

Current Operations and KPIs: Medical Only

Given that the recreational market in Canada remains an illicit industry, Aphria’s current operations to- date only serves the medical end market in Canada. We note that Aphria’s reported volume sold and revenues include the wholesale of product to other LPs. See Exhibit 21 below.

Exhibit 21: Aphria KPIs

KPI FQ1/17 FQ2/17 FQ3/17 FQ4/17 FQ1/18 FQ2/18 FQ3/18

Market Share Registered Patients - Canada 269,502 Registered Patients - Aphria ~40,000 Market Share by Patients 15%

Volume Sold - Canada (kg) 15,616 Volume Sold - Aphria (kg)1 585 639 653 738 852 1,237 1,428 Market Share by Volume 9%

Sales KPIs for Aphria Total Sales ($ 000s)1 $4,376 $5,227 $5,119 $5,718 $6,120 $8,504 $10,267

Cost KPIs for Aphria ($/g) Cash Cost to Produce Dried Cannabis $1.23 $1.26 $1.73 $1.11 $0.95 $1.45 $0.96 Packaging & Fulfillment Cost $0.14 $0.17 $0.14 $0.20 $0.20 $0.27 $0.26 Depreciation $0.43 $0.36 $0.36 $0.36 $0.46 $0.40 $0.33 Shipping cost is included in Sales & Marketing expenses.

Source: Statistics Canada, company filings. Note (1): Includes wholesale to other LPs.

Despite the uncertainty on the date of initial legalization, provincial/territorial governments have already begun to establish their supply chains. Most provincial/territorial governments will purchase cannabis from LPs on a wholesale basis to distribute into the retail channel. As a result of this regulated supply chain, securing provincial/territorial supply contracts will be critical for LPs to access recreational markets. See Exhibit 5 in the industry section of this report for more details on each province’s/territory’s supply chain model.

At this point, Quebec, Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and Yukon have publicly announced LP suppliers. So far, Aphria has announced a supply agreement with Quebec and New Brunswick for the recreational markets and with Shoppers Drug Mart in anticipation that future regulations will permit pharmacies to dispense medical cannabis prescriptions. In addition, Aphria announced that Great North Distributors (GND) will be the company’s exclusive manufacturer’s representative for the recreational market. GND is a subsidiary of Southern Glazer, which is North America’s largest wine and spirits distributor. See Exhibit 22 below.

Exhibit 22: Aphria’s Recreational Go-to-Market Strategy by Province

TBD

TBD TBD

Quebec TBD 1 of 6 LPs TBD signed TBD 3-year term Max 12,000 TBD TBD kg / yr

New Brunswick 1 of 5 LPs signed 2,500 kg

Source: Company filings.

Company History and Recent Developments

Aphria’s wholly owned subsidiary, Pure Natures Wellness (PNW), which operates the Leamington greenhouse facility (Aphria One), is licensed to produce and sell medical cannabis under the ACMPR regulatory framework. PNW received its cultivation and sales licenses in November 2014, followed by a sales license for cannabis extracts (i.e., oil) in August 2016. In March 2017, Aphria shares were listed on the TSX. See Exhibit 23 below for recent notable developments.

M&A / Strategic Facility Supply or Retail International Investments Development Agreements Expansion

May 2018 January 2018 Announces 25% Announces investment in Berlin- acquisition of based Schöneberg Nuuvera Hospital

January 2018 February 2018 March 2018 April 2018 May 2018 Announces Aphria Quebec Signs jointly Appoints Chief Signs exclusive Diamond joint exclusive supply Commercial Officer, supply agreement venture agreement with Chief Legal Officer with Colcanna SAS, February 2018 Argentinian importer and governance a Colombia importer Signs offtake policies and distributor January 2018 agreement with Broken Coast facility Verve Dynamics, a March 2018 acquisition licensed producer in Acquires ASG May 2018 Lesotho Pharma, a GMP lab Signed exclusive in Malta agreement with January 2018 Great North New Brunswick Distributors

Source: Company filings.

CEO Profile: Vic Neufeld

Vic Neufeld was appointed CEO of Aphria in June 2014. Prior to this, Mr. Neufeld was CEO of Jamieson Laboratories (now Jamieson Wellness) from 1993 to 2014. During his tenure as CEO, Jamieson increased sales from $20 million to over $250 million, grew its market share from 7% to 25% and established its brand across 44 countries. Mr. Neufeld was also previously a Partner with Ernst & Young. He holds a Bachelor’s degree in Economics from Western University and an Honours degree in business and an MBA from the University of Windsor.

The two founders of Aphria, Cole Cacciavillani and John Cervini, have had long careers in the agricultural and greenhouse industry.

Aphria Inc. Income Statement for the Fiscal Year ended May 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020 Old COGS reporting New COGS reporting

Revenue $8,434 $20,438 $34,482 $148,440 $740,063

Cost of goods sold, net 1,861 3,599 Amortization 590 986

Inventory production costs 8,356 41,735 202,505 Gross Margin before fair value changes 5,982 70.9% 15,854 77.6% 26,126 75.8% 106,705 71.9% 537,558 72.6%

Unrealized (gain) on changes in fair value of bio assets 5 (1,444) (11,482) - - Inventory expensed to cost of sales 7,250 - - Reported Gross margin 5,977 70.9% 17,298 84.6% 30,358 88.0% 106,705 71.9% 537,558 72.6%

General + administrative 2,425 28.8% 4,678 22.9% 10,502 30.5% 50,000 33.7% 80,000 10.8% Selling, marketing + promotion 3,598 42.7% 6,664 32.6% 12,758 37.0% 90,000 60.6% 140,000 18.9% Research + development 220 2.6% 492 2.4% 430 1.2% 5,000 3.4% 10,000 1.4%

EBITDA (267) nmf 5,463 26.7% 6,668 19.3% (38,295) -25.8% 307,558 41.6% Adj. EBITDA attributable to Aphria shareholders1 (41,039) 282,958 0.0% Amortization 362 4.3% 956 4.7% 2,070 6.0% 22,500 15.2% 35,000 4.7% Impairment of intangible asset 3,500 - - - Share-based compensation 462 2,399 16,668 32,000 35,000

Operating income (1,091) nmf (1,392) nmf (12,070) -35.0% (92,795) -62.5% 237,558 32.1%

Other (income) expenses (289) (4,996) (42,847) - - Finance expense (income), net (728) (1,533) 8,000 13,500

Earnings before tax (802) nmf 4,332 nmf 32,310 93.7% (100,795) -67.9% 224,058 30.3%

Incom tax expense (recovery) (1,200) 134 8,139 - 56,014

Net income 398 nmf 4,198 nmf 24,171 70.1% (100,795) -67.9% 168,043 22.7% Non-controlling interest - 1,176 10,600 Net income attributable to Aphria shareholders 24,171 70.1% (101,971) -68.7% 157,443 21.3%

Earnings per share - Basic $ 0.01 $ 0.04 $ 0.18 $ (0.40) $ 0.62 - Diluted $ 0.01 $ 0.04 $ 0.17 $ (0.38) $ 0.59

Weighted average shares outstanding - basic 58,443 104,341 157,168 255,910 255,910

Weighted average shares outstanding - diluted 58,443 111,428 164,776 268,707 268,707

Source: Company filings, BMO Capital Markets. Note (1): Excludes fair value changes in biological assets and non-recurring expenses. Backs out non-controlling interest.

Aphria Inc. Cash Flow Statement for the Fiscal Year ended May 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020

Net income (loss) after income taxes $398 $4,198 $24,171 ($100,795) $168,043

Income tax expense (recovery) (1,200) 134 Change in fair value of biological assets 5 (5,005) Depreciation and amortization 952 1,942 2,070 22,500 35,000 Gain on sale of capital assets (7) (11) Disposition and usage of bearer plants 67 Impairment of intangible assets 3,500 Accrued interest on convertible note advanced to debtors (34) Profit from equity accounted investee (210) Amortization of finance fees on long-term debt 5 Gain on marketable securities (209) Share-based compensation 462 2,399 16,668 32,000 35,000 Unrealized gain on long-term investments (6,312) Realized loss on long-term investments 2,741 Consulting revenue (512) Change in non-cash working capital (1,598) 2,633 (4,488) (26,500) (33,000) Net cash from operating activities (988) 5,326 38,421 (72,795) 205,043

Share capital issued, net of cash issuance costs 10,315 204,408 195,661 - - Share capital issued on warrants exercised 6,065 23,039 Share capital issued on stock options exercised 975 Advances from related parties 1,140 388 Repayment of amounts due to related parties (1,140) (852) Proceeds from long-term debt, net of finance fees 32,825 - 300,000 - Repayment of long-term debt (644) - - - Net cash from financing activities 16,380 260,139 195,661 300,000 -

Issuance of promissory notes receivable (200) - Repayment of promissory notes receivable 232 568 Investment in capital assets (4,426) (66,416) (200,000) (200,000) (200,000) Business acquisitions (55,697) - - Proceeds from disposal of capital assets 37 33 Investment in intangible assets, net of shares issued (54) (1,306) Convertible note advanced to debtors (1,500) Purchase of equity investments (25,366) Investment in marketable securities (109,269) Proceeds from disposal of marketable securities 22,131 Investment in long-term investments (1,560) (28,097) Proceeds from divestiture of long-term investments 7,196 Net cash from investing activities (5,971) (202,027) (255,697) (200,000) (200,000)

Net cash inflow (outflow) 9,421 63,438 (21,615) 27,205 5,043 Cash and cash equivalents, beginning 7,052 16,473 79,910 58,296 85,501 Cash and cash equivalents, end 16,473 79,910 58,296 85,501 90,544

Source: Company filings, BMO Capital Markets.

Aphria Inc. Balance Sheet for the Fiscal Year ended May 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020

Assets Cash and equivalents $16,473 $79,910 $58,296 $85,501 $90,544 Marketable securities - 87,347 87,347 87,347 87,347 Accounts receivable 1,779 826 5,000 40,000 100,000 Other receivables 127 4,512 4,512 4,512 4,512 Inventory 2,089 3,887 3,887 3,887 3,887 Biological assets 698 1,363 1,363 1,363 1,363 Prepaid assets 160 1,060 1,500 2,000 10,000 Due from DFMMJ Investments - 464 464 464 464 Promissory notes receivable 568 - Current assets 21,893 179,367 162,367 225,072 298,116

Capital assets 7,309 72,500 270,430 447,930 612,930 Intangible assets 4,318 1,891 1,891 1,891 1,891 Convertible note receivable 1,361 1,361 1,361 1,361 Embedded derivative 173 173 173 173 Interest in equity accounted investee 28,376 28,376 28,376 28,376 Long-term investments 1,560 27,788 27,788 27,788 27,788 Deferred tax asset 3,315 3,315 3,315 3,315 Goodwill 1,200 1,200 1,200 1,200 1,200 Other 634,758 634,758 634,758 Total Assets 36,280 315,970 1,131,659 1,371,864 1,609,907

Liabilities Accounts payable and accrued liabilities 1,266 5,873 6,000 15,000 50,000 Deferred gain from equity accounted investee - 2,800 2,800 2,800 2,800 Current portion of promissory note payable - 878 878 878 878 Current portion of long-term debt - 765 765 765 765 Current liabilities 1,266 10,316 10,443 19,443 54,443

Promissory note payable - 366 366 366 366 Long-term debt - 31,420 31,420 331,420 331,420 Total Liabilities 1,266 42,102 42,228 351,228 386,228

Shareholders' Equity Share capital 40,917 274,317 1,049,039 1,049,039 1,049,039 Warrants 694 445 445 445 445 Share-based payment reserve 1,724 3,230 3,230 3,230 3,230 Deficit (8,321) (4,123) 36,716 (32,079) 170,965

Total Equity 35,013 273,869 1,089,431 1,020,636 1,223,679

36,280 315,970 1,131,659 1,371,864 1,609,907

Source: Company filings, BMO Capital Markets.

Our Investment Thesis

We are initiating coverage of Canopy Growth (Canopy) with an Outperform rating.

Near-term market leader in recreational market: In an industry where restrictive marketing and packaging regulations may significantly limit product differentiation, we believe the key near-term success factor for LPs will be to secure in-store shelf space for their products. However, based on our visits to most of the larger Canadian LPs’ facilities, where many are still under construction or waiting for licenses, we are concerned that the majority of companies will not have the inventory or production capacity to meaningfully participate in the near-term market. We believe Canopy will be one of the few LPs with sufficient product to supply the initial recreational demand and we believe such a “first mover” advantage should enable the company to quickly capture significant share and generate attractive unit economics in an undersupplied market.

Well positioned for international opportunity: We believe Canopy could be well-positioned to supply emerging medical markets outside of Canada. We consider the company’s current international operations to be more advanced versus most other players and Canopy appears to be laying the groundwork in markets where medical is not yet legalized, but may soon be. In addition, the approach to develop cultivation in “hub” regions like Denmark for export to Germany and eventually Australia for export to the Asia-Pacific region provides the company longer-term access to these markets.

Long-term global-branded leader: We believe Canopy could emerge as a leader over the long term given that the company’s scale will facilitate meaningful investment in areas such as brand development, value-add formats, advanced pharmaceutical applications, and the gradual legalization of international medical markets. We believe Canopy’s strategic alliance with Constellation Brands could prove to be a significant advantage as the industry evolves into value-add formats, and in this particular case, into cannabis-infused beverages.

Our target price of $45 is based on a projected enterprise value that is about 20x our Base Case fiscal 2020 EBITDA estimate. We believe the forward multiple of 20x is appropriate based on a number of considerations:

 This is within the valuation range attributed to Canadian consumer discretionary stocks, with Dollarama at the high end.

 We note that our Base Case fiscal 2020 EBITDA estimate assumes that Canopy’s facility expansions are only at 65% of full ramp potential versus management’s expectation that the facilities will be close to 100% capacity by that time. In our Upside Case, we assume that the facilities achieve 75% of full ramp and Canopy experiences firmer selling prices, and based on that scenario, our $45 target price would represent a multiple of 14.5x our Upside fiscal 2020 EBITDA estimate. If the Upside scenario were to unfold, our implied target price would generally be in the mid-range for Canadian consumer stocks.

 If these facilities reach full capacity by fiscal 2020, which is above and beyond our Upside scenario, Canopy’s EBITDA generation would be even higher and under these circumstances, our implied target multiple would be 11x.

BMO Base BMO Upside Management

Production as 65% 75% 100% % of Full Ramp Target Price $45 $45 $45 Implied Target Multiple (off fiscal 20.0x 14.5x 11.0x 2020 EBITDA)

Source: BMO Capital Markets.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 35 May 28, 2018  The 20x forward multiple (based off our Base Case fiscal 2020 EBITDA estimate) is generally higher than the valuation multiples attributed to the brewery and tobacco stocks, although in the context of spirits companies (see “Comparable Companies – Alcohol & Tobacco”). We believe the cannabis industry presents substantially higher growth opportunities and potentially higher EBITDA margins as the Canadian recreational market expands, value-add product formats are legalized and more international jurisdictions establish medical regulatory frameworks. Specific to Canopy, our target multiple reflects our view that the company has a relative head start in brand development and international expansion, and could emerge as a leading global branded company in the long-term.

Possible Scenarios

Our forecast horizon in terms of earnings estimates consists of fiscal 2019 and fiscal 2020. We have three scenarios: Base, Upside, and Downside. See Exhibit 24 below.

Our outlook for Canopy’s ramp over the next two fiscal years is below that of management’s expectations as we believe all LPs will likely encounter challenges to ramp their significant grow facilities. We believe initial aggregate demand from the domestic medical and recreational markets will satisfy industry supply and Canopy will be able to sell all that it can produce in the near term. Our demand projections assume that international sales during this period are minimal; however, if international sales were to develop at a faster rate than we anticipate, then overall demand could be even stronger than we are forecasting.

Exhibit 24: BMO Research’s Scenarios for FY2020

($ mm unless otherwise stated) Base Upside Downside

Total Production (kg) 215,770 258,750 170,700

Avg. Selling Price - Medical $8.73 $8.73 $8.73 Blended Wholesale Price - Recreational $5.50 $6.00 $4.00

Cost of Production ($ / g) Harvest $0.55 $0.45 $0.65 Post-harvest $0.55 $0.55 $0.55 Packaging + shipping (medical) $1.50 $1.50 $1.50 Packaging + shipping (recreational) $0.50 $0.50 $0.50

Total Revenues $1,237 $1,585 $727

Adj. EBITDA $576 $773 $238

Source: BMO Capital Markets.

Risks to Consider

In terms of risks that are common to the larger LPs, we note that Canopy is in the process of undertaking a dramatic increase in production. In fiscal Q3/18, Canopy produced 7,961 kg of cannabis. However, based on our Base Case projections, we estimate that the company’s current expansion plans will provide Canopy with just below 60,000 kg of production in fiscal 2019, and about 215,000 kg of production in fiscal 2020. We believe an expansion plan of this magnitude is subject to considerable execution risk, and hence our more conservative ramp projections versus management’s expectations.

In addition, Canopy has undertaken a significant scope of start-ups, investments, joint ventures, and acquisitions, both domestically and internationally, over such a short period. Due to the sheer number of these investments, we are concerned that management structure, oversight and controls may be insufficient and that this could result in unanticipated developments. Moreover, we have found that Canopy’s senior management is inherently entrepreneurial in style, and that while this attribute is at the

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 36 May 28, 2018 core of the company’s impressive development and success to date, a shift in corporate culture will be necessary as Canopy grows and matures into a true multi-national company.

Finally, many LPs are establishing brands for the recreational market. At this time, the LPs (including Canopy) have only provided limited details surrounding their brand development and marketing strategies. In addition, we note that there is a high possibility of significant regulatory restrictions on the scope of marketing and branding activities that can be undertaken by the LPs. As a result, it is difficult for us to assess which brands, including those of Canopy’s, will ultimately emerge with adequate market share.

Overview of Canopy

Canopy is a Canadian-based licensed cannabis producer with seven operational cultivation facilities in Ontario, Quebec, and Saskatchewan. The company is currently in the process of expanding production capacity in both existing and new facilities. See Exhibit 25 below.

Exhibit 25: Current and Future Production Facilities

Current Annual Production Future Annual Production Base Case Long-term 1 1 Total Size Est. Annual Total Size Production in Potential Annual 2 2 2 Facility Type (sq. ft.) Production (kg) (sq. ft.) FY2020 (kg) Production (kg) Smiths Falls, ON Indoor 168,000 9,360 450,000 15,600 24,300 Mirabel, QC Greenhouse 700,000 24,570 37,800 Niagara, ON Greenhouse 350,000 8,400 1,000,000 17,200 37,200 BC Tweed - Aldergrove4 Greenhouse 1,300,000 58,500 91,000 BC Tweed - Delta4 Greenhouse 1,700,000 78,000 119,000 Denmark Greenhouse 430,000 0 16,000 Newfoundland Indoor 150,000 3,000 12,000

Bowmanville, ON Indoor 75,000 6,750 Yorkton, SK Indoor 60,000 5,400 Scarborough, ON Indoor 50,000 4,500 Same as current Creemore, ON3 Indoor 15,000 1,350 St. Lucien, QC Indoor 10,000 900

Source: Company filings, BMO Capital Markets. Note (1): Total space includes both cultivation rooms and other space (such as offices, processing and shipping areas). Note (2): BMO Capital Markets estimates from base case scenario. Note (3): Facility is 40% owned by Canopy. Canopy has an off-take arrangement for between 75%-100% of production. Note (4): Canopy announced that it will acquire the remaining 33% stake that it currently does not own. Expected closing in late-July 2018.

Exhibit 26: Overview of International Operations

Canopy's Presence Corporate Import & Domestic Country Legal Status of Cannabis Entity Distribute Production R&D Overview of Operations

Launch of Spectrum Australia. Will establish a facility in the State of Victoria for cultivation and Australia Legal medical   Soon research. The facility is expected to supply other regions in Asia Pacific.

Partnership with Brazil company Entourage to Brazil Legal medical  develop cannabis-based pharma products and launch a clinical research plan. Operating as Spectrum. Partnership with a Chile Legal medical Chilean medical cannabis company.

Acquired Annabis Medical, which will be renamed Czech Republic Legal medical  to Spectrum Czech. Canopy will import products for sale in Czech pharmacies.

Operating as Spectrum. Will export production to Denmark Legal medical, domestic production Soon the rest of Europe. 430k sq. ft. greenhouse under development.

Acquired MedCann GmbH to form Spektrum, a German-based pharmaceutical distributor. Import Germany Legal medical  products for distribution to pharmacies. Also has a GMP certified facility in Germany.

Italy Legal medical 

Legal medical. Decriminalized Operating as Tweed. Licensed for production. Jamaica Soon recreational. Greenhouse facility development underway.

Poland Legal medical 

Strategic partnership with Alcaliber SA. Canopy Spain Limited legal medical  has transferred 1,500 cannabis genetics to Alcaliber.

Source: Company filings.

As we noted in the industry section of this report, we believe Germany’s medical market is the primary near-term international opportunity for the Canadian LPs. However, we note there are several hurdles a Canadian LP must meet in order to be able to export product into the German medical market: have an export license from Health Canada, GMP-certification, and a distributor partner with supply relationships in the fragmented German pharmacy landscape.

We understand that Canopy is one of a select number of LPs currently participating as a supplier to the German medical market. The company announced it received approvals to export to Germany in July 2016, but we believe inventory constraints and regulatory delays in Germany has so far resulted in only a modest amount of product being exported there. In fiscal Q3/18 ended December 2017, Canopy shipped 78 kg (or 1% of total volume sold) to Germany.

Canopy’s go-to-market strategy is to target different markets and consumer demographics with a portfolio of differentiated brands. See Exhibit 27 below.

Exhibit 27: Portfolio of Brands

In April 2017, Canopy launched its online sales platform, Tweed Main Street. Patients registered with Tweed, Bedrocan Canada, and/or Mettrum Health (now named Spectrum) can purchase medical cannabis from these banners on the Tweed Main Street platform. In addition to these three Canopy- owned brands, the company also launched its CraftGrow program, whereby other LPs can join to access Canopy’s resources in plant genetics and operational best practices in exchange for selling their harvest on a wholesale basis to the Tweed Main Street online marketplace.

Other Notable Strategic Investments

Canopy Rivers is a vehicle that establishes investment positions in cannabis production applicants and existing LPs. Canopy Growth holds a 25% economic and 90% voting interest in Canopy Rivers. Up to this point, Canopy Rivers has raised about $80 million from private investors and Canopy, and has closed eight investments. The investee companies benefit from the access to capital, but also essentially have a partnership with Canopy and thereby access to all of Canopy’s relationships and broad capabilities. The structure allows Canopy to undertake strategic investments in the industry that may not be suitable for direct investment by Canopy.

Canopy Health engages in various research areas related to cannabis application for humans and animals in order to develop intellectual property. Ownership consists of Canopy Growth and qualified private investors. Canopy Growth has first right to license and commercialize any intellectual property developed by Canopy Health. In April 2018, Canopy Health announced that it has filed eight provisional U.S. patients related to the delivery and application of cannabis and cannabinoid-based therapeutics in certain conditions. The organization now has 38 provisional patent filings. Canopy Growth currently holds a 44% economic interest in Canopy Health, but announced in May 2018 that it will acquire the remaining stake it did not own. This transaction is expected to close at the end of July 2018.

Given that the recreational market in Canada remains an illicit industry, Canopy’s current operations to date only serve the medical market, primarily in Canada. See Exhibit 28 below.

Exhibit 28: Canopy KPIs

KPI FQ1/17 FQ2/17 FQ3/17 FQ4/17 FQ1/18 FQ2/18 FQ3/18

Market Share Registered Patients - Canada 201,398 235,621 269,502 Registered Patients - Canopy 16,699 24,477 29,294 55,601 59,163 63,513 69,919 Market Share by Patients 29% 27% 26%

Volume Sold - Canada (kg) 12,090 13,574 15,616 Volume Sold - Canopy (kg) 984 1,169 1,245 1,740 1,830 2,020 2,330 Market Share by Volume 15% 15% 15%

Implied gram per patient - Canada 60 58 58 Implied gram per patient - Canopy 59 48 43 31 31 32 33

Sales KPIs for Canopy Medical Cannabis Sales ($ 000s) $6,979 $8,197 $9,163 $13,976 $14,568 $16,140 $19,340 Avg. Selling Price ($/g) $7.09 $7.01 $7.36 $8.03 $7.96 $7.99 $8.30

Sales Mix - % Dried Flower 94% 86% 86% 78% 81% 82% 77% Sales Mix - % Oils & Gel Capsules 6% 14% 14% 22% 19% 18% 23%

Cost KPIs for Canopy ($/g) F2017 not comparable to F2018 due to restatements Cash Harvest Cost $1.10 $0.99 $0.87 $0.86 $0.76 $0.72 $0.59 Cash Post-harvest Cost $0.54 $0.71 $0.54 $0.60 $0.51 $0.53 $0.44 Shipping, Fulfillment & Packaging $1.01 $1.01 $1.17 $1.44 $1.50 $1.48 $1.50 Depreciation related to cultivation is included in overall depreciation expense.

Source: Statistics Canada, company filings.

Gearing Up for the Recreational Market

Despite the uncertainty on the date of initial legalization, provincial/territorial governments have already begun to establish their supply chains. Most provincial/territorial governments will purchase cannabis from LPs on a wholesale basis to distribute into the retail channel. As a result of this regulated supply chain, securing provincial/territorial supply contracts will be critical for LPs to access recreational markets. See Exhibit 4 in the industry section of this report for more details on each province’s/territory’s supply chain model.

At this point, only Quebec, Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and Yukon have publicly announced LP suppliers. We note that Canopy has secured supply agreements with all four provinces and one territory. In addition, the company has secured licenses to operate retail stores in Newfoundland and Manitoba. See Exhibit 29 below.

Yukon 1 of 2 LPs signed 3-year term Up to 900 kg Newfoundland TBD Only LP signed TBD First 2 years supply 8,000 kg 4 retail sites

TBD Manitoba 1 of 4 TBD companies Quebec selected to 1 of 6 LPs TBD signed operate retail PEI stores 3-year term TBD 12,000 kg 1 of 3 LPs Partner with signed Delta 9 2-year term Min. of 1,000 kg in year 1 New Brunswick 1 of 5 LPs signed 2-year term 4,000 kg in year 1 Source: Company filings.

Company History and Recent Developments

The predecessor entity that eventually formed Canopy was incorporated in August 2009 as LW Capital Pool Inc. (LW), which listed on the TSX Venture Exchange in June 2010. As a “capital pool company”, LW had no assets, other than cash, or any business operations. In March 2014, the shareholders of Tweed, a licensed cannabis producer with a facility in Smiths Falls, Ontario, completed a reverse takeover of LW and the combined entity renamed to Tweed Marijuana. In June 2014, Tweed Marijuana acquired all the outstanding shares of Prime 1 Constructions Services Corp., which was conducting business as Park Lane Farms. The company was later renamed to Tweed Farms, which operates a greenhouse for cannabis cultivation in Niagara-On-The-Lake. This transaction was followed by several acquisitions that are now part of Canopy’s portfolio of brands. See Exhibit 30 below.

Exhibit 30: Notable Acquisitions

Announced Target Purchase Price Date Company Assets Acquired ($ mm) -annual production capacity of 50,000 sq. ft. -a subsidiary of Bedrocan Beheer BV, a leading LP in the 6/24/2015 Bedrocan Canada Netherlands $61 -international expansion of Bedrocan is limited due to licensing rights -Quebec-based LP with an indoor grow facility in Saint-Lucien 11/1/2016 Vert Medical -strategic rationale is to establish a brand specifically for the ~$6 to 7 Quebec medical and recreational market

-German-based pharmaceutical distributor MedCann GmbH -MedCann will distribute imported cannabis from Canopy to 11/28/2016 Pharma and ~$10 to 11 German pharmacies to supply the country's medical market Neutraceuticals -Upon acquisition, MedCann was renamed as Spektrum -Canadian-based LP with three indoor production facilities in Ontario totaling 100,000 sq. ft. -the second largest LP in the Canadian medical market -strategic rationale was to establish Mettrum (now named Mettrum Health Corp. 12/1/2016 Spectrum) as Canopy's medical brand globally given the restrictions $380 (renamed to Spectrum) with Bedrocan -Canopy management also attributed value to Mettrum's colour- coded strain classification system and product offering, particularly the Mettrum yellow oil.

Source: Company filings, BMO Capital Markets.

M&A / Strategic Facility Supply or Retail International Investments Development Agreements Expansion

April 2018 Acquired Annabis October 2017 Medical: importer & Announces 20% December 2017 distributor of medical investment from Acquired Vert cannabis in Czech Constellation Brands Médical Republic

September 2017 October 2017 December 2017 January 2018 April 2018 New Brunswick Formed BC Tweed Newfoundland Prince Edward Both BC Tweed to develop two island greenhouses are greenhouses of fully licensed for September 2017 3mm sq. ft. December 2017 cultivation February 2018 Expansion of Spectrum Denmark Manitoba Niagara greenhouse announces plan to October 2017 establish facility April 2018 Tweed JA will build Spectrum Australia September 2017 facility in Jamaica Supply agreement with AusCann in April 2018 Australia Yukon, and finalized September 2017 Quebec Establish Spectrum Denmark JV

Source: Company filings.

CEO Profile: Bruce Linton

In addition to his current role as CEO of Canopy, Bruce Linton also serves as President of HBAM Holdings (since May 2007). Mr. Linton is currently a Director on the Board of Thermal Energy International.

Mr. Linton’s prior professional background has been primarily in the telecom and technology industries. After graduating from Carleton University in 1992 with a Bachelors of Public Administration, Mr. Linton joined Newbridge Networks and eventually held a senior executive position at CrossKeys Systems, a subsidiary spun out of Newbridge. Mr. Linton founded WebHancer, which developed customer-tracking software. He also served as CEO of Clearford Water Systems from 2005 to 2012.

Canopy Growth Corporation Income Statement for the Fiscal Year ended March 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020 Old COGS reporting standards

Revenue $12,699 $39,895 $79,056 $327,105 $1,236,528

Inventory production costs 33,371 114,378 373,451 Gross Margin before fair value changes 0.0% 0.0% 45,685 57.8% 212,727 65.0% 863,077 69.8%

Unrealized (gain) on changes in fair value of bio assets (38,805) (60,061) (35,374) Inventory expensed to cost of sales 12,796 39,577 Other cost of sales 19,722 22,747 Reported Gross margin 18,986 149.5% 37,632 94.3% 81,059 102.5% 212,727 65.0% 863,077 69.8%

Sales + marketing 5,653 44.5% 12,960 32.5% 33,452 42.3% 112,227 34.3% 170,000 13.7% Research + development 721 5.7% 810 2.0% 1,214 1.5% 3,500 1.1% 7,000 0.6% General + administrative 8,177 64.4% 16,858 42.3% 38,436 48.6% 83,338 25.5% 110,000 8.9% Equity investment (income) loss 276 2.2% 50 0.1% 170 0.2% - 0.0% - 0.0% Share-based compensation 3,497 27.5% 8,736 21.9% 46,936 59.4% 72,000 22.0% 75,000 6.1%

Reported EBITDA 662 5.2% (1,782) -4.5% (39,149) -49.5% (58,338) -17.8% 501,077 40.5% Adjusted EBITDA1 (26,104) 13,311 576,077

Depreciation + amortization 2,256 17.8% 6,064 15.2% 20,735 26.2% 33,200 10.1% 70,000 5.7% Other 1,155 7,369 2,491 - -

Operating income (2,749) -21.6% (15,215) -38.1% (62,375) -78.9% (91,538) -28.0% 431,077 34.9%

Interest expense (income) 140 66 (101) 4,220 8,750 Other non-operating costs (gains) 481 1,778 (44,660) - -

Earnings before tax (3,370) -26.5% (17,059) -42.8% (17,614) -22.3% (95,758) -29.3% 422,327 34.2%

Tax expense (recovery) 126 (401) 8,405 - 105,582 25.0%

Net income (3,496) -27.5% (16,658) -41.8% (26,019) -32.9% (95,758) -29.3% 316,745 25.6% Non-controlling interest (51) 9,036 176 - Net income attributable to Canopy shareholders ($3,496) -27.5% ($16,607) -41.6% ($35,055) -44.3% ($95,934) -29.3% $316,745 25.6%

Earnings per share - Basic $ (0.05) $ (0.14) $ (0.20) $ (0.47) $ 1.47 - Diluted $ (0.05) $ (0.14) $ (0.19) $ (0.40) $ 1.26

Weighted average shares outstanding - basic 77,024 118,990 173,792 209,544 215,310

Weighted average shares outstanding - diluted 77,024 118,990 180,147 245,709 251,475

Source: Company filings, BMO Capital Markets. Note (1): Excludes fair value changes in biological assets and non-recurring expenses. Adds back share-based compensation and deducts non-controlling interest.

Canopy Growth Corporation Cash Flow Statement for the Fiscal Year ended March 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020

Net income (loss) after income taxes ($3,496) ($16,658) (26,019) (95,758) 316,745

Depreciation and amortization 2,256 6,064 20,735 33,200 70,000 Share of loss (gain) in equity investment 276 50 Unrealized (gain) on change in fair value of bio assets $ (38,805) (60,061)$ (35,374) Net changes in inventory and biological assets 20,063 34,761 Share-based compensation 3,678 10,043 46,936 72,000 75,000 Non-cash acquisition costs 1,333 Loss on disposal of property, plant and equipment 661 Income tax (recovery) expense 126 (401) Increase in fair value of acquisition consideration related liabilities 481 1,193 Changes in non-cash operating working capital items 1,544 (4,078) (4,836) (25,000) (36,000) Other 350 Net cash from operating activities (13,527) (27,093) 1,442 (15,558) 425,745

Purchases of property, plant and equipment (12,196) (29,391) (130,000) (400,000) (300,000) Purchases of intangible assets (141) Purchase of acquisitions 1,054 11,193 - (1,000) - Proceeds on disposals of property and equipment 37 Purchases of restricted investment (236) (300) Net cash from investing activities (11,378) (18,602) (130,000) (401,000) (300,000)

Proceeds from issuance of common shares 14,376 130,276 269,990 - - Proceeds from exercise of stock options 319 6,961 Proceeds from exercise of warrants 7,703 126 Payment of share issue costs (1,642) (8,066) Issuance of long-term debt 3,500 - 175,000 - Increase in capital lease obligations 260 Repayment of long-term debt (1,900) (959) - - - Net cash from financing activities 18,856 132,098 269,990 175,000 -

Net cash inflow (outflow) (6,049) 86,403 141,432 (241,558) 125,745 Cash and cash equivalents, beginning 21,446 15,397 101,800 243,232 1,674 Cash and cash equivalents, end 15,397 101,800 243,232 1,674 127,419

Source: Company filings, BMO Capital Markets.

Canopy Growth Corporation Balance Sheet for the Fiscal Year ended March 31 (amounts in C$000's except per share)

Est Est Est 2016 2017 2018 2019 2020

Assets Cash and equivalents $15,397 $101,800 $243,232 $1,674 $127,419 Restricted short-term investments 550 550 550 550 Accounts receivable 1,486 5,815 7,000 50,000 100,000 Biological assets 5,321 13,643 49,017 49,017 49,017 Inventory 22,153 45,981 45,981 45,981 45,981 Prepaid expenses and other assets 489 3,735 4,000 4,000 10,000 Assets held for sale 6,180 6,180 6,180 6,180 Current assets 44,846 177,704 355,960 157,402 339,147

Property, plant and equipment 44,984 96,270 205,535 572,335 802,335 Intangible assets 31,861 162,263 162,263 162,263 162,263 Goodwill 20,886 241,371 241,371 241,371 241,371 Other 804 - - 1,000 1,000 Total Assets 143,381 677,608 965,129 1,134,371 1,546,116

Liabilities Accounts payable and accrued liabilities 6,107 15,386 12,000 30,000 50,000 Deferred revenue 533 588 588 588 588 Current portion of long-term debt 553 1,691 1,691 1,691 1,691 Current liabilities 7,193 17,665 14,279 32,279 52,279

Acquisition consideration related liabilities 1,258 - - - - Long-term debt 3,469 8,639 8,639 183,639 183,639 Deferred tax liability 7,413 35,798 35,798 35,798 35,798 Other long-term liabilities 243 766 766 766 766 Total Liabilities 19,576 62,868 59,482 252,482 272,482

Shareholders' Equity Share capital 131,080 621,541 891,531 891,531 891,531 Share-based reserve 5,804 23,415 23,415 23,415 23,415 Warrants 676 - - - - Accumulated other comprehensive loss - 198 198 198 198 Retained Earnings (Deficit) (13,775) (30,382) (18,501) (42,259) 349,486

Non-controlling interest - (32) 9,004 9,004 9,004

Total Equity 123,785 614,740 905,647 881,889 1,273,634

143,361 677,608 965,129 1,134,371 1,546,116

Source: Company filings, BMO Capital Markets.

Tamy Chen, CFA (416) 359-5501 Peter Sklar, CPA, CA (416) 359-5188 Cannabis Coverage

Market Fiscal Current EV / Recent Quarter # of Share Price 52-Week Cap. EV Year Revenue EBITDA Selling Price Cash COP (2) Volume Sold Registered Company Rating (1) 25-May-18 High Low (C$ mm) End FY2019E FY2020E FY2019E FY2020E (C$ / gram) (C$ / gram) (kg) Patients

Canopy Growth Corporation (3) OP $35.00 $44.00 - $6.58 $8,697 $8,275 31-Mar 25.3x 6.7x 621.7x 14.4x $8.30 $1.03 2,330 69,919

Aurora Cannabis (4) $8.02 $15.20 - $1.90 $4,793 $5,002 30-Jun 41.0x 5.8x nmf 13.9x $7.99 $1.53 1,353 45,776

Aphria (3) OP $11.90 $24.75 - $4.55 $3,198 $3,173 31-May 21.4x 4.4x nmf 11.2x $8.30 $0.95 1,428 40,000 Medreleaf Corp. $24.51 $31.25 - $6.81 $2,809 $2,572 31-Mar 19.0x 6.8x 76.0x 18.3x $8.64 $1.83 1,263 n.a.

Cronos Group $7.76 $14.83 - $1.58 $1,673 $1,670 31-Dec 11.4x 5.4x 34.4x 16.1x n.a. n.c. n.a. n.a.

Hydropothecary Corporation $5.17 $5.42 - $0.75 $1,179 $1,033 31-Jul 9.6x 3.5x 45.3x 9.0x $8.99 $0.97 132 n.a.

The Green Organic Dutchman $4.12 $4.25 - $3.50 $1,040 $880 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

CannTrust Holdings $8.57 $10.58 - $5.86 $877 $780 31-Dec 3.9x 2.8x 10.9x 6.8x $7.63 n.c. 982 40,000

OrganiGram Holdings $4.88 $5.68 - $1.81 $788 $738 31-Aug 6.7x 3.4x 22.6x 9.9x n.c. n.c. 348 12,957

Cannabis Wheaton $1.39 $2.97 - $0.68 $716 $602 31-Dec 3.6x 1.1x 19.6x 3.3x n.a. n.a. n.a. n.a.

Supreme Cannabis Company $1.77 $3.49 - $0.23 $594 $563 30-Jun 6.8x 3.8x 28.3x 10.3x n.a. n.a. n.a. n.a.

Emerald Health Therapeutics $4.21 $9.68 - $1.03 $557 $512 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

HIKU Brands $1.50 $4.82 - $0.55 $526 $521 31-Mar 38.2x 6.8x nmf 31.3x n.a. n.a. n.a. n.a.

Namaste Technologies $1.47 $1.75 - $0.04 $411 $359 31-Aug nmf nmf nmf nmf n.a. n.a. n.a. n.a.

Newstrike Resources $0.67 $3.30 - $0.18 $358 $321 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

Notes: Not reflective of entire industry. This comp sheet only includes companies with a fully-diluted market capitalization value above $400 million. N.a. = not available / disclosed. N.c. = figure disclosed by company is not comparable to other players. (1) Stock Rating System: OP – Outperform; Mkt – Market Perform; Und. – Underperform; R – Restricted. (2) Cash cost of production up to the point before packaging and fulfillment. (3) Forward estimates are BMO Capital Markets. (4) Metrics do not reflect announced acquisition of MedReleaf. BMO Capital Markets is restricted on Aurora Cannabis

Source: Company filings, BMO Capital Markets Inc., FactSet.

(all in USD '000s) Share Market Enterprise EV / EBITDA Sales Gross Margin (%) EBITDA Margin (%) Selling & Marketing Margin (%) Company name Price (US$) Cap. Value 2018E 2019E 2017A 2018E 2017A 2018E 2017A 2018E Breweries Large cap Ambev SA $5.51 $86,500 $84,634 13.5x 12.0x $15,003 $14,163 60.0% 63.4% 41.4% 44.2% Anheuser-Busch InBev SA/NV $95.00 183,693 295,593 12.5x 11.7x 56,444 57,145 59.4% 64.5% 39.2% 41.4% Diageo plc Sponsored ADR $146.34 91,938 104,496 18.1x 17.0x 15,343 16,664 46.5% 62.3% 33.9% 34.6% Molson Coors Brewing Company Class B $61.43 13,232 24,336 9.6x 9.5x 11,003 11,019 40.1% 41.3% 22.8% 22.9% Heineken NV $102.14 58,240 75,376 11.7x 11.0x 24,688 26,429 43.7% 42.2% 26.0% 24.4% Carlsberg A/S Class B $113.07 17,231 20,992 10.0x 9.6x 9,372 9,496 48.8% 50.1% 23.8% 22.2% Large-cap average 12.6x 11.8x 49.8% 54.0% 31.2% 31.6% Mid-cap Compania Cervecerias Unidas S.A. $13.27 $4,905 $5,173 8.4x 8.4x $2,617 $2,841 53.0% 53.2% 21.0% 21.6% Embotelladora Andina S.A. Sponsored ADR Pfd Class A $23.49 1,853 2,820 5.0x 4.6x 2,847 3,039 42.2% NA 19.3% 18.4% Mid-cap average 6.7x 6.5x 47.6% 53.2% 20.1% 20.0% Small-cap Boston Beer Company, Inc. Class A $240.05 $2,790 $2,724 16.2x 15.2x $863 $915 52.1% 53.2% 19.4% 18.4% Craft Brew Alliance $19.35 374 406 18.6x 16.4x 207 214 31.5% 33.6% 7.9% 10.2% Small-cap average 17.4x 15.8x 41.8% 43.4% 13.7% 14.3%

Tobacco Large cap British American Tobacco p.l.c. $51.51 $118,140 $179,884 11.9x 11.2x $26,066 $33,431 58.9% NA 45.4% 45.0% Altria Group Inc $55.63 105,767 118,449 12.1x 11.4x 19,494 19,631 61.3% 61.6% 50.7% 50.0% Philip Morris International Inc. $80.34 124,786 152,534 11.4x 10.6x 28,688 31,371 63.3% 63.0% 43.2% 42.5% Imperial Brands PLC $36.68 35,029 51,675 10.1x 9.8x 19,355 11,393 34.7% 73.5% 27.1% 45.0% Large-cap average 11.4x 10.7x 54.6% 66.0% 41.6% 45.6% Mid-cap Vector Group Ltd. $19.25 $2,587 $3,435 13.2x 11.8x $1,807 $1,868 32.1% 34.5% 14.2% 13.9% Mid-cap average 13.2x 11.8x 32.1% 34.5% 14.2% 13.9% Small-cap Schweitzer-Mauduit International, Inc. $43.95 $1,350 $1,927 9.0x 8.6x $983 $1,052 28.8% 28.9% 20.4% 20.4% Small-cap average 9.0x 8.6x 28.8% 28.9% 20.4% 20.4%

Spirits/Wine Large cap Constellation Brands, Inc. Class A $216.81 $40,971 $51,084 16.5x 15.1x $7,586 $8,145 50.4% 51.4% 36.5% 38.0% Brown-Forman Corporation Class A $55.09 26,440 28,250 22.5x 20.9x NA 3,477 NA 67.8% NA 36.1% Pernod Ricard SA $169.69 44,807 53,959 17.7x 16.8x 9,822 10,531 62.2% 62.2% 31.8% 28.9% Large-cap average 18.9x 17.6x 56.3% 60.5% 34.1% 34.3% Mid-cap Vina Concha Y Toro S.A. Sponsored ADR $43.00 $1,606 $1,980 13.3x 10.9x $991 $1,062 35.7% 37.9% 13.1% 14.0% Andrew Peller Limited Class A $13.98 $601 $768 14.7x NA NA $303 NA 40.9% NA 17.3% Corby Spirit and Wine Limited Class A $15.69 $447 $389 12.0x 11.9x $108 $113 63.9% NA 31.6% 28.8% Mid-cap average 13.3x 11.4x 49.8% 39.4% 22.3% 20.0% Small-Cap Castle Brands Inc. $1.24 $205 $244 26.3x 21.7x NA $100 NA 41.5% NA 9.3% Truett-Hurst, Inc. Class A $1.37 6 16 NA NA 22 NA 33.5% NA NA NA Willamette Valley Vineyards, Inc. $8.34 $41 4,465 NA NA $21 NA 61.8% NA NA NA Small-cap average 26.3x 21.7x 47.7% 41.5% NA 9.3%

Source: FactSet.

Term Definition ACMPR Access to Cannabis for Medical Purposes Regulation. Replaced the MMPR and is the current regulatory framework that oversees the legal medical cannabis market in Canada. Allows both Health Canada licensed commercial producers and approved individuals to grow. The amount that can be grown by an individual is limited. Bill C-45 Federal legislation outlining the framework for legalizing recreational cannabis in Canada. Cannabinoids Distinct active chemical compounds found in the cannabis plant. There are over 100 different cannabinoids that have varying effects on the human body’s receptors. The two primary cannabinoids are THC and CBD. CBD Cannabidiol. One of the two primary cannabinoids found in the cannabis plant. Does not cause psychoactive effects. Associated with medical benefits (i.e., anti-inflammatory) and is used to treat various conditions including arthritis, diabetes, chronic pain, etc. Cloning Involves taking a clipping off a mother plant, and planting it in a separate pot to grow its own roots. The clone then develops into a fully grown cannabis plant for harvest. Drying Following the flowering stage, the plant is subject to a period of drying to remove all moisture and maximize its concentration of cannabinoids. Edibles A type of value-add format. Consumables that are infused with cannabis, such as cookies, brownies, chocolates, and beverages. Extraction A process to extract the cannabinoids and terpenes from parts of the cannabis plant into a liquid form. The two most common methods are supercritical CO2 extraction and ethanol extraction. Flowering The third stage of the cultivation process following vegetation where the clone plant matures, developing flowers/buds with trichomes on them. Genetics The cannabis strain’s genetic makeup (also called a genotype) that gives its effects, flavours, potency, and growth characteristics. Acts as a blueprint for the growth and development of the plant, but it is also highly influenced by its environment (see “Phenotype”). GMP Good Manufacturing Process. A system to ensure that consistent standards are being applied to a specific process. There are various GMP standards that may only be recognized by certain jurisdictions. Greenhouse facility A cannabis cultivation facility with a glass roof that utilizes the sun but typically contains supplemental lighting. Typically have lower capital and operating costs versus an indoor facility, but the environment cannot be as strictly controlled as an indoor facility. Hemp A variety of cannabis that are dominant-sativa species. Produces smaller flowers, or buds. Very low in THC concentration. Indoor facility A fully engineered and constructed building (including a roof) for cannabis cultivation. Typically have higher capital and operating costs versus a greenhouse facility. The climate can be more strictly controlled and therefore can result in higher yield and quality flower. The cultivation process is completely dependent on artificial lighting. Indica One of the principal cannabis species. The species can be distinguished by their plant structures and leaves. The indica plant is typically shorter and bushier than sativa. LP Health Canada licensed producer of cannabis. Typically refers to commercial producers.

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission or publication without the prior written consent of BMO Capital Markets strictly prohibited. Cannabis | Page 48 May 28, 2018 MMAR Medical Marijuana Access Regulations. Initial regulatory framework that legalized the medical cannabis market in Canada in 2001. Allowed approved individuals to grow cannabis, or appoint a designated person to grow for several individuals. MMPR Marihuana for Medical Purposes Registration. Replaced the MMAR. Only permitted Health Canada licensed commercial producers to grow cannabis. Mother Plant A plant that is used to make new cannabis plants through a cloning process. See “Cloning”. Oil A liquid substance extracted from the cannabis plant which is then combined with a medium such as sunflower oil for consumption. Phenotype The traits of the cannabis plant that the environment pulls out from the plant’s genetics. This means the same genetic being cultivated in two different facilities could yield materially different traits. Propagation The first stage of the cultivation process following cloning where the new clone plant establishes its roots. Sativa One of the principal cannabis species. The species can be distinguished by their plant structures and leaves. The sativa plant is generally tall, thin, and wispy. Strain (or Hybrid) A hybrid mix of the plant species (sativa, indica), developed either through selective breeding or naturally occurring in the wild. Terpenes Organic compounds in the cannabis plant. Gives the plant a unique smell profile. THC Tetrahydrocannabinol. One of the two primary cannabinoids in the cannabis plant. Provides the psychoactive effect attributed to cannabis. THC Concentrates A type of value-add format. Comes in various shapes, sizes, and forms. Contains a very high concentration of THC. Within this format category, forms of these include wax, shatter, kief, and hash. Trichomes Crystalline or hair-like components found on the flowers of the unpollinated female cannabis plant that contain the cannabinoids, terpenes, and other compounds. Trichomes grow all over the cannabis plant, but are in highest concentration on the flowers or buds. Value-add Formats Formats containing cannabis beyond dried flower and oils, such as vape pens, edibles, and concentrates. Vape pen A form of consuming cannabis. Vape pens contain a cartridge that is pre- filled with cannabis oil. A battery-powered element inside the pen heats the oil into a vapour that can be inhaled. Vegetation The second stage of the cultivation process following propagation where the clone plant experiences rapid growth. Plants at this stage are subject to a specific environment of light and nutrients to maximize the plant’s yield of unpollinated female flower buds, which has the highest concentration of cannabinoids.

C$25

C$20

C$15

C$10

C$5

C$0 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018

Closing Price Target Price

Outperform (OP); Market Perform (Mkt); Underperform (Und); Speculative (S); Suspended (Spd); Not Rated (NR); Restricted (R)

Source: FactSet, BMO Capital Markets

Canopy Growth Rating History as of 05/26/2018

C$50

C$40

C$30

C$20

C$10

C$0 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018

Closing Price Target Price

Outperform (OP); Market Perform (Mkt); Underperform (Und); Speculative (S); Suspended (Spd); Not Rated (NR); Restricted (R)

Source: FactSet, BMO Capital Markets

IMPORTANT DISCLOSURES Analyst's Certification We, Peter Sklar and Tamy Chen, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities or issuers. We also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to Canopy Growth within the past 12 months. Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Canopy Growth within the past 12 months. Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to Canopy Growth within the past 12 months. Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Canopy Growth within the past 12 months. Disclosure 6A: Canopy Growth is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services

Cannabis | Page 50 May 28, 2018 Disclosure 16: A research analyst has extensively viewed the material operations of Aphria and Canopy Growth. Disclosure 18: A redacted draft of this report was previously shown to Canopy Growth (for fact checking purposes) and changes were made to the report before publication.

Methodology and Risks to Target Price/Valuation for Aphria (APH-TSX) Methodology: EV / EBITDA Risks: Key risks include: the recreational cannabis industry in Canada is an emerging sector with limited and unreliable market forecasts of demand and other consumer trends, any adverse regulatory changes could impair the company's business model in the Canadian medical and/or recreational markets, the company's operating history is limited, reliance on key management including Vic Neufeld (CEO) and its two founders, Cole and John, any increase in key input costs such as utilities or labour, risks inherent in the agriculture business, product liability and risk of recalls, risks related to international operations (including but not limited to regulatory, economic and social volatility in those foreign markets). Methodology and Risks to Target Price/Valuation for Canopy Growth (WEED-TSX) Methodology: EV / EBITDA Risks: Key risks include: the recreational cannabis industry in Canada is an emerging sector with limited and unreliable market forecasts of demand and other consumer trends, any adverse regulatory changes could impair the company's business model in the Canadian medical and/or recreational markets, the company's operating history is limited (incorporated in 2010 and began conducting business in 2013), reliance on key management including Bruce Linton (CEO), any increase in key input costs such as utilities or labour, risks inherent in the agriculture business, product liability and risk of recalls, risks related to international operations (including but not limited to regulatory, economic and social volatility in those foreign markets).

Distribution of Ratings (May 27, 2018)

Rating category BMOCM US BMOCM US IB BMOCM US IB BMOCM BMOCM IB StarMine BMO rating Universe* Clients** Clients*** Universe**** Clients***** Universe Buy Outperform 48.8% 18.7% 52.6% 50.2% 54.6% 55.3% Hold Market Perform 48.9% 16.1% 45.4% 47.5% 44.2% 39.7% Sell Underperform 2.3% 15.4% 2.1% 2.4% 1.2% 5.0%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as percentage of Investment Banking clients. Other Important Disclosures For Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/ Company_Disclosure_Public.aspx or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3. Dissemination of Research Dissemination of BMO Capital Markets Equity Research is available via our website https://research-ca.bmocapitalmarkets.com/Public/Secure/ Login.aspx? ReturnUrl=/Member/Home/ResearchHome.aspx. Institutional clients may also receive our research via Thomson Reuters, Bloomberg, FactSet, and Capital IQ. Research reports and other commentary are required to be simultaneously disseminated internally and externally to our clients. Research coverage of licensed cannabis producers is made available only to Canadian and EU-based BMO Nesbitt Burns Inc./BMO Capital Markets Limited clients solely via email distribution. ~ Research distribution and approval times are provided on the cover of each report. Times are approximations as system and distribution processes are not exact and can vary based on the sender and recipients’ services. Unless otherwise noted, times are Eastern Standard and when two times are provided, the approval time precedes the distribution time. BMO Capital Markets may use proprietary models in the preparation of reports. Material information about such models may be obtained by contacting the research analyst directly. There is no planned frequency of updates to this report. General Disclaimer "BMO Capital Markets" is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns

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A member of Cannabis | Page 53 May 28, 2018 Equity Research Analysts

Director of Canadian Equity Research Director of US Equity Research Bert Powell, CFA 416-359-5301 Carl Kirst, CFA 212-885-4113 Associate Director − Canada Associate Director − US Hari Sambasivam 416-359-8357 Todd J. Jonasz 212-885-4051

ENERGY CONSUMER DISCRETIONARY REAL ESTATE

Oil & Gas – Integrateds Retailing/Consumer REITs (Canada) Randy Ollenberger 403-515-1502 Peter Sklar, CPA, CA 416-359-5188 Jenny Ma, CFA 416-359-4955 Oil & Gas – E&P Cannabis Troy MacLean, CFA 416-359-8366 Jared Dziuba, CFA 403-515-3672 Tamy Chen, CFA 416-359-5501 REITs (US) Phillip Jungwirth, CFA 303-436-1127 Peter Sklar, CPA, CA 416-359-5188 John P. Kim 212-885-4115 Ray Kwan, P.Eng. 403-515-1501 Restaurants R. Jeremy Metz 212-885-4053 Dan McSpirit 303-436-1117 Andrew Strelzik 212-885-4015 Mike Murphy, P.Geol. 403-515-1540 David Round +44 (0)20 7664 8052 Toys & Leisure INFORMATION TECHNOLOGY Gerrick L. Johnson 212-883-5192 Oil & Gas – Oilfield Services IT Services & Software Auto Parts Daniel Boyd, CFA 713-547-0812 Keith Bachman, CFA 212-885-4010 Mike Mazar, CPA, CA, CFA 403-515-1538 Peter Sklar, CPA, CA 416-359-5188 Communications Equipment Education Tim Long 212-885-4101 Jeffrey M. Silber 212-885-4063 MATERIALS Information Technology Special Situations Thanos Moschopoulos, CFA 416-359-5428 Commodity Strategy Stephen MacLeod, CFA 416-359-8069 Colin Hamilton +44 (0)20 7664 8172 Jonathan Lamers, CFA 416-359-5253 Semiconductors Ambrish Srivastava, Ph.D. 415-591-2116 Base Metals & Mining Telecom/Media/Cable David Gagliano, CFA 212-885-4013 CONSUMER STAPLES Alexander Pearce +44 (0)20 7246 5435 Tim Casey, CFA 416-359-4860 Edward Sterck +44 (0)20 7246 5421 Food Retail Media and Internet Alex Terentiew 416-359-6319 Kelly Bania 212-885-4162 Daniel Salmon 212-885-4029 Precious Metals & Minerals Food & Ag Products Andrew Breichmanas, P.Eng. +44 (0)20 7246 5430 Kenneth B. Zaslow, CFA 212-885-4017 Andrew Kaip, P. Geo. 416-359-7224 UTILITIES Food & Beverage Andrew Mikitchook, P.Eng., CFA 416-359-5782 Amit Sharma, CFA 212-885-4132 Electric Utilities & Independent Power Sanam Nourbakhsh +44 (0)20 7664 8091 Ben Pham, CFA 416-359-4061 Brian Quast, P. Eng., JD 416-359-6824 Personal Care & Household Products Ryan Thompson, CFA 416-359-6814 Shannon Coyne, CFA 404-926-1591 US Pipelines & MLPs Danilo Juvane, CFA 713-518-1267 Fertilizers & Chemicals Joel Jackson, P.Eng., CFA 416-359-4250 HEALTHCARE US Chemicals MACRO John McNulty, CFA 212-885-4031 Biotechnology Do Kim 212-885-4091 Investment Strategy Packaging & Forest Products Matthew Luchini 212-885-4119 Brian G. Belski 212-885-4151 Mark Wilde, Ph.D. 212-883-5102 416-359-5761 Ketan Mamtora 212-883-5121 Managed Care/Facilities Matthew Borsch, CFA 212-885-4094 Economics Douglas Porter, CFA 416-359-4887 Medical Technology Michael Gregory, CFA 312-845-5025 INDUSTRIALS Joanne K. Wuensch 212-883-5115 416-359-4747 Transportation & Aerospace Pharmaceuticals Earl Sweet 416-359-4407 Alex Arfaei 212-885-4033 Fadi Chamoun, CFA 416-359-6775 Quantitative/Technical Gary Nachman 212-883-5113 Diversified Industrials Mark Steele 416-359-4641 Devin Dodge, CFA 416-359-6774 Herbert Sun 416-359-6704 Diversified Industrials & Industrial Distribution FINANCIALS Exchange Traded Funds R. Scott Graham 212-885-4077 Jin Li 416-359-7689 Canadian Banks Machinery Sohrab Movahedi 416-359-7157 Joel Tiss 212-883-5112 US Large Cap Banks & Specialty Finance SPECIAL PROJECTS Business & Industrial Services James Fotheringham 212-885-4180 Jeffrey M. Silber 212-885-4063 Special Projects US Banks Kimberly Berman 416-359-5611 Mobility Equipment & Technology Lana Chan 212-885-4109 Richard Carlson, CFA 212-883-5141 Insurance/Diversified Financials (Canada) Tom MacKinnon, FSA, FCIA 416-359-4629 Diversified Financials (Canada) Nik Priebe, CFA 416-359-4293

1 First Canadian Place, P.O. Box 150, Toronto, ON M5X 1H3 416-359-4000 • 129 Saint-Jacques Street, 10th Floor, Montreal, Quebec H2Y 1L6 • 900, 525 - 8th Avenue S.W., Calgary, AB. T2P 1G1 95 Queen Victoria Street, London, U.K., EC4V 4HG • 3 Times Square, 29th Floor, New York, NY 10036 212-885-4000 • 200 Tower Place, 3348 Peachtree Road, NE, Suite 1430, Atlanta, GA 30326 100 High Street, 26th Floor, Boston, MA 02110 617-451-0670 • 600 17th Street, Suite 1704S, South Tower, Denver, CO 80202 • 700 Louisiana Street, Suite 2100, Houston, TX 77002 713-546-9746 One Market, Spear Tower, Suite 1515, San Francisco, CA 94105 415-591-2100 • 115 S. LaSalle Street, Chicago, IL 60603 BMO CAPITAL MARKETS Canada Leads the Global Cannabis Paradigm Shift: Initiating Aphria and Canopy at Outperform

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BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, (Member FDIC), BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe and Australia and BMO Advisors Private Limited in India.

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