Industry Report – CBD

September 5, 2017
Member of the Canadian Investor Protection Fund

Cannabidiol (CBD) – A Growing Sector of the Medical Cannabis Industry

Neal Gilmer, MBA | 416-843-3457 | ngilmer@haywood.com

What is CBD?
Cannabidiol is a cannabinoid chemical compound that is found in both marijuana plants and hemp plants. There are more than
100 cannabinoids in a cannabis plant that exhibit varying effects by mimicking the endocannabinoids that are naturally produced
in the body. Endocannabinoids regulate functions in the body such as internal stability, pain regulation and immune system
functions.

Why Focus On CBD?

Cannabidiol, otherwise known as CBD, is expected to be one of the segments supporting the growth of the overall cannabis
market. It is known for its relief of a plethora of medical conditions, without the psychoactive high associated with THC. As the
medicinal benefits of CBD become more widely known, the CBD market is projected to grow significantly over the next few
years. We believe that the CBD market will emerge as one of the forefront areas on the medical side of the broader cannabis
industry.

With this report we have tried to provide investors with an overall understanding of what CBD is, the various different potential
medical health benefits it can provide, it’s potential to help alleviate the opioid crisis and the projected market size and growth.
Much of the discussion in Canada to date has been on the initial medical marijuana market and the upcoming recreational
market. While we believe both will prove to be significant growth areas, along with various international opportunities, we
believe that the CBD market will emerge as one of the focal points as a sub-sector of the overall cannabis industry.

CBD Market Poised For Significant Growth

The CBD market is project to grow significantly over the next few years. The Hemp Business Journal estimates that the CBD
market will grow to US$2.1 billion in consumer sales by 2020, a 700% increase from 2016. Another estimate by Greenwave
advisors suggests a total CBD market size of US$3 billion by 2021.

We believe that as more research is conducted and validates the perceived health benefits that more pharmaceutical companies
will forced to have exposure to the CBD market due to its expected growth. In addition, there are already numerous companies
and hundreds of CBD products touting the natural benefits of CBD available in various markets today.

We believe that current market estimates could prove conservative, particularly on the pharmaceutical side which we believe
could become a significant driver in the global market. In our view that will only accelerate the growth and adoption within the
consumer products segment, particularly in the natural and specialty products market. We have seen in the past the significant
growth of other natural products with expected or anecdotal general health benefits. For example sales of fish and animal oil
supplements were just $45 million in 2001 and grew to $252 within 5 years which demonstrates how quickly these industries
can grow based on anecdotal health benefit claims.

Going forward we believe that we will see more companies clearly identify a CBD strategy, whether it be growth through high
CBD marijuana strains or hemp based CBD. We have already seen come companies with more defined approaches to the market
summarized at the end of this report. We expect more companies to follow suit as ths market unfolds as one of the potential
sub-sectors of material growth within the broader cannabis industry.

Please see page 11 for Analyst Certification, pages 11 - 13 for Important Information,
Legal Disclaimers, Rating Structure, and notes.
 Cannabidiol (CBD) – A Growing Sector of the Medical Cannabis Industry 9/5/17

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Cannabidiol (“CBD”) Introduction

The medical marijuana industry has seen a significant increase in acceptance over the past few years.
Various countries and states have implemented new medical marijuana regulations as more and more
citizens demand access to it. One of the areas that has been gaining more traction and attention is on
the therapeutic benefits of Cannabidiol (“CBD”).

CBD is a cannabis compound that has significant medical benefits that is an appealing option for
patients looking for relief from inflammation, pain, anxiety, seizures, spasms and many other
conditions. One of the events that brought the therapeutic benefits of CBD to lights was the work by
the Stanley Brothers. Their project that became known as Charlotte’s Web started in early 2012 after
learning that a 5 year old girl, Charlotte Figi, had dramatic success in treating epileptic seizures brought
on by Dravet syndrome. Her usage of the Charlotte’s Web strain, which contains 17% CBD and 0.3%
THC was featured in a 2013 CNN documentary “Weed” done by Sanjay Gupta. Following that, media
coverage increased demand for both Charlotte’s Web and other strains high in CBD.

GW Parmaceuticals received a licnese from the British government in 1998 to grow cannabis and
develop a precise extract for use in clinical trials. The company’s co-founder, Geoffrey Guy, theorized
that by using CBD rich plants that the company could produce a cannabis based medicine without the
psychoactive effects. GW acquired a genetic strain library from HortaPharm, a Dutch seed company.

CBD rich cannabis has some history for being used to treat health problems. There is anecdotal
evidence that CBD is helpful in treating PTSD, addiction, anxiety, inflammatory disorders, multiple
sclerosis, prion disease, acne, diabetes, fibromyalgia, and others. But historically the focus in the
cannabis world was in breeding strains that were righ in THC as that was typically what the market was
looking for. However, with the increased attention on the medical benefits of cannabis and CBD, there
has been a growing movement on the development of both CBD rich marijuana strains as well as CBD
extracted from Hemp plants.

What is CBD?
As mentioned cannabidiol is a cannabinoid chemical compound that is found in both marijuana plants
and hemp plants. There are more than 100 cannabinoids in a cannabis plant that exhibit varying effects
by mimicking the endocannabinoids that are naturally produced in the body. Endocannabinoids
regulate functions in the body such as internal stability, pain regulation and immune system functions.

There are at least two different types of cannabinoid receptors, CB-1 that is present mainly in the brain
and CB-2 receptors present throughout the body. Different cannabinoids typically produce different
effects depending on which receptor they bind to. THC is known to primarily bind to receptors in the
brain, CB-1, while CBD binds with the CB-2 receptors throughout the body.

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Figure 1: Cannabinoid receptors in the human body

Source: Cre8-health.com

THC is the most popular type of cannabionoid with its euphoric and psychoactive effects. THC
accomplishes this by binding to cannabinoid receptors in the brain and the central nervous system.
THC is known to deliver a number of short term effects such as :

• sedating effect
• pain relief
• increased energy
• hunger
• drowsiness
• feelings of elation
• calm and relaxation
• short-term memory impairment
• dry mouth
• red eyes
• increased heart rate
• laughter
• dizziness
• slowed perception of time
• anxiety
• paranoia

What’s important to understand is that CBD is very different than THC, however historically most
people are familiar with the above noted possible effects of THC. First and most importantly, CBD does
not have a psychoactive effect and therefore does not make users ‘high’. It also does not cause parnoia
or anxiety when consumed in high concentrations. Instead it is believed that CBD has healing

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properties to treat a wide range of medical conditions such as anti-inflammatory, anti-seizure, anti-
anxiety, and anti-tumor properties.

Medical uses of CBD

The direct medical efficacy of CBD is still being studied. The various therapeutic applications that have
been suggested that can benefit from CBD are supported by various levels of evidence. These can
range from clinical trials to determine the efficacy in humans to animal studies that examine the
behaviooural or physiological effects as well as experiments that look at its pharmacological
interations and mechanism of action.

As we mentioned earlier in the report, CBD is well known for the potential treatment of childhood
epilepsy and clinical trials testing that efficacy are currently underway. In addition, there is evidence
from some other studies that suggest that CBD may have properties to address neuroprotective, anti-
inflammatory and analgesic issues. It is also believed that it has therapeutic value in treatment of
disorders such as depression, anxiety and addiction.

CBD influences many different receptor systems in the body, affecting the signaling through the CB-1
and CB-2 receptors indirectly. It is also known to increase the level of the body’s endocannabinoids by
inhibiting enzymes that break them down. Figure X below outlines the ailments that CBD may help as
it influences non-cannabinoid receptors such as opiod, dopamine and serotonin. This may be why we
have seen a significant drop of prespcription use by patients in those states with a legal medical
marijuana program.

Figure 2: CBD’s potential influence on receptor systems

Source: Leafly

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There are a number of conditions that CBD consumers have reported to have provided relief for. The
main conditions that are typically reported are anxiety, insomnia, joint pain and depression. According
to a study by the Brightfield Group CBD users also listed conditions such as menstrual cramps, skin
concerns, diabetes, ADHD among others. Figure X outlines the conditions that CBD users relieve with
cannabis.

Figure 3: Conditions CBD users relieve with cannabis

Source: Brightfield Group, HelloMD

A survey by the Brightfield Group and HelloMD looked at the usuage of CBD products by 2,400 of its
community of 150,000 members. The survey revealed a couple of interesting data points. Within the
CBD only users 58% are women. The most common ailments people used CBD for were to treat
insomnia, depression, anxiety and joint pain. What is also interesting is that 42% of CBD users stopped
using tradition medications or pain relievers such as Tylenol and drugs such as Vicodin. Eighty percent
of the respondents stated that they found CBD products to be “very or extremely effective”. In Figure
X below, the respondents in the survey were asked to rate the efficacy of CBD versus traditional over
the counter products and prescription products. In both cases CBD was deemed to more effective or
much more effective in more than 50% of the responses.

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Figure 4: CBD Product Efficacy vs Traditional Medications

Source: Brightfield Group, HelloMD

Possible Influence on the Opioid epidemic

The United States as well as many other nations are currently in the middle of what is referred to as
an opioid epidemic. Based on data from the U.S. Centers for Disease Control and Prevention, opioids
were involved in more than 33,000 deaths in 2015, the most recent year that data is available for.
Many believe that the death rate is continuing to rise. Recently South Carolina has sued Purdue
Pharma LP, becoming the most recent government to accuse the maker of OxyContin for deceptive
marketing practices that has led to the opioid addiction epidemic.

What’s interesting to note about this epidemic is the statisics from states that have a legal medical
cannabis program in place show a signficnat reduction in opioid related deaths. In a study conducted
in the United States over a 10 year period, those states with a legal medical cannabis program in place
saw 25% fewer opioid related deaths than those states where medical cannabis remains illegal. This
has led others to research the associations between medical cannabis use and opioid use and
dependence.

Further evidence to support medical cannabis displacing traditional prescription drug classes will be
detailed in a soon to be published article in the ‘Journal of the American Directors Association’.
Patients who enrolled in the New Mexico state medical cannabis program significantly reduced their
use of prescription medications. The study found that 71% of the medical cannabis program members
either ceased or significantly reduced use of scheduled prescriptions within 6 months of enrolling.

With the growing interest in CBD and its therapeutic benefits, many are suggesting that medical
cannabis and more spefifically CBD could help stem this epidemic. Between the survey results from
the BRightfield Group and HelloMD and the noticeable drop in opioid related deaths, we believe that
the momentum in CBD will continue to gain traction, leading to further research and development.
There is already a noticeable change in attitude towards cannabis in general, both in Canada, the U.S.
and other countries globally. We expect that as more information on the benefical effects of CBD
become apparent, it will become even more mainstream for the treatment of various therapeutic
ailments.

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CBD as a substitute for opiates

A study by the Harm Reduction Journal, published August 18 2017, examines cannabis as a substitution
therapy in the treatment of opioid addiction. The findings of the report support the use of cannabis as
an adjunct or substitute for opioids. The study was authored by Philippe Lucas and based on the
findings suggested the following policy recommendations:

1. as an initial treatment for chronic pain, instead of opioids

2. as a substitution treatment for those already using / addicted to opioids

3. “as an adjunct therapy to methadone or suboxone treatment in order to increase treatment

success rates”

Regulations
The regulatory environment in the U.S. is confusing at best. As we discussed earlier there are two
different sources for CBD, marijuana plants and hemp plants. With respect to marijuana sourced CBD,
that is only legal for production and sale in those 29 states that have implemented a medical and/or
recreational adult use program and can only be sold within the state it is produced in.

With respect to hemp based CBD, growing hemp in the US was illegal for almost 50 years. However in
2014, the Farm Bill, also known as the Agricultural Act of 2014, gave authorization to states that have
legalized hemp to cultivate for research purposes. There are 16 states that have passed pro-hemp
legistlation, however commercial production of hemp remains prohibited. Under the Controlled
Substances Act (CSA) hemp’s stalks and oil or seeds were excluded, so products made from those parts
of hemp can be produced and purchased. However, that requires that all hemp used for those
products must be imported. The Industrial Hemp Farming Act is a bill that was introduced in 2015 that
if passed would remove hemp as a controlled substance. This would allow for the cultivation and
commercial production of hemp but the bill has remained stagnant.

Industrial hemp is legal to grow in the more than 30 countries. Much of the current hemp is sourced
from Canada, China and Europe among other countries. In Canada hemp is classified as Cannabis sativa
and is regulated by Health Canada. In order to produce and manufacture hemp requires a license from
Health Canada. In November 2016 Health Canada issued Section 56 exemption to the production of
industrial hemp in an effort to simplify the license application process. However it is is still not legal to
extract CBD from hemp in Canada. The Industrial Hemp Regulations (IHR) allow for the ability to
cultivate and process industrial hemp for commercial purposes. However, the Controlled Drugs and
Substances Act (CDSA) does not allow for any derivative or product made from whole industrial hemp
plants, including the sprouts, leaves, flowers etc.

Consumer Products
As the health benefits of CBD has gained more awareness and interest, more and more products are
being made with hemp oil extracts with CBD. These include food, personal care items, supplements,
other consumer goods and pet care products. In 2016 US hemp food sales increased 44% to $129
million, one of the sectors to record the biggest Y/Y increase. With the uncertainty of the federal rules
on CBD, it has been the independent retailers competing in the market despite the mainstream
retailers significantly increasing market share of natural and organic product sales. Many of the
mainstream retailers don’t carry CBD products for fear of action from the federal government. Many
in the mass market retail channel have limited their offering of CBD products to topical products.

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Market Size
Given the relatively early nature of the CBD market there is limited information and data on the size
of the market, particularly on a global basis. In the U.S. the Hemp Business Journal estimates that the
size of the U.S. CBD market was $173 million in 2015. The journal estimates this comprised of $93
million in cannabis CBD products and $80 million in hemp based CBD products. The Hemp Business
Journal estimates that total US sales increased in 2016 to $262 million, with an almost 50/50 split
between hemp based sources and cannabis. Another report by the Brightfield Group estimated the
hemp based CBD sales at US$170 million in 2016.

Based on The Hemp Business Journal estimates, the total U.S. CBD market has been growing at 60% in
2015 and 52% in 2016. There is little data on a global basis but we believe that it is reasonable to
assume that the global market is experiencing similar growth rates.

Figure 5: U.S. Total CBD Sales, 2014-2022e

$2,000 70%

$1,800
60%
$1,600

$1,400 50%

$1,200
$ millions

40%
$1,000
30%
$800

$600 20%
$400
10%
$200

$0 0%
2014 2015 2016 2017e 2018e 2019e 2020e 2021e 2022e

Sales Growth Rate

Source: Hemp Business Journal, Haywood Securities

With the growing awareness surrounding the potential benefits of CBD, the market is expected to
grow sigifnicantly over the next few years. As we have noted earlier in this report, the potential impact
from its ability to stem the opioid crisis is sure to drive research and demand, let alone the other
medical and health benefits. The Hemp Business Journal estimates that US total CBD sales will surpass
$1.15 billion by 2020 while there are other estimates in excess of that. The drive in the growth of CBD
is expected to come from a number of sources, but the underlying driver is the perceived health
benefits. As more research is conducted regarding the positive effects of CBD, we believe that will
drive further adoption and as a result a greater need for CBD extracts. Greenwave advisors estimates
a total CBD market size of US$3 billion by 2021.

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Pharmaceutical Chain is Likely to Drive Growth

Greenwich Biosciences, the U.S. subsidiary of GW Pharmaceuticals plc (Nasdaq: GWPH, Not Rated), is
behind the development of Epidiolex. Epidiolex is in development to treat forms of childhood onset
epilepsy to provide relief for conditions that has few treatment options currently. Expectations from
the analyst community suggest that this drug could be approved and available by late 2018 or early
2019 and could result in sales of more than $1 billion after a few years on the market. We highlight
this as one example that is likely to help drive the overall growth of the CBD market. We believe that
other pharmaceutical companies are already looking at the potential options with CBD both in full drug
development as well as other potential uses.

Outlook
We believe that the CBD market will emerge as one of the forefront areas of the broader cannabis
space. The latest report from Arcview Market Research estimated the North American 2016 overall
cannabis market was appaorximately $6.7 billion in 2016, up 34%. Furthermore, the company
estimates that the CAGR over the next fives years will be 27%, bringing the total size of the market to
$22.6 billion.

We expect that as more research is conducted and validates the perceived health benefits that more
pharmaceutical companies will forced to have exposure to the CBD market due to its expected growth.
In addition, there are already numerous companies and hundreds of CBD products touting the natural
benefits of CBD available in various markets today.

We have already highlighted the various estimates for the growth and size of this industry going
forward. We believe that current market estimates could prove conservative, particularly on the
pharmaceutical side which we believe could become a significant driver in the global market. In our
view that will only accelerate the growth and adoption within the consumer products market,
particularly in the natural and specialty products market. We have seen in the past the significant
growth of other natural products with expected general health benefits. For example, according to the
Hemp Business Journal, sales of fish and animal oil supplements were just $45 million in 2001 and
grew to $252 within 5 years.

Going forward we believe that we will see more companies clearly identify a CBD strategy, whether it
be growth through high CBD marijuana strains or hemp based CBD. We have already seen come
companies with more defined approaches to it. We expect more companies to follow suit as ths
market unfolds and one of the potential sub-sectors of material growth within the broader cannabis
industry.

Select companies with CBD exposure

Many of the public companies operating in the Cannabis space in general have exposure to the CBD
market. Canaidan LP’s all have exposure to a certain degree as most of them carry a strain that is high
in CBD and low in THC. As an example just last week OrganiGram (TSXV: OGI, Not Rated) announced
the launch of what the company referred to as its first pure CBD cannabis oil. However the oil contains
1.39 mg/ml THC and 23.7mg/ml CBD. What’s important in our view is that the company highlighted
that it was responding to physician feedback and patient interest in CBD products that will help them
manage symptoms of chronic conditions, including pain.

There are others that have taken a more deliberate approach to the potential market in CBD. Earlier
this year Aurora Cannabis (TSX: ACB, Not Rated) announced it was acquiring a 19% interest in Hempco
with an option to increase to 50.1%. Aurora included in that press release that the strategic rationale
was for the potential extractable quantaties of CBD.

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Harvest One Cannabis Inc. (TSXV: HVST, Buy $1.60 TP) and its subsidiary Satipharm is focused on the
development and distribution of medical cannabis with a focus on legally accessible cannabidiol (CBD)
with its CBD Gellpel Microgel Capsules. Currently Satipharm offers two GelPell capsules, a 10mg
capsule and a 50mg capsule. The products are intended as a form of cannabidiol (CBD) dietary
supplement. The Company states that the products are developed with an enhanced bioavailability
helping the body absorb the ingredient. However, given the fact that there has been no clinical
research on the product, the Company is limited from making any specific claims as the benefits. As a
result, that is why Satipharm has positioned the product as a dietary supplement in Germany, Poland
and the UK according to the Euopean Union regulations.

ICC International Cannabis Corp (TSXV: ICC, Not Rated), has authorization to plant approximately 560
acres of hemp in Uruguay for CBD extraction and the production of CBD oil. In May 2017 the company
planted 5,000 seeds of Helena hemp seeds in its 21,500 square foot greenhouse, with harvest
expected in Novermber of this year. The company intends to plant at least 15 hectares this fall with
anticipated harvest in April 2018. It is also building a large cale extraction lab, expected to be complete
at the same time.

Aphria Inc. (TSX: APH, Buy, $8.25 TP) owns 37% of Liberty Health Sciences (CSE: LHS, Not Rated)
which is one of seven licensed producers and sellers of medical marijuana in Florida. The Florida
market is expected to grow to US$1.6 billion by 2020 and is essentially a CBD only market with a CBD
limit of not less than 10% and a THC limit of less than 0.8% THC. Liberty currently has production
capacity of 700 kg annually in a 13,000 square foot facility. It expects to more than double that by the
beginning of 2018 and expand to 25,000 kg annually by the end of 2018.

Risks (mandatory in ALL reports)

Significant Investment Risks

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

 Market adoption of CBD may not follow the projections outlined and the actual size of the CBD
market could be lower our greater than that forecast. As a result, those companies looking to
capitalize on the CBD market may face greater competition for market share if the actual market
is smaller.

 Further research and development on the benefits may not support the preliminary research or
anecdotal claims thus reducing the potential size and demand for CBD.

 Alternative treatment options may disrupt the use of CBD for various health conditions thus
reducing the potential size of the market.

For further information on our Risk Rating

please visit: http://haywood.com/what-we-offer/research/research-policy

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Important Information and Legal Disclaimers

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I, Neal Gilmer, hereby certify that the views expressed in this report (which includes the rating assigned to the issuer’s shares
as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities
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▪ Haywood Securities, Inc. or an Affiliate has managed or co-managed or participated as selling group in a public offering of
securities for Aphria Inc. (APH-T) in the last 12 months.

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Other material conflict of interest of the research analyst of which the research analyst or Haywood Securities Inc. knows or has
reason to know at the time of publication or at the time of public appearance:
▪ n/a
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reasons stated in the research report the analyst believes that the security is deserving of a (continued) BUY rating.
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analyst believes that the security is deserving of a (continued) SELL rating.
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Overall Risk Rating
Very High Risk: Venture type companies or more established micro, small, mid or large cap companies whose risk profile
parameters and/or lack of liquidity warrant such a designation. These companies are only appropriate for investors who have
a very high tolerance for risk and volatility and who are capable of incurring temporary or permanent loss of a very significant
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High Risk: Typically micro or small cap companies which have an above average investment risk relative to more established or
mid to large cap companies. These companies will generally not form part of the broad senior stock market indices and often
will have less liquidity than more established mid and large cap companies. These companies are only appropriate for investors
who have a high tolerance for risk and volatility and who are capable of incurring a temporary or permanent loss of a significant
loss of their investment capital.
Medium-High Risk: Typically mid to large cap companies that have a medium to high investment risk. These companies will
often form part of the broader senior stock market indices or sector specific indices. These companies are only appropriate for
investors who have a medium to high tolerance for risk and volatility and who are prepared to accept general stock market risk
including the risk of a temporary or permanent loss of some of their investment capital

Neal Gilmer ngilmer@haywood.com Page 13

 Cannabidiol (CBD) – A Growing Sector of the Medical Cannabis Industry 9/5/17

Moderate Risk: Large to very large cap companies with established earnings who have a track record of lower volatility when
compared against the broad senior stock market indices. These companies are only appropriate for investors who have a
medium tolerance for risk and volatility and who are prepared to accept general stock market risk including the risk of a
temporary or permanent loss of some of their investment capital.

Distribution of Ratings (as of September 5, 2017)

IB Clients
% # (TTM)
Buy 68.6% 70 100.0%
Hold 8.8% 9 0.0%
Sell 0.0% 0 0.0%
Tender 0.0% 0 0.0%
UR (Buy) 1.0% 1 0.0%
UR (Hold) 0.0% 0 0.0%
UR (Sell) 0.0% 0 0.0%
Dropped (TTM) 21.6% 22 0.0%

Price Chart, Rating and Target Price History (as of September 5, 2017)
Aphria Inc. (APH-T) Date Target(C$) Rating Harvest One Cannabis Inc. (HVST-V) Date Target(C$) Rating
6/27/17 $8.25 Buy 6/27/17 $1.60 Buy
Price History (C$) Target/Rating/Coverage Change Price History (C$) Target/Rating/Coverage Change
9 3
8
2.5
7
6 2
5
1.5
4
3 1
2
0.5
1
0 0
Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Apr May May May May Jun Jun Jun Jun Jun Jul
14 15 15 15 15 16 16 16 16 17 17 17 17 17 17 17 17 17 17 17 17 17

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

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

Source: Capital IQ and Haywood Securities

Neal Gilmer ngilmer@haywood.com Page 14