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Annual Review

“As I look back at fiscal 2016 and look forward to the future, two words, growth and opportunity, come to mind.� - Bruce Linton Chairman & CEO, Canopy Growth Corporation

Table of Contents





















CGC Annual Review : 2016





01. Message from the CEO

CGC Annual Review : 2016



GROWTH BY THE NUMBERS Investments across our operations, including in our ­production capacity and in our award winning customer ­service ­generated significant growth in our business. By the ­numbers, the growth our business delivered in fiscal 2016 was impressive: revenues and grams of marijuana sold ­increased greater than four-fold over 2015, to $12.7 ­million and 1.7 million grams, respectively. Our registered patient count rose 300 percent to over 11,600 at the end of the 2016 fiscal year. GROWING OUR PRODUCTION CAPACITY AND PRODUCT OFFERING Investments made over the fiscal year resulted in the more than doubling of our licensed production capacity, to 595, 000 square feet, in three world-class production ­facilities. In the second half of the year, our research and development, production, marketing and regulatory teams worked hard and smart to begin licensed production and sale of targeted cannabis oil extract products for the market. With the growth in our revenue, grams sold, number of registered patients, licensed production space and product offering over the past year, we have built what is arguably the dominant medical marijuana platform in Canada. That said, in my opinion, what we are doing to position our c­ ompany for the future and the extent of the opportunities that lie ahead for our business, are the real stories.



Message from the CEO

FY 2015

FY 2016









STRONGER THROUGH ACQUISITION The acquisition, in the second quarter of fiscal 2016, of ­Bedrocan Canada, a company with a strong medical ­marijuana brand and over 20 years of medicinal marijuana research and indoor growing experience, strengthened our ability to meet the needs of the marijuana market, today and in the future. EVOLUTION IN CORPORATE NAME AND STRUCTURE The acquisition of Bedrocan precipitated a change in our ­corporate structure and in the name of the publicly traded entity. Changing the corporate structure, to a multi-brand holding company, sets the stage for expanding our business. To better leverage our distinct customer-facing brands, Bedrocan and Tweed, to build upon our dominant position in the marijuana market in Canada, we changed the name of the publicly-­traded entity, to Canopy Growth Corporation.

STRENGTHENED BRANDS AND MARKET SEGMENTATION During the fiscal year we undertook various activities to strengthen our brands and their market focus. Bedrocan, which is and will remain 100% focused on the medical ­market, initiated a number of programs to help advance the understanding and affordability of treating ­medical ­symptoms using cannabis. Very active engagement with online and traditional media communities, further ­strengthened the already strong Tweed brand. Like the launch of our Tweed Main Street community engagement centres and the partnership with Snoop Dogg, a renowned cannabis connoisseur, both of which were launched towards the end of the fiscal year, the Tweed team is determined to use creative marketing strategies to further increase public awareness of the Tweed brand. Our objective is to make the Tweed brand top-of-mind as consumers consider making their first legal marijuana purchase.

CGC Annual Review : 2016

THE NEXT OPPORTUNITY IN CANADA – ADULT RECREATIONAL ACCESS As I believe you all know, the Canadian Federal government has promised to introduce legislation to “legalize, regulate and restrict access to marijuana” in the spring of 2017. It goes without saying that legalizing recreational use will ­greatly increase the size of the marijuana market in Canada. A quick Google search reveals size forecasts for the ­recreational marijuana market in Canada that range from $7b to $10b per year. To put this market opportunity into context, according to Statistics Canada, Canadians spent $8.7b on beer in 2014. With a strong and growing medical marijuana market and the prospect of a very large recreational market on the horizon, the opportunity to grow our business in Canada is significant. BRINGING ADDITIONAL CANADIAN CAPACITY UNDER THE CANOPY Several years ago, I read a newspaper article that alerted me to pending disruption in the medical marijuana market. In the years since, our business strategies and execution have provided us with a very strong start. Now consider that, today, it can take at least three years and an investment of many hundreds of thousands, if not millions, of dollars before the many applicants awaiting Health Canada approval, can sell their first gram. The challenges faced by late market entrants and aspiring applicants are significant. This will drive consolidation in the market. We have received multiple inbound inquiries from other Licensed Producers and license applicants with built-out capacity, seeking to be acquired. Leveraging our strong balance sheet, financial performance and ­presence in the ­capital markets, we are interested in acquiring complementary Canadian assets though, rest assured, we will be very selective in the assets that we acquire.


the ­Canadian border. Our recently announced partnership in Australia, with AusCann Holdings, the Bedrocan Brazil joint venture and our partnership with MedCann GmbH, Pharma and Nutraceuticals to export medical cannabis to Germany, demonstrate the opportunities that exist. With ­significant ­interest from multiple third-parties, we are currently pursuing a number of very exciting projects ranging from t­ he export of medical cannabis to the ownership of ­cannabis cultivation and sales operations in countries around the world. I am hopeful that we will be able to close on at least a couple exciting international business ventures over the next number of months. VERTICALLY INTEGRATING UP THE VALUE CHAIN We believe a significant potential future opportunity exists, within an appropriate regulatory framework, to drive up our margins by vertically integrating up the value chain. In a future recreational market, this could mean the ­commercialization of edible and drinkable consumer ­products infused with cannabis elements, most notably THC. Think of the market disruption that could be caused by the introduction of THC-infused beverages that bring the same personal enjoyment as traditional beer, spirits and wine but without the negative post-consumption effects ­including weight gain. In the medical market, think of ­marijuana based therapies for the treatment of a wide-range of medical ­symptoms. In closing, I would like to thank our employees and their ­families and our board of directors for their hard work and ­continuing dedication. I would also like thank you, our ­s­hareholders, for your support — we would not be where we are today without you. Sincerely,

EXTENDING THE CANOPY BEYOND CANADA Governments, entrepreneurs and researchers around the world have recognized the effectiveness of Canada’s ­medicinal marijuana regime and the growing strength of our business. This recognition has literally pulled our ­business, and further opportunities for its growth, beyond


Bruce Linton, Chairman & CEO



Meet the Team


TIM SAUNDERS Senior Vice President, Chief Financial Officer


PHIL SHAER Vice President, General Counsel, HR

CGC Annual Review : 2016

TOM SHIPLEY Vice President, Quality Assurance & Lab Services

AMANDA DALEY Vice President, Medical

RADE KOVACEVIC Vice President, Sales & Customer Experience

MARTIN STRAZOVEC Chief Creative Officer



02. Path to Legalization

CGC Annual Review : 2016


In 1923, without a great deal of debate or fanfare, ­marijuana was prohibited in ­Canada. For almost eighty years, ­public opinion generally supported a crime and punishment ­approach to cannabis laws. However, over the past ten years we have seen a change in attitude towards marijuana, both in Canada and around the world. In fact, more Canadians now prefer softer ­marijuana laws. Many, 68% according to a recent Globe and Mail poll, now consider recreational legalization to be a ­sensible ­approach. Prior to Justin Trudeau’s election as Prime Minister last October, the Supreme Court of Canada ostensibly drove all MMPR policy reform. Patients around the country earned concessions like non-inhaled delivery options by challenging the framework of the day in the courts but rarely, if ever, saw improvements to the medical marijuana system. In addition to the change in approach to medical laws, Justin Trudeau and the federal government are moving to legalize, restrict and regulate marijuana for recreational use. This decision is driven by a desire to remove revenue sources flowing into criminal organizations, reduce access for young Canadians, and to reduce the amount of taxpayer money spent on enforcing marijuana laws. These policy objectives will help define Canada’s emerging cannabis industry, which will be regulated at the federal level aside from distribution channels, which will likely differ from province to province, similar to liquor distribution across the country today.

With medical marijuana already legal in Canada and ­producers like Tweed and Bedrocan Canada having ­production and distribution experience in the medical sphere, there has never been a greater opportunity for growth in the cannabis space. Some of Canada’s most recognizable businesses and entrepreneurs have taken note of Canada’s shifting political climate and public opinion. Shopper’s Drug Mart, London Drugs, and the Pharmacist’s Association of Canada have openly i­ ndicated their interest in medical cannabis. And Ontario premier Kathleen Wynne has openly indicated that the ­provincially-run LCBO would be the ideal place to sell recreational cannabis products. In short, the stigma that has surrounded cannabis for many years is quickly eroding. Canopy Growth is in an ideal position to capitalize on the opportunities at hand. Through our existing brands we can simultaneously strengthen our position in the Canadian medical marijuana market and transition seamlessly into a recreational market.


03. World-Class Production

CGC Annual Review : 2016





World-Class Production

Refined Standardized Harvests

CGC Annual Review : 2016



BEDROCAN CANADA TORONTO, ONTARIO Bedrocan Canada cultivates and ­processes marijuana using the ­refined and unwavering processes ­developed over more than two decades by ­Bedrocan International (formerly Bedrocan BV) of the Netherlands. With 50,000 square feet of licensed ­production space, no variable is left unchecked to ensure the stabilized genetics produce ­standardized harvests time and time again. The production of standardized strains using highly-repeatable ­processes and minimal labour drives down the per gram production costs to levels that are competitive with greenhouse ­production.



World-Class Production

Data Driven Indoor Production

CGC Annual Review : 2016




Tweed is housed in the famous ­former Hershey Chocolate factory in Smiths Falls, Ontario. The Tweed facility has 168,000 square feet of licensed space with 12 of an eventual 30 growing rooms completed. It is a data-­driven, automated and lean operation, h ­ ousing an R&D facility, oil extraction ­infrastructure, and in-house lab. ­Precise climate controlled spaces for each stage of cannabis production, from clone to cured bud, allows for the ­highest quality and widest variety of product in the sector. The Tweed campus comprises 40 acres of land, much of which is ­underdeveloped, and a main building with a total footprint exceeding 460,000 square feet, providing ­signif­i cant ­opportunity to increase licensed p ­ roduction within the ­existing building or by erecting new growing space as demand increases.


Canopy Growth, thr owned subsidiaries ­Canada, Tweed and currently operates t marijuana cultivatio facilities. Investmen fiscal 2016 more tha combined licensed square feet.

CGC Annual Review : 2016

rough its ­whollys, Bedrocan d Tweed Farms, three world-class on and ­processing nts made during an double the space to 595,000





World-Class Production

True Greenhouse Grown

CGC Annual Review : 2016



TWEED FARMS NIAGARA ON THE LAKE Tweed Farms sits on approximately 9 acres of land and ­features 375,000 square feet of licensed space comprising greenhouse production and storage/shipping facilities. Investments made during fiscal 2016 more than doubled the ­licensed greenhouse production space, to 350,000 square feet, and added a 25,000 square foot secure storage and shipping centre. Scale and passive growing processes allow the Farm to produce environmentally-friendly cannabis at extremely competitive per gram costs. The Farm combines traditional and state-of-the art agricultural techniques, using the natural power of the sun, natural ventilation and r­ ecycled rainwater. The Farm will be able to nurture ­genetically ­identical plants produced in an on-site tissue culture ­propagation lab.



World-Class Opportunity Production to Add Production Capacity

We are ­positioning our company for the future. The ­opportunities that lie ahead for our business are the real story.

CGC Annual Review : 2016







With Tweed and Bedrocan ­being among the very first ­Licensed P ­ roducers in Canada, we have ­developed, ­ within ­Canopy Growth, an ­unparalle­d ­understanding of the ­regulatory ­environment. This understanding, in part, guided the acquisition of Tweed Farms and drove this ­ facility to achieve its first license ­approval in a short eight weeks post-acquisition. ­



Understanding the ­challenges facing many pre-license as well as Licensed Producers and ­capitalizing on our k ­ nowledge and expertise, our strong balance sheet and ­financial ­performance and our ­presence in the capital markets, we see ­opportunities to make select and ­prudent ­investments to bring a­ ­dditional pre-license or licensed ­production capacity under the canopy.



04. Brand & Market Segmentation

CGC Annual Review : 2016



The growing marijuana market presents a unique business opportunity at home and abroad. Here in Canada the ­medical ­market continues to grow at an exciting rate as doctors and the public become more c ­ omfortable with cannabis as a ­medical option. With an aging population, more medical treatments and ­medications are bound to be sought out and medical marijuana aligns with prevailing societal values of choosing ­simplicity over complicated synthetic pharmaceuticals with long side-­effect disclaimers in the fine print. With ­proposed legislation expected Spring 2017, another much more ­lucrative opportunity is emerging in Canada. With ­segmented ­approaches and value propositions, Canopy Growth can expand i­ nternationally using either of the ­consumer facing brands, depending on the right fit for the local market. In Tweed and Bedrocan Canada, Canopy Growth has positioned two distinct brands to maximize market ­opportunities in the medical and recreational market segments. ­Presently, both brands are vertically integrated producers and e-commerce distributors that serve medically ­authorized ­individuals. As laws and market dynamics evolve and recreational consumers likely gain access to ­products on store shelves, the two brands will diverge.

Bedrocan Canada will remain a focused medical cannabis company, true to Bedrocan International’s values. In Canada, this means a continued focus on clinical research through initiatives like the EQUAL Study, the largest clinical study of its kind in the world, and additional research initiatives that will serve as the basis for greater medical understanding of cannabis as a therapy. Medical outreach efforts at Bedrocan Canada have thrived ­under the Canopy Growth banner with physician interactions n ­ umbering 16,000 since the inception of the program. ­Quantitatively, the team continues to engage with ­family physicians, pain specialists and primary care ­professionals on a daily basis and will continue to do so as these interactions are key to the Canopy Growth story. A client that chooses ­Bedrocan Canada based on their family doctor’s ­recommendation rather than a cannabis-focused clinic is very valuable to our business, it is a sign that our outreach efforts are working.



At ­Bedrocan ­Canada we have focused our advocacy efforts on measures related to clients out-of-pocket costs.

and p ­ recedents in the insurance industry that can lead to ­structural changes to the way cannabis is covered by insurers.

Bedrocan Canada, working with NGOs, industry partners, and federal lawmakers, created a petition to coalesce support around removing sales tax from medical cannabis. Today, cannabis is the only physician-authorized medicine that isn’t “zero-rated” by the Canada Revenue Agency, a designation that would exempt it from taxation at the point of sale. Over 10,000 signatories’ voices will be heard when the petition is presented to the House of Commons in the fall of 2016.

Thanks to the low cost ­production m ­ ethods developed over the course of two decades by ­Bedrocan International and used at Bedrocan Canada’s ­facility, the lowest full product line in the industry still ­provides healthy margins to investors.

By partnering with Canadians for Fair Access to Medical ­Marijuana, Bedrocan Canada is also working with its clients to identify individuals who may be eligible for insurance coverage. This work is designed to help individual clients, but over the long-term, the goal is to create awareness

Tweed’s brand, by contrast, will focus on ­creating an affinity for the Tweed story through ­interesting product lines and high profile, high impact ­collaborations. In many regards this work is ­underway, with many acknowledging that Tweed is the most recognizable cannabis brand in the world.

These efforts, in addition to the cutting edge clinical work and industry leading physician education, set Bedrocan Canada apart as the leading medical marijuana brand in the country.

CGC Annual Review : 2016



For cannabis ­companies, medical ­focus means more than clinical r­ esearch and physician ­education, it means that you have to be a ­patient ­advocate on a ­number of fronts. Active media engagement, through social media channels and ­mainstream media has allowed Tweed to drive brand recognition and thought leadership at a pivotal time for the industry. Tweed will continue to serve its medical patients once a recreational market is defined but its primary focus will shift closer to recreational customers looking for a wide variety of products and formats. The transition to recreational ­focus will take place subtly. An existing market presence will serve as an early-mover ­advantage when new ­opportunities open up, but until that time the Tweed team will remain solely focused on the needs of our medical customers. An established partnership with DNA Genetics plays well in an evolving market. As a product-focused arrangement, it

benefits every category of consumer by improving the quality of Tweed’s entire product line. Along the same lines, aligning with Snoop Dogg also makes sense in both markets. As a long-time medical patient in ­California and the most visible cannabis icon in the world, working with Tweed has resonance now and in a legal recreational context. We are thrilled to be partnered with Snoop. He has the ability to raise Tweed’s visibility in Canada and around the world. His interests in the cannabis space include his own brand of flowers, Leafs by Snoop, as well as many other peripheral businesses. Tweed will play a key role in introducing Snoop’s cannabis businesses to the Canadian market with exclusive branding and content rights.

05. Products

Many producers have diverse seed banks but no other company in Canada is capable of producing the same volume as Tweed, an advantage we’re proud to pass on to customers. Canopy Growth’s two consumer ­facing cannabis brands are very different and the ­production methods and ­product lines ­offered by each company reflect ­distinct values. Bedrocan Canada’s product line includes six strains of whole flower dried cannabis, granulated product and extracts. All products sold by Bedrocan Canada have been standardized to ensure they are genetically identical at every harvest. Physicians and patients, many of whom require medical ­cannabis to treat symptoms over the long-term, place a great deal of value in Bedrocan’s standardized varieties. In time, additional delivery methods will be added to satisfy the growing market demand for non-smoked forms of ­cannabis therapy like capsules, sprays, and topical ­treatments.

Tweed’s product lines, by contrast, reflect a desire to appeal to broad segments of the market through variety and ­diversity. Supported by the largest indoor & greenhouse grows in the MMPR, Tweed customers are able to consistently access a wide variety of cannabis strains, blends, and extracts. Regulatory change in the summer of 2015 allowed Tweed and Bedrocan to legally produce and distribute cannabis extracts oils to authorized patients. Both company’s extract lines are ­produced in Smiths Falls to reduce the capital costs and ­physical space required to run a commercial extraction lab. Demand for these products was evident prior to the R v Smith decision and subsequent regulatory changes. In fact, since ­extracts hit the market in 2016, equipment ­doubled, ­production efficiency tripled, and a custom built

CGC Annual Review : 2016



industrial extractor is being purpose-built by a Canadian ­company called Advanced Extraction Systems (ABS) to ­prepare for the legal recreational market.

sunflower oil to reach a­ llowable potency levels. The subtle differences allow us to separate the brands and occupy ­various positions in the market.

Management decided the best approach was to be the first company to do it well rather than the first company to do it, period. Both Tweed and Bedrocan have developed ­reputations for quality and consistency, reputations the ­companies wanted to carry with them into oils. ­Planning to produce at an industrial scale allowed us to plan a ­competitive pricing structure.

Tweed’s 10:1 Cannabis Oils are supported by a line of ­baking kits and other culinary resources branded as the Tweed P­­antry. These value-adds speak to the typical Tweed ­customer’s needs. They are the sort of customer who isn’t just looking for a producer, they’re looking for an experience.

Using common infrastructure, the initial offering from Tweed and Bedrocan were similar. Each offer ­extracted ­cannabis oil in 100ml bottles, equivalent to 10g of a ­customer’s ­monthly ­allotment. Each company uses

Bedrocan bedro-oils 10:1 Cannabis Oil extracts are ­medically focused, produced using whole-flower standardized cannabis. They form the basis of a product line that appeals to the medical community.


“Navigating ahead based on having the best view.” - Bruce Linton CHAIRMAN & CEO, CANOPY GROWTH CORPORATION

CGC Annual Review : 2016



06. Market Share

Our primary focus is ­strengthening our market share across all legal ­Canadian ­marijuana markets. We’ve begun establishing strong positions in new ­geographical markets and will increase our international focus where opportunities ­exist. Looking at the scope of the opportunity, we want to make sure we’re making investments with an eye to the future and how successful we can be if we start big. These investments, whether via acquisition or by expanding existing facilities, are likely to delay when our business becomes cash flow positive. However, we strongly believe this focus will drive ­significantly higher cash earnings and shareholder returns over the long-term.

Attracting market share can be achieved through a variety of strategies. Pricing, for example, allows us to position the two consumer-facing brands differently. Bedrocan, with its standardized product line and low cost of production allows us to position it as the lowest cost product offering in Canada with the True Compassionate Pricing promise, regardless of income. Positioning Tweed, at slightly higher price points of $6­–$12 per gram attracts a unique clientele and avoids having the brands competing against one another for the customers who are driven by cost alone.

CGC Annual Review : 2016



Quarterly Revenue ($000’s) $14,000







0 Q1








(CRA Approved a one-time five-quarter fiscal year for FY 2015 due to a change in year-end)

Tweed’s prices are a reflection of slightly higher production costs and h ­ ands-on production techniques, akin to craft ­brewing in the beer market. Marketing very different value propositions remains the ­principle differentiator between the two brands. At this ­crucial time of market divergence between medical and ­recreational, Canopy Growth investors get the best of both worlds with a leading medical company and a leading, ­ lifestyle driven ­recreational company. Attracting customers is a key consideration. Retaining them is equally important

to maintain the momentum we e­ xperienced throughout 2016. In the upcoming year we will launch a comprehensive customer loyalty program to promote retention and reward long term loyalty to the ­business. Layered with award-winning ­customer service, we are confident that we can create ­informal referral networks and customer ambassadors across the country. The results speak for themselves—22,000 customers at end of August 2016, up from less than 500 at end of June 2014.



07. International

CGC Annual Review : 2016



In recent years, the actions of many ­governments around the world have ­signaled a significant change in attitudes towards the legalization of marijuana. At the recent UN General Assembly Special Session on Drugs (UNGASS), the Government of Canada took centre stage by announcing its intention to introduce, by the spring of 2017, legislation ­legalizing ­recreational marijuana use. Many countries are pushing for drug consumption to be seen in a different light, one that moves beyond prohibition to one that ­emphasizes public health and education and defunding criminal ­organizations around the world. With changing global attitudes towards marijuana, many countries are looking to Canada, and its regulatory framework that is driving the commercialization of medical marijuana, with much respect. As jurisdictions move towards establishing new or improved medical marijuana systems, they are looking to companies acting within the Canadian framework for expertise, knowledge, financial strength and potentially product to share. Having established and now expanding our dominant position in the Canadian medical

marijuana market, third parties in countries around the world want to work with Canopy Growth and its subsidiaries. We believe a significant opportunity exists currently and will develop further in the future, to leverage our ­expertise, ­financial strength and business model in developing ­legal marijuana markets around the world. To date Canopy Growth has established three international partnerships including an ownership position in AusCann Holdings of Australia, a joint venture, Bedrocan Brazil, and an export ­arrangement in place with a partner in Germany. Other ­exciting opportunities exist and, in time, we will expand ­Canopy into other markets. The international business opportunities being pursued by Canopy Growth include ­providing advisory services to third parties, exporting ­medical cannabis and, of most interest, the ownership of c­ annabis cultivation and sales operations in countries outside of Canada.

There has 足never been a 足greater 足opportunity for growth in the 足cannabis space.

This document contains forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Canopy Growth Corporation, Tweed Inc., Tweed Farms Inc. or Bedrocan Canada Inc. to be ­materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Examples of such statements include future operational and production capacity, the impact of enhanced infrastructure and production capabilities, and forecasted available product selection. The forward-looking statements included in this document are made as of the date of this document and Canopy Growth Corp. does not undertake an obligation to publicly update such forward-looking statements to reflect new i­ nformation, subsequent events or otherwise unless required by applicable securities legislation. Neither the TSX Exchange nor its R ­ egulation Services Provider (as that term is defined in policies of the TSX Exchange) accepts responsibility for the adequacy or accuracy of this document. C ­ anopy Growth Corporation, Tweed Main Street, and Tweed are trademarks of Canopy Growth Corporation.

1 Hershey Drive, Smiths Falls, Ontario k7a 0a8

Canopy 2016 Annual Review  
Canopy 2016 Annual Review