Canopy Growth Corp (WEED)

[Wo]

CANOPY GROWTH’S POSITIONING FOR THE CANADIAN REGULATED RECREATIONAL
MARKET

CANOPY GROWTH CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2017
FEBRUARY 14, 2018
https://www.canopygrowth.com/wp-content/uploads/2018/02/Canopy-Growth-Corporation_Q3_2018_MDA_FINAL.pdf

{a few interesting tidbits about the strength or lack thereof in Pharmacy Channels and expectancy of Online Distribution taking a lead into the opening of the market}

Early in the development of the Company’s plan to enter the future Canadian Regulated Cannabis
Market, management realized that securing channels to market was equally, if not more, important
than licensed cultivation capacity. With the provincial liquor agencies being given responsibility for
establishing distribution and retail frameworks focused the majority of its management outreach on
building relationships with these agencies. To aid in this effort, the Company hired a government
relations team with over two decades of direct liquor agency experience.
It is worthwhile highlighting that the Company has engaged in outreach to other retail networks
including national pharmacy chains. As it remains unclear as to when other retail networks,
including pharmacies, will be permitted to sell cannabis, the Company determined that efforts to
secure supply related agreements with pharmacy chains would provide limited, if any, real value to
the Company in the short to medium-term.
When selecting Licensed Producers to supply cannabis for recreational retail sales, provincial
governments and/or their liquor control agencies, many factors, including cannabis inventory and
production capacity, product quality, product variety, product branding, price, sales support and
economic commitments to the provinces are expected to influence product demand and supplier
selection.
In preparation for the launch of a regulated recreational cannabis market expected in the summer
of 2018 (July 2018), the provincial liquor agencies are actively seeking multi-year supply
arrangements with a limited number of licensed producers that they believe can provide them
supply certainty. Management believes that most provinces are likely to enter into supply
arrangements with 4 or 5 primary suppliers.
Cannabis producers positioning to become primary provincial suppliers will need to demonstrate
that they have sufficient inventory levels and in production capacity at March 31, 2018. The supply
related agreements established by the provincial liquor agencies in Newfoundland & Labrador, New
Brunswick and Prince Edward Island contemplate two-year supply contracts. It is anticipated that
many, if not all, of the remaining provincial and territorial liquor agencies will enter similar supply
agreements with primary suppliers.
For Licensed Producers that meet the inventory and capacity requirements sought by the provinces
and who successfully secure a primary supplier relationship, management believes the two-year
supply contracts can be expected to provide certainty of business operation and secure a channel
to market for additional capacity that the selected producers may bring into production as well as
partner capacity offtake.
To position the company to confidently secure primary supplier contracts with all of the provincial
liquor agency, the Company has invested significant resources to establish the largest cannabis
inventory and licensed and in-production capacity by the end of the first calendar quarter 2018. At
December 31, 2017, management believes the company had the largest inventory of harvested
product and biological assets with a value exceeding $108,318. As of February 13, 2018,
management believes the Company has the largest licensed and in production platform in Canada,
at over 600,000 sq. ft. In addition, the Company expects to have up to an additional 5,000,000 sq.
ft. enter production over the next twelve months. With the combination of the sector’s largest
inventory and the Company’s vast production platform, management believes the Company is well
positioned to secure large supply channels into the regulated recreational market and ultimately
supply a significant portion of that market.
The Company’s CraftGrow program discussed elsewhere, which assists smaller local/regional
Licensed Producers in getting their product to market, provides additional value-added
consideration should provincial liquor control agencies seek the flexibility to showcase products of
local/regional Licensed Producers within a trusted supply agreement with a larger producer.
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With renowned cannabis brands (Tweed, Leafs By Snoop & DNA Genetics), strong customer and
online communication, substantial product variety, management believes consumer demand for
the Company’s products will be strong.
With licensed cultivation and production operations in Ontario and Saskatchewan and Quebec as
well as announced development plans spanning British Columbia, Alberta, New Brunswick and
Newfoundland & Labrador, Canopy Growth has made meaningful economic development
commitments in various provinces.
Management believes large scale Licensed Producers are well positioned to support the provinces
in their efforts to establish, oversee and implement physical and online cannabis retail. The
Company, with comprehensive standard operating procedures for secure cultivation, production,
storage and transportation of Cannabis and significant, highly secure vault storage capacity in place
or under development in multiple locations across the country, is well positioned to assist provincial
agencies with the provisioning of secure cannabis storage and transportation. With the largest
customer base in the legal Canadian cannabis market and broadest product portfolio in the sector,
the Company can offer provincial agencies/crown corporations/retailers with significant consumer
product demand intelligence to assist with product selection.
Management believes Licensed Producers will be required to have operational information
technology systems, including Enterprise Resource Planning systems, to interface with the
sophisticated inventory management, ordering and billing systems in operation at the various liquor
boards. Canopy Growth has invested significantly in the upgrading of our IT infrastructure,
including the implementation of an Enterprise Resource Planning application. To help guide the
implementation of information technology systems required to interface with the various provincial
liquor agencies, the Company’s Chief Information Officer (“CIO”) has established relationships with
the CIOs of many of these agencies.
The large product volumes that will be required to be packaged and shipped to the provincial liquor
agencies demands the automation of product packaging and shipping functions. As with
information technology systems, Canopy Growth has invested significant resources in improving
the efficiency of these functions through increasing utilization of automated systems.
The provincial liquor control agencies are being tasked with implementing and managing the
distribution and, in many cases, the retail of cannabis products. As management functions within
the liquor agencies and new staff being hired to support the rollout of cannabis distribution and
retail likely have limited previous experience/knowledge of the product, Management believes
significant in market sales support and education will be required. The Company has established
a sales management and in market support team and programs to educate and prepare retail staff.
To date, the Company has entered into agreements with the liquor agencies in New Brunswick and
Prince Edward Island for the development and delivery of education programs.
As highlighted earlier, Canopy Growth believes that, in certain provinces, it will take two years and
possibly longer to rollout the full network of regulated cannabis retail stores that is required to satisfy
consumer demand. As such, Canopy Growth believes that most of the sales in the first two years
of the regulated recreational market will go through provincial online sales. With less than 6 months
to establish a robust online retail system and cannabis marketplace, management expects that
certain, if not many, provinces could benefit from leveraging the existing online ecommerce,
customer demand data and transactional information technology systems that have been deployed
by the Company. The Company’s Tweed Main Street online store (See Overview of Canopy
Growth Corporation, Tweed Main Street), a single online marketplace offering cannabis for sale
from multiple producers across numerous brands – delivering a shopping experience that
consumers expect, is uniquely suited to deliver the online retail experience that provincial
agencies/crown corporations/retailers will be expected to deliver.

https://www.canopygrowth.com/wp-content/uploads/2018/02/Canopy-Growth-Corporation_Q3_2018_MDA_FINAL.pdf