Industry Update Cannabis 22 July 2020 Matt Bottomley, CPA, CA, CBV | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.867.2394 Derek Dley, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.869.7270 Company Rating Price Target Cannabis Cannabis ESG themes CCHW-NEO Spec Buy C$3.73 C$13.00 CL-CSE Spec Buy C$6.70 C$11.50 Key themes impacting the sector CURA-CSE Spec Buy C$9.51 C$15.00 In a sector that is still in a very nascent stage of its growth curve, the cannabis GTII-CSE Spec Buy C$15.60 C$22.00 industry has experienced its fair share of opportunities and challenges. Although Priced as of close of business 20 July 2020 ESG considerations are typically not at the forefront of many of our discussions with investors, we believe a number of important themes are starting to emerge, including: Canaccord Genuity Corp. acted as financial advisor to Tryke Companies • Community relations and support of social/criminal justice reforms. Due to for its proposed sale to Cresco Labs. the historical disparity in the implementation of strict laws for cannabis possession/ distribution among different social/racial groups in the US, regulators are increasingly Canaccord Genuity Corp. acted as calling for reforms as markets become legalized. In addition to expunging criminal financial advisor to Grassroots and records, many markets have earmarked license grants to groups that have been provided a fairness opinion to the disproportionally impacted by this issue. As a result, a number of companies have Board of Directors of Grassroots in begun providing assistance and advisory services to members of groups that do not its proposed acquisition by Curaleaf have the financial resources or legal expertise common to most public companies, in Holdings Inc. order to ensure these groups are also able to participate in the benefits brought on by cannabis legalization. As maintaining a good relationship with regulators is critical to success in any market, we believe these moves to help rectify past injustices are mutually beneficial. • Public health & safety in adapting to COVID-19. The cannabis sector has experienced a unique dynamic in the current COVID-19 environment, with demand surging in virtually all legal markets. However, in the US, state governors and regulators are also calling for strict social distancing measures, which increases the complexity of distributing product to end-users. As a result, we believe companies that are best able to pivot to curbside pickup and home delivery models, and/or manage foot traffic logistics, will be best suited to mitigate business interruptions in a sector where maintaining and holding market share is highly competitive. • Corporate governance. With company founders and other insiders holding large ownership interests throughout the sector, the need for improved corporate governance and independent board representation continues to be a theme among cannabis operators. We believe this is partially a function of the nascent state of the industry; however, the sector has nonetheless seen a number of notable missteps (failed M&A, poor capital allocation) that have weighed on investor confidence. How do we measure company performance? Although it is difficult to precisely measure and quantify the above factors, we believe investors should look toward operators which have publicly disclosed social justice initiatives, longstanding/strong relationships with regulators in their core markets, the ability to maintain sales/market share while complying with COVID-19 protocols, and boards that increasingly add independent directors. Which companies are doing it best? Based on the above criteria, we highlight four US cannabis companies: (1) Columbia Care, which has announced a number of social equity partnerships (link) and houses a board where four of its six directors are independent; (2) Cresco Labs, which launched its Social Equity & Educational Development initiative (link), with four of its nine directors being independent; (3) Curaleaf, which has launched its Rooted in Good initiative, continues to print all-time high revenues despite COVID-19 overhangs, and has a board with three of its five directors being independent; and (4) Green Thumb Industries, which has implemented its Social Equity License Education Assistance Program (including pro bono mentoring - link), remains one of the most profitable MSO’s, and has a board in which three of seven are independent directors. Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. 22 July 2020 3