Equity Research Cannabis Click here to enter text. \ FEBRUARY 25, 2019 11 Cowen analysts across consumer, health care, industrials, and regulatory offer a comprehensive view of the global CBD opportunity. Nearly 7% of adults in our proprietary U.S. survey (n = ~2,500) reported using CBD as a supplement, far higher than we expected. We believe U.S. CBD can conservatively generate sales of $16 bn by 2025. We offer detailed analysis at the sub-category level, as well as company-specific discussions, including Outperform rated WEED, TLRY, and TPB. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Cowen Research 646 562 1330 cowen.research@cowen.com Vivien Azer 646 562 1351 vivien.azer@cowen.com This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. COWEN COLLABORATIVE INSIGHTS February 25, 2019 This page left blank intentionally. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 2 COWEN.COM COLLABORATIVE INSIGHTS February 25, 2019 ■ Cannabis COWEN RESEARCH EQUITY RESEARCH Cowen Research 646 562 1330 cowen.research@cowen.com Vivien Azer 646 562 1351 vivien.azer@cowen.com John Blackledge 646 562 1359 john.blackledge@cowen.com Andrew M. Charles, CFA 646 562 1332 andrew.charles@cowen.com Oliver Chen, CFA 646 562 1424 oliver.chen@cowen.com John Kernan, CFA 646 562 1324 john.kernan@cowen.com Phil Nadeau, Ph.D. 646 562 1336 phil.nadeau@cowen.com Charles Neivert 646 562 1370 charles.neivert@cowen.com Jeffrey Osborne 646 562 1391 jeffrey.osborne@cowen.com Charles Rhyee 646 562 1376 charles.rhyee@cowen.com Doug Schenkel 617 946 3918 doug.schenkel@cowen.com COWEN WASHINGTON RESEARCH GROUP MACRO POLICY Eric Assaraf 202 868 5304 eric.assaraf@cowen.com Any portion of this report prepared by a member of Cowen Washington Research Group is intended as commentary on political, economic or market conditions and is not intended as a research report as defined by applicable regulation. COLLABORATIVE INSIGHTS COWEN'S COLLECTIVE VIEW OF CBD - AHEAD OF THE CURVE SERIES THE COWEN INSIGHT In a collaboration featuring 11 analysts spanning Cowen's consumer, health care, industrials and regulatory teams, we offer a deep dive on the global cannabis market, with a particular emphasis on the U.S. For consumer goods, we believe the U.S. CBD market could represent a $16 bn opportunity by 2025. $16 bn Consumer Opportunity (Azer, Blackledge, Charles, Chen & Kernan) In our monthly proprietary consumer survey (n = ~2,500) we were surprised to see that nearly 7% of respondents in January 2019 reported using CBD as a supplement. This strong consumer interest is validated by the growing number of brands and form factors that are now available through increasingly diverse retail channels, including Amazon, Sephora and Neiman Marcus. That said, consumption of CBD on-premise will likely take longer, given regulatory uncertainty. And, while our analysis primarily focuses on consumer staples applications for CBD, it is interesting to see a growing number of specialty apparel brands embrace hemp as a sustainable textile. Retail sales of CBD consumer products in 2018 have been estimated between ~$600 mm and $2 bn. By 2025, we believe CBD offerings could conservatively generate $16 bn in retail sales (assuming a ~40% increase in consumer incidence, to 10%, and spend of less than $2 / day). Our bottom-up analysis anticipates a diverse category, that is still led by traditional health & wellness form factors (e.g., $6.4 bn in nutraceuticals, and $4 bn in topicals). And, while likely smaller, we also expect categories like food, beverages, beauty and vapor to all generate sales between ~$1-2.5 bn by 2025. Herein, we offer a detailed look at category brand and pricing architecture in the U.S. CBD market today, as well as detailed discussions of 21 public and private operators that currently have exposure to the category, including Outperform rated Canopy Growth, Tilray and Turning Point Brands, which have all announced plans to enter the U.S. CBD market. The Science of CBD (Nadeau) Cannabis’s therapeutic potential is attributable to the valuable overlap between phytocannabinoids (i.e. plant-derived cannabinoids) and the endogenous cannabinoid system in humans, termed a “therapeutic handshake.” While THC's activity in the body is fairly well elucidated, CBD’s pharmacokinetics are less well understood (no specific receptor for CBD has been identified). Clinical trial results to date demonstrate few adverse effects from oral CBD doses of up to 1500 mg/day or up to 30mg IV. The scientific understanding of CBD’s clinical effects is based mostly on studies in specific indications, like epilepsy. GW Pharma’s Epidiolex (highly potent, pure formulation of CBD) was approved by the FDA in 2018 for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome, and other companies (Tilray, MMJ Phytotech, Insys) have clinical trials underway in seizure disorders as well. CBD Hemp Cultivation (Neivert) According to the National Conference of State Legislatures, 41 states have set up cultivation and production programs to regulate the production of hemp. There is little research on CBD hemp cultivation methods as hemp cultivation research historically has focused on fiber and grain/seed. This lack of research, combined with a number of variables that affect hemp for CBD yield, makes hemp for CBD cultivation much more art than science at this point. That said, no other crop in the U.S. offers the type of return of the CBD Plasticulture Model, and we would thus expect the country's two largest crops, corn and soybeans, to lose some acreage to CBD hemp. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Please see pages 100 to 106 of this report for important disclosures. COWEN.COM 3 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Synthetic Biology Provides Alternative Cannabinoid Production Method; Life Science Tools Well Positioned To Benefit From QA/QC Testing Opportunity (Schenkel) As an alternative to cultivation-based methods, cannabinoids can be produced using either chemical or synthetic biology approaches. Synthetic biology methods, which harness fermentation to produce cannabinoids, are particularly attractive considering they can potentially produce a variety of cannabinoids while being highly scalable, efficient, and environmentally friendly. While QA/QC testing standards for CBD currently vary greatly by state (if any exist at all), we expect Life Science Tools companies to benefit from this nascent market opportunity as testing regulations are implemented and standardized. Similar to medical/ recreational cannabis testing, instruments such as mass spectrometers and liquid/gas chromatographs are utilized to analyze CBD samples. Key vendors for mass spectrometry and chromatography instruments include Agilent, Danaher (SCIEX), PerkinElmer, Shimadzu, Thermo Fisher, and Waters Corporation. CBD From a Retailer and Payor Perspective (Rhyee) Healthcare: Drug Retailer Perspective: CBD products appear to be gaining traction with independent pharmacies, many of whom are already selling or planning to sell CBD oils. Independent pharmacies likely find the high-margin profile of CBD oils attractive, which we suspect is similar to those of more traditional over-the-counter drugs, as well as the differentiation it affords independents relative to larger chain pharmacies. For those selling CBD oils today, the focus is on quality, particularly as it relates to bioavailability. Large pharmacy chains, such as CVS and Walgreens, don’t currently sell CBD oil, but WBA noted it is monitoring the CBD market. Healthcare: Payor Perspective: Generally speaking, managed care does not cover OTC products, with the same being true for Medicare and Medicaid. Based on our conversations with a number of payors, whether CBD oils will be covered as a medical benefit by government sponsored health programs is determined by the Center for Medicare and Medicaid Services (CMS) and state governments. Currently, CBD products are not a covered benefit, or an extra benefit, that has been approved by CMS or states, and it isn’t known at this time whether CMS or states governments are considering reimbursement for CBD products. Separately, Payors noted three factors complicating commercial coverage of CBD oils, including (1) legal issues, as CBD oils derived from THC (cannabis) isn’t legal if it contains equal to or more than 0.3% THC; (2) lack of regulation by the FDA; and (3) its availability as an OTC medication. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 4 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Global Landscape (Azer) While the global regulatory landscape varies, the CBD category outside of the U.S. has been evolving rapidly, with more change likely to come with the WHO's current evaluation of CBD, as well as its recent addition to the EU's Novel Food Catalogue. In Europe, CBD products are now widely available in markets like the U.K., Italy and Switzerland, though regulations vary with Italy allowing for "cannabis light" products, with allowable THC of as much as 0.6%, while in Switzerland CBD products can have as much as 1% THC, and are classified as a tobacco substitute. In Latin America, hemp has been in production since the 1500s is also rapidly expanding their regulatory frameworks around marijuana and hemp. Canadian licensed producers have been actively entering the market in Latin America to capitalize on this evolving opportunity, including Canopy Growth, Tilray, Aurora and Cronos. Regulatory Outlook (Eric Assaraf - Cowen Washington Research Group) The 2018 Farm Bill declassifies industrial hemp as a Schedule I substance, shifts regulatory authority from the DEA to the Department of Agriculture, and provides autonomy for states to regulate the industry. However, the new law does not change the FDA's oversight authority over CBD products and FDA Commissioner Scott Gottlieb has made it clear that his agency will continue to step in when certain health claims are made. Additionally, FDA has stated that CBD cannot be added to food products sold across state lines or marketed as a dietary supplement, regardless of whether it is hemp-derived. The FDA will explore new pathways for CBD to be sold legally; however, it seems clear that there will be a period of regulatory uncertainty over CBD products at the state and federal level. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. COWEN.COM 5 COWEN COLLABORATIVE INSIGHTS February 25, 2019 TABLE OF CONTENTS Consumer Products Market Sizing (Azer) ................................................................................................................................................................................. 8 The Science Of CBD (Nadeau) .................................................................................................................................................................................................... 10 CBD Hemp Cultivation (Neivert)................................................................................................................................................................................................ 11 Synthetic Cannabis (Schenkel) .................................................................................................................................................................................................. 17 Life Science Tools Participation In The Legal Cannabis Market (Schenkel) .................................................................................................................. 22 Consumer Products Opportunities (Azer) .............................................................................................................................................................................. 24 Nutraceuticals ............................................................................................................................................................................................................................ 28 Topicals ........................................................................................................................................................................................................................................ 35 Beverages .................................................................................................................................................................................................................................... 38 Bottled Water ............................................................................................................................................................................................................................ 39 Energy Drinks ............................................................................................................................................................................................................................. 40 Beer ............................................................................................................................................................................................................................................... 41 Beauty .......................................................................................................................................................................................................................................... 44 Food (Confections) .................................................................................................................................................................................................................... 49 Vapor ............................................................................................................................................................................................................................................ 51 The CBD Competitive Landscape – Public/Private Company Discussions (Azer) ....................................................................................................... 54 Publicly Traded Companies .................................................................................................................................................................................................... 54 Canadian LP Commentary on CBD ....................................................................................................................................................................................... 57 Benchmarking ............................................................................................................................................................................................................................ 58 Private Companies .................................................................................................................................................................................................................... 61 Health Care: Drug Retailer Perspective (Rhyee)................................................................................................................................................................... 63 Health Care: Payor Perspective (Rhyee)................................................................................................................................................................................. 64 Health Care: Provider Perspective (Rhyee)............................................................................................................................................................................ 64 eCommerce To Be A Key Consumer Distribution Channel Long Term (Blackledge)................................................................................................... 65 Cannabidiol (CBD) Entrance Into Mass Retail May Start In Beauty Before Entering Broadlines (Chen)............................................................... 69 Growing Application For Hemp And CBD Within The Apparel & Footwear Market (Kernan) ................................................................................. 70 We Would Expect Starbucks To Be First Under Our Active Coverage To Pilot CBD Oil, Though Not In Near Term Plan (Charles) .............. 74 Regulatory Considerations For CBD (Assaraf – Washington Research Group) ........................................................................................................... 75 Global CBD Landscape (Azer)..................................................................................................................................................................................................... 79 European Landscape ................................................................................................................................................................................................................ 80 Latin American Landscape ..................................................................................................................................................................................................... 84 Additional Applications / Implications (Nadeau & Osborne) ............................................................................................................................................. 87 Epilepsy & Psychiatric Conditions (Nadeau) ...................................................................................................................................................................... 87 Industrial Hemp And Sustainable Bioproducts (Osborne) ............................................................................................................................................. 94 Appendix .......................................................................................................................................................................................................................................... 96 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 6 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 COWEN’S COLLECTIVE VIEW OF CBD In a collaboration featuring 11 analysts across Cowen’s consumer, health care, industrials and regulatory teams, herein we offer our outlook for the global CBD market, with a particular focus on the U.S. While little science exists supporting medical efficacy of CBD (with the exception of seizures, which GWPharma was able to prove with Epidiolex for Dravet syndrome and Lennox-Gastaut syndrome, as discussed in more detail herein), the popularity of CBD products seems to be growing exponentially in the U.S. Indeed, our consumer survey work suggest that close to 7% of adults in the U.S. already use CBD as a supplement. With the category gaining increasing interest from consumers we have seen a swell in product innovation. And, the opportunity is increasingly drawing the attention of larger competitors (where for instance, WEED announced that they would consider spending as much as $500 mm in U.S. hemp / CBD). By 2025, we estimate that the U.S. CBD market could approach $16 bn (from $600 mm -$2 bn in 2018). Herein, we offer our views of: 1. Consumer Products Market Sizing (Azer) 2. The Science of CBD (Nadeau) 3. The Hemp / CBD Supply Chain: From Cultivation to Extraction (Neivert & Schenkel) 4. Consumer Products Opportunities (Azer) 5. The CBD Competitive Landscape - Public and Private Company Discussions (Azer) 6. Consumer Discretionary Retail and Brand Opportunities Across: a. Pharmacy (Rhyee) b. E-Commerce (Blackledge) c. Broader Retail (Chen) This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. d. Specialty Brands (Kernan) 7. On-Premise Consumption Opportunities (Charles) 8. U.S. Regulatory Outlook (Assaraf, Krueger, Seiberg & Weissenstein) 9. Global CBD Landscape (Azer) 10. Additional Potential Opportunities for Hemp / CBD, Including a. Pharmaceutical Applications (Nadeau) b. Industrial Applications (Osborne) COWEN.COM 7 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Consumer Products Market Sizing (Azer) In our proprietary Cowen consumer survey (~2,500, 18+ respondents), we found that in January 2019 close to 7% of respondents indicated that they use CBD as a supplement. While this is only the first month’s reading of the data (which can fluctuate from month to month), this initial response piqued our interest considerably, as it was much higher than we would have suspected. Indeed, to put the 6.9% incidence rate in context, that compares to JUUL use of 4.2%, and 19.6% of consumers that consider themselves a current tobacco user, per our survey. From a user perspective, category engagement not surprisingly skews younger, with use among 18-24 and 25-34 year olds at over 9%, while it is below 4% for consumers 55+. Figure 1 CBD Use Over-Indexes to Consumers Aged 18-34 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 6.9% Do You Use CBD as a Supplement? 9.2% 9.5% 7.8% 6.4% 3.7% Total 18-24 25-34 35-44 45-54 55+ Source: Cowen Survey, n=~2500, January 2019 While the category remains nascent (with revenue estimates ranging from $600 mm to $2 bn in 2018) it seems clear that the abundance of choice, which we discuss in more detail herein, has been a key driver of that consumer engagement. In particular, we were surprised to see that beverages already account for close to 20% of reported form factor use, given that this segment is among the newer offerings in the market place. Meanwhile, tinctures, which were arguably one of the original delivery systems, has a dominant 44% share. Figure 2 Tinctures Are the Most Popular Delivery Mechanism This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. CBD Form Factor Use Other, 20.9% Beverages, 19.2% Capsules, 22.1% Tinctures, 43.6% Topicals, 26.2% Source: Cowen Survey, n=~2500, January 2019 Note: Users had the option to choose multiple form factors 8 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 3 We Believe CBD Can Be a $16 BN Revenue Opportunity in the U.S. by 2025 While we are keen to gain more insights into the evolving use of CBD in the coming months from our survey work, this initial snapshot offers a framework for sizing the ultimate CBD opportunity. With growing consumer awareness, we conservatively believe that CBD use can grow to 10% of adults in the U.S., or ~25 mm consumers (using current population) by 2025. If we assume that the average consumer ultimately spends $640 per year (or less than $2 / day), that would imply a $16 bn market opportunity for CBD. We would note that using the U.S. Census 18+ population projection in 2025, a 10% incidence rate would equate to just over $590 in annual spend to achieve $16 bn. Conversely, holding the $640 in spend constant with the U.S. Census forecasted population would result in over $17 bn in revenues by 2025. That said, we view this estimate as somewhat conservative, as we can envision a scenario where a consumer that uses a CBD tincture or capsule, may also be inclined to convert his or her beauty regimen to include CBD (e.g., CBD infused beauty products), and or use a topical for targeted relief as well. Our $16 bn estimate assumes the following category contributions: This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Note: $ in mm unless otherwise stated. Source: Cowen and Company COWEN.COM 9 COWEN COLLABORATIVE INSIGHTS February 25, 2019 The Science Of CBD (Nadeau) The Endocannabinoid System Cannabis’ therapeutic potential is due to this valuable overlap between phytocannabinoids (i.e. plant-derived cannabinoids) and the endogenous cannabinoid system in humans, termed a “therapeutic handshake.” However, though THC’s activity in the body has been fairly well elucidated (it acts through G-protein coupled cannabinoid receptor 1 and cannabinoid receptor 2), CBD’s pharmacokinetics are less well understood (no specific receptor for CBD has been identified). The scientific understanding of CBD’s clinical effects is based mostly on studies in specific indications, like epilepsy. GW Pharma’s Epidiolex (highly potent, pure formulation of CBD) was approved by the FDA in 2018 for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome, and other companies (Tilray, MMJ Phytotech, Insys) have clinical trials underway in seizure disorders as well. Additional possible indications for CBD products include autism spectrum disorders, psychiatric conditions, diabetic neuropathy pain, fibromyalgia, chronic pain, and back pain; clinical trials in these indications are underway. Clinical trial results to date demonstrate few adverse effects from oral CBD doses of up to 1500 mg/day or up to 30mg IV. Specifically, CBD studies have not reported effects on blood pressure, heart rate, or respiratory rate, and no negative changes in mood or psychomotor slowing. Some studies (such as GW’s in Epidiolex) have shown side effects resulting from high doses of CBD (~2g/day) inhibiting hepatic drug metabolism, prompting increased blood levels of some background medications. Additionally, in vitro studies have shown CBD to be pro-apoptotic in lymphocytes and to inhibit IL8 and IL10 production, suggesting that it may suppress the immune system. However, though unknowns remain, the summation of pre-clinical and clinical data suggest that the compound is safe at typical doses seen in over the counter products (5-10mg). Additionally, other cannabinoids (found in CBD distillate) have been discovered that may have differentiated pharmacological effects. For example, cannabidivarin (CBDV) may have differentiated anticonvulsant effects, tetrahydrocannabivarin (THCV) may have anti-diabetic and appetite suppressant effects, cannabidiol-acid (CBDA) may have antinausea effects, and bannabigerol (CBG) may have anti-cancer effects. Further research is needed to elucidate the clinical effects of these compounds. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 10 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 CBD Hemp Cultivation (Neivert) 2018 Farm Bill Legalizes Commercial Cultivation of Hemp: The 2018 Farm Bill legalized industrial hemp at the federal level removing it from schedule I status under The Controlled Substance Act. The bill defines industrial hemp as a variety of cannabis with a THC concentration of /=50°F), which influences timing for planting, is recommended for successful germination. Industrial hemp can be planted in late April in Kentucky and late June in Vermont. Planting depth for seeds should be ~0.50 inches. Female seedlings, started in a greenhouse approximately 6 weeks prior to planting, or transplanted female clones (planted with root structure), can be planted into black plastic outdoors to control weeds. 5 ft x 5 ft plant spacing has been found to be ideal and results in a population of 1,742 plants per acre. Harvest. Average time to harvest a 6 inch clone is 90-120 days, Flower buds from outdoor plants are removed by hand or using a debudder machine after using a chainsaw or lopper to cut the plant down. Flower bud harvest is labor intensive and can take ~30 hours per acre. Flower buds in a UVM study were dried at 80°F for 18-36 hours until dry enough for storage without molding. Indoor storage requirements creates a production challenge. As with most crops, variations in yield can result from variations in genetics (variety), soil, weather, and other growing conditions. Testing. State Departments of Agriculture conduct field and greenhouse inspections for THC levels, which is the only way to separate hemp from illegal cannabis. Crops that test >0.3% THC will be destroyed. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 12 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Wide Range Of Returns On CBD There is little data on economics for hemp CBD cultivation given wide range of outcomes that can result on the seed vs clone decision (CBD levels vary for each and will impact cost), as well as the type of production model used. The University of Kentucky (College of Agriculture) recently published six budget models for industrial hemp producers. Four of the six budgets address CBD hemp, with a separate budget for grain and another for fiber. We highlight the University of Kentucky’s CBD Plasticulture budget model below since it is the most profitable and will likely be the most commonly implemented. We note all four of the CBD hemp models indicate a positive return above variable costs per acre while hemp grain and hemp fiber do not reach breakeven due to low pricing for both harvestable components.. University Of Kentucky’s Budget Assumptions For CBD Plasticulture: � � � Dry matter yield per acre: UK estimates 1,200 lbs of dry matter yield produced per acre based on 1,500 plants per acre (recall 5 ft. 5ft. allows for up to 1,742 plant per acre) and 0.8 lb of dry matter yield per plant (yield per plant can range from 0.5 lb-1.5 lbs). Gross return per acre: CBD concentration and price per % are the factors that determine the price of dry matter yield/lb. In the below example, 6% CBD% * $5.00 per % = $30/lb. Gross return per acre is then calculated by multiplying dry matter yield/lb by dry matter yield/acre (1,200). Variable cost per acre: 72% of variable cost per acre is for clone transplants for 1,500 plants at $5.00 each. Other notable costs include planting, plastic to protect against weeds, drip line for water, harvesting costs, cash rent and application/test fees. We note clones currently can range from $3.50-$5.50 per plant. Clones have become more common than seeds in Kentucky as they offer an easy way to produce female plants. A seed mix may be cheaper but would include male seeds than can potentially pollinate female seeds and negatively impact CBD concentration which influences pricing for dry matter yield. Feminized seeds are an option but will likely be the most expensive option. We note that the model assumes outdoor production rather than greenhouse production since a greenhouse is efficient for clone production (then transplanted to the field) but prohibitive for plant production. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. COWEN.COM 13 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 4 – CBD Plasticulture Model – University of Kentucky Source: hemp.ca.uky.edu, Cowen and Company Sensitivity Analysis For CBD Plasticulture Model. As shown below, there is a significant change in return for every $1 change in price per CBD%. A deterioration of this pricing with no corresponding change in cost would impact CBD production. Breakeven for the model above is ~$9/lb for dry matter yield compared to the $30/lb used to calculate the margin over variable cost per acre used. While price % CBD can fluctuate, the second factor determining the dry matter yield/lb price is CBD%. Figure 5 – Sensitivity Analysis Quantity Unit Price Total CBD% 6% - - - Price per % $5.00 - - - Dry Matter Yield 1,200 lb $30 $36,000 Gross Returns Per Acre - - - $36,000 Transplants (clone) 1,500 plants $5.00 $7,500 Fertilizer -Nitrogen (urea) 100 unit $0.47 $47 -Phosphorus (P2O5) 30 unit $0.60 $18 -Potassium (P2O) 45 unit $0.38 $17 Planting/Setting 1,500 plants $0.20 $300 Black Plastic/Drip Line 1 acre $515 $515 Harvest Cost 32.4 hrs $12.50 $405 Cash rent 1 acre $300 $300 Application & License Fee 1 per year $400 $400 Lab Test 1 - $300 $300 Other - - - $669 Total Variable Cost Per Acre - - - $10,471 Margin Over Variable Cost Per Acre - - - $25,529 Price per % CBD Total Revenue Returns Above Variable Costs $6 $43,200 17,671 $5 $36,000 10,471 $4 $28,800 3,271 $3 $21,600 -3,929 $2 $14,400 -11,129 $1 $7,200 -18,329 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: hemp.ca.uky.edu, Cowen and Company CBD Hemp Clearly An Attractive Option For Growers. No other crop in the U.S. offers the type of return of the CBD Plasticulture Model. We would expect the two largest crops in the U.S.: corn and soybeans to lose some acreage to CBD hemp, though given corn and soybean area planted was 89.1M and 89.2M acres respectively in 2018. (Total planted acres in the U.S. is ~320M acres.) 14 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 6 – 2017 Production Less Operating Costs Per Acre (Cash Grower Margin/Acre) Source: USDA, Cowen and Company Figure 7 – Kentucky Department of Agriculture Industrial Hemp Research Pilot Program Production Year Approved Processors Approved Growers Approved Acres per acre Corn Soybeans Gross Value of Production $620 $455 Operating Costs Seed $99 $58 Fertilizer $116 $25 Chemicals $35 $27 Other Operating Costs $85 $48 Total Operating Costs $335 $158 Cash Grower Margin $285 $297 Kentucky Hemp Growth Provides An Indication For Near-Term Acceleration Figure 7 shows hemp production in Kentucky under Kentucky Department of Agriculture (KDA) Industrial Hemp Research Pilot Program. The figure shows the increase in planted acres in 2018 (Sept) as well as the shift toward CBD as a percentage of total hemp (planted acres for CBD rising to 4,121 acres in 2018 from 864 in 2017). In 2018, there were 158 greenhouses in Kentucky representing 764,000 sq. ft., which is included in the 2018 acreage below. (Note 1 acre = 43,560 sq. ft.) On January 22, 2019, the Kentucky Department of Agriculture approved 1,035 applications to cultivate up to 42,086 acres of industrial hemp in 2019, up from 16,100 acres in 2018 and 33 acres in 2014, which was the first growing year. (67 acres of greenhouse space was also approved for hemp cultivation.) We note that of the 16,100 acres approved in 2018, less than half (6,700) was planted. Planted Acres Harvested Acres % of Grain or Seeds % Fiber % CBD % CBD & Grain % Grain & 2014 9 20 - 33 - 47% 32% 21% 0% 0% 2015 29 99 1,742 922 500 47% 6% 47% 0% 0% 2016 45 137 4,600 2,300 2,000 34% 6% 60% 0% 0% 2017 49 204 12,800 3,200 2,300 36% 5% 27% 32% 0% 2018 (Sept) 72 210 16,100 6,700 TBD 18% 4% 62% 14% 2% 2019 N/A N/A 42,086 N/A N/A N/A N/A N/A N/A N/A Fiber This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: kyagr.com/hemp, Cowen and Company Outlook For Growth The expected growth for hemp is supported by the economics offered. However, there are limitations related to required cultivation methods. Conversations with industry experts estimate planted hemp acres in 2019 could reach 200,000, up from 78,176 in 2018. The growth is supported by expansion like Kentucky’s and new states entering the market (only 23 states participated in 2018). COWEN.COM 15 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 8 – U.S. Planted Hemp Acres – 2017 and 2018 State 2017 2018 Montana 542 22,000 Colorado 9,700 21,578 Oregon 3,469 7,808 Kentucky 3,271 6,700 Tennessee 200 3,335 North Carolina 965 3,184 North Dakota 3,020 2,778 New York 2,000 2,240 Nevada 417 1,881 Wisconsin 0 1,850 Vermont 575 1,820 Minnesota 1,205 710 Pennsylvania 36 580 Maine 30 550 Oklahoma 0 445 South Carolina 0 256 West Virginia 14 155 Washington 175 142 Virginia 87 135 Massachusetts 0 21 Indiana 5 5 Hawaii 1 2 Nebraska 1 1 Total 25,713 78,176* * Includes 232 acres of greenhouse or indoor cultivation Source: votehemp.com, State Departments of Agriculture, Cowen and Company Challenges For Growth This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. We see several issues that we expect will moderate growth of hemp CBD in years to come. As a commodity, we see economics diminishing as CBD supply rises with increased acres along with higher costs for seed from increased seed demand. We also see a lack of best practices for cultivation, storage restrictions and uncertainty about the consistency of seeds/clones available increasing the probability that yields are compromised. 16 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Synthetic Cannabis (Schenkel) The Broad Spectrum Of Cannabinoids Figure 9 Approved & Potential Medicinal Roles Of Selected Phytocannabinoids Cannabinoid Tetrahydrocannabinol (THC) Cannabidiol (CBD) Tetrahydrocannabivarin (THCV) Cannabigerol (CBG) Cannabichromene (CBC) Source: Cowen and Company Percent Of Total Cannabinoid Content Cannabinoids fall into three main types: (1) endogenous cannabinoids, which are produced naturally in the bodies of humans and animals; (2) phytocannabinoids, which are isolated from plants; and (3) synthetic cannabinoids, which are produced in the laboratory and may have some structural deviations from the naturally occurring molecules. Of the three types, phytocannabinoids have garnered a lot of interest because of their therapeutic and recreational potential. For example, Marinol and Syndros, which the FDA cleared for the treatment of anorexia associated with weight loss in AIDS patients, include the active ingredient dronabinol, a synthetic delta-9- tetrahydrocannabinol (THC) which is considered the psychoactive component of marijuana. In June 2018, the FDA approved an oral formulation of cannabidiol (CBD), Epidiolex, which GW Pharmaceuticals PLC developed for the treatment of seizures associated with two rare and severe forms of epilepsy in children. In addition to THC and CBD, more than 100 other phytocannabinoids have been identified from the cannabis plant. This includes lesser-known compounds such as tetrahydrocannabivarin (THCV), cannabigerol (CBG), and cannabichromene (CBC). The broad spectrum of phytocannabinoids can bind to a range of different receptors in the human body and induce a wide variety of pharmacological responses. However, due to the limited research into these varying effects, a full understanding of the role of each cannabinoid compound is still poorly understood. With that said, some of the most studied roles are listed in the table below. Role 15-35% � Psychotropic � � FDA-approved as appetite stimulant for people with AIDS and antiemetic for people receiving chemotherapy Alleviates neuropathic pain, spasticity, overactive bladder, and other symptoms 1-12% � FDA-approved for treating rare seizure disorders � � Chronic pain treatment <1% � Potential anxiety relief � Being studied for treatment of anxiety, post-traumatic stress disorder, pain, schizophrenia, Parkinson’s disorder and Huntington’s disorder Potential appetite suppressant <1% � Potential anti-inflammatory � Potential anti-cancer <1% � Potential anti-inflammatory � � Potential anti-cancer Potential GI motility modulator This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. COWEN.COM 17 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Need For Alternative Methods To Produce Cannabinoids Cannabis plants can exhibit wide variation in the quantity and type of cannabinoids they produce. However, cannabinoids are only produced in limited quantities regardless of the strain; in total, cannabinoids account for <1% of the dry weight of the cannabis plant. Selective breeding has led to strains of the cannabis plant that produce relatively large amounts of the intermediary forms of THC and CBD. While THC content varies substantially among cannabis strains, it generally represents 15-35% of the cannabinoid content of the plant, and CBD is typically 1-12%. The relative abundance of these compounds have allowed them to be well studied and their diversity of applications have created a large commercial market. After THC and CBD, the remaining cannabinoids are found only in trace amounts in the plant. Compounds such as THCV, CBG, and CBC have elicited therapeutic interest, but because they are only present in minute amounts they have been difficult to extract and purify and impossible to produce at commercial scale. This has limited their study up to this point. Alternative Methods For Producing Cannabinoids To combat the limited availability of cannabinoids using cultivation-based methods, alternative approaches have been developed that use chemical and biotechnological synthesis to produce cannabinoids. Chemical Synthesis Chemical synthesis methods use organic chemistry to produce cannabinoids; however, the process has several drawbacks. Chemical methods have largely failed to be cost effective for commercial scale cannabinoid production because of the complexity required to produce the cannabinoid molecules, and extensive purification is needed to obtain a high quality product. Commercial chemical synthesis also generates large amounts of organic waste, takes several weeks to produce kilogram quantities, and is expensive. As such, practical methods for the chemical synthesis of many cannabinoid molecules has not been developed. Biotechnological Synthesis (Synthetic Biology) This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. An emerging alternative to traditional cultivation and chemical synthesis is the use of biotechnology-based approaches to produce cannabinoids. These synthetic biology approaches produce cannabinoids through modifying the metabolism of genetically engineered organisms. This converts the organism into a biological factory, producing the desired cannabinoid in large quantities. Compared to chemical methods, biosynthesis methods are more cost effective, scalable, and environmentally friendly. Compared to traditional methods, biosynthesis of cannabinoids is potentially more sustainable, more reliable, faster, and less expensive. Biosynthesis does not require as much water or energy input, is not subject to weather or other exogenous factors, takes ~3-5 days to yield an end product vs. traditional methods taking up to 4 months, and is theoretically less expensive. Additionally, growing cannabis often involves using several hard-to-remove impurities (e.g., pesticides), that could potentially create significant safety issues and other undesirable dynamics. Furthermore, purity and regulatory 18 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 10 Selected Synthetic Biology Cannabinoid Companies Company Cellibre Ginkgo Bioworks Hyasynth Biologicals InMed Pharmaceuticals Librede Renew Biopharma Teewinot Life Sciences Amyris Source: Cowen and Company Notes controls can be implemented when producing compounds with a biosynthesis method similar to the processes in place for pharmaceutical regulation. The many perceived advantages of synthetic cannabinoid creation have led to a series of companies entering the market, as described below. Cellibre is a next-generation cellular agriculture company. Employing an organism-agnostic approach, Cellibre turns cells into specialized, sustainable factories for the manufacture of globally significant products at scale. Ginkgo is a Boston-based company that designs custom microbes for customers across multiple markets, developing new organisms that replace technology with biology. Located in Montreal, Hyasynth Biologicals uses the technologies from traditional and modern biology combined with computational analysis to develop organisms at the fastest possible speed. InMed Pharmaceuticals is a biopharmaceutical company that specializes in the discovery and development of novel, cannabinoid-based therapeutics for the treatment of diseases with high unmet medical need. Librede has developed a yeast-based cannabinoid production and drug discovery platform to create chemical compounds that target the endocannabinoid system. Librede’s modular technology enables large scale production of natural cannabinoids in a more economic and environmentally sustainable way Renew Biopharma harnesses the biological pathway to produce natural and novel cannabinoids that cross the blood brain barrier and target specific receptors associated with neuroinflammation and chronic pain. Tampa-based Teewinot combines its biosynthetic processes with sophisticated chemical synthesis to produce proprietary cannabinoid analogs and prodrugs at commercial scale. Amyris is an industrial biotechnology company that has used sugarcane fermentation to create hydrocarbon molecules and produces an array of specialty ingredients and consumer products. Producing Cannabinoids Using Synthetic Biology Synthetic biology methods use fermentation to produce cannabinoids with identical chemical structures to those found in plants. Biocatalytic Cannabinoid Pathways The first step of the synthetic cannabinoid production requires identification and extraction of the desired cannabinoid biosynthetic pathways from a cannabis varietal. The biosynthesis of cannabinoid molecules in a microbe could require four or more cannabinoid metabolic pathways. When the pathways are selected, their corresponding DNA sequences need to be cloned from the cannabis varietal and spliced into the microbial DNA. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Cannabinoids could be produced biocatalytically using the following mechanism: i. In the first pathway, glucose is converted into G3P and pyruvate via glycolysis. These two compounds are then utilized to produce the precursors geranyl pyrophosphate (GPP), and/or neryl pyrophosphate (NPP). ii. Glycolysis of glucose also produces Acetyl CoA, which can catalyze biosynthesis of the second group of precursors: olivetolic acid (OA) and divarinic acid (DVA). COWEN.COM 19 COWEN COLLABORATIVE INSIGHTS February 25, 2019 iii. Various combinations of the aforementioned precursors then combine in the third pathway to yield parent cannabinoid molecules (e.g., cannabigerolic acid or CBGA). iv. These parent cannabinoids are then modified in the fourth pathway to produce cannabinoids such as tetrahydrocannabinolic acid (THCA) and cannabidiolic acid (CBDA). These acids can be transformed into a non-acid form using synthases, producing the terminal cannabinoid form. Figure 11 Biosynthetic Cannabinoid Production Pathways Source: Cowen and Company Cannabinoid Production Using Fermentation To power the aforementioned pathways, water and glucose (or a cannabinoid substrate) are added to the microbe (e.g., yeast) in a bioreactor. Under fermentation, the yeast will consume the glucose and produce the desired cannabinoid. This culture is incubated for ~3-5 days to produce sufficient cannabinoid intermediaries. Afterwards, the fermentation mixture is separated and combined with a non-toxic solvent to extract and purify the cannabinoids. Recent Cannabinoid Partnerships In Synthetic Biology This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. With the recent legalization of cannabis in several countries and U.S. states and growing acceptance of its utility, many recent notable partnerships have been created on the potential of synthetic cannabinoid production. We highlight two such agreements from the past few months below. Amyris / Undisclosed Partner (February 2019; Valued Up to $255MM) In February 2019, Amyris announced that it has signed an agreement for cannabinoid development, licensing, and commercialization in a partnership valued at up to $255MM (not including royalties for commercial products) with an undisclosed partner. The $255MM in payments include an upfront payment and the remainder is linked to milestones that are expected over the next 12-36 months. The partner is expected to provide initial, lab-based and later commercial-scale milestone cash payments in tranches for the development and scaling of technology to produce CBD. 20 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Cronos Group / Ginkgo Bioworks (September 2018; Valued Up to $122MM) Cronos Group is a vertically integrated Canadian cannabis company that operates two licensed producers. In addition, the company has developed an assortment of cannabis varietals and has amassed an extensive database on various cannabinoids and their properties. Boston-based Ginkgo Bioworks is a synthetic biology company that has developed a cutting edge, automated platform for biological engineering and fermentation. Using synthetic DNA to modify yeast and other organisms, the company endeavors to produce large amounts of various rare strains through this more efficient, lower-cost, novel process. Indeed, as we asserted in the MO/CRON note (link), we believe that this strategic partnership was integral in informing the entry of the largest tobacco player in the U.S., into the legal global cannabis market. By way of background, in September 2018, Cronos and Ginkgo announced an agreement to produce cultured cannabinoids. Ginkgo is tasked with developing strains of yeast that can produce eight target cannabinoids. Cronos would then handle large scale production and distribution of those cultured cannabinoids. The total agreement is valued at $122MM; this includes $22MM to fund R&D, and up to $100MM of CRON common shares in tranches in accordance with production milestones. More specifically, the tranches will be issued once each of the target cannabinoids can be produced for less than $1,000/kg of pure cannabinoids at a scale of >200 liters as follows: THC (20%), CBD (15%), THCV (15%), CBC (10%), CBG (10%), CBGV (10%), CBDV (10%), and CBCV (10%). Cronos and Ginkgo expect to reach the milestone for these eight strains within three years. Figure 12 Cronos and Ginkgo Partnership to Produce Eight Targeted Cannabinoids at Scale Milestone Shares Issued Target Cannabinoid Shares % THC(A) 2,934,981 20% CBD(A) 2,201,235 15% CBC(A) 1,467,490 10% CBG(A) 1,467,490 10% THCV(A) 2,201,235 15% CBGV(A) 1,467,490 10% CBDV(A) 1,467,490 10% CBCV(A) 1,467,490 10% Total 14,674,903 100% This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Cowen and Company COWEN.COM 21 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Life Science Tools Participation In The Legal Cannabis Market (Schenkel) Life science tools companies currently participate in the cannabis market primarily through providing instruments and equipment that: (1) extract active cannabis ingredients from leaves and seeds and (2) analyze cannabis products for potency and contaminants. According to one of our consultants who runs a cannabis testing laboratory, separations instrumentation including liquid chromatography (LC) and gas chromatography (GC), and mass spectrometry (primarily single quadrupoles, triple quadrupoles, and inductively coupled plasma mass spectrometers) are the primary technologies used in cannabis testing. We note that the cannabis testing opportunity is not limited to LC, GC, and mass spec technologies – other technologies including genetic analysis tools (DNA sequencers, microarrays, and PCR) could have a greater role in the cannabis industry in the future. Cannabis Testing Details There are three major categories of tests used to measure and monitor the quality of recreational and medicinal cannabis products: potency testing, terpene profiling, and contaminant testing. Contaminant testing typically includes testing for the following: (1) pesticides; (2) residual solvents; (3) heavy metals; (4) moisture content; (5) mycotoxins; and (6) microorganisms. For the most part, standards and regulations for cannabis potency and contaminants testing are still in the infancy stage and vary widely by state – accordingly, testing of cannabis products vary greatly by locality. The aforementioned tests (also in Figure 13) are the most commonly performed tests. These tests are primarily performed using separations instruments and mass spectrometry (see pages 22-23 for details on these instruments and a list of vendors). Figure 13 lists commonly used instruments associated with a specific cannabis test. Figure 13 Overview Of Cannabis Testing Technologies Test Potency Terpene Profile Pesticides Common Analytical Instrument(s) Used LC (HPLC or UHPLC), GC GC-MS, LC-UV detector LC-MS (triple quad), GC-MS (single or triple quad) This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Residual Solvents Heavy Metals Moisture Content Mycotoxins Microorganisms Actives Extraction GC-MS ICP-MS Moisture balances, weight loss methods LC-MS (triple quad) or immunoassays Mostly culturing, some PCR, few MALDI-TOF Supercritical Fluid Extraction (SFE) Source: The Analytical Scientist and Cowen and Company 22 COWEN.COM Millions COWEN COLLABORATIVE INSIGHTS February 25, 2019 Background On Separations Technology And Market Figure 14 Overall Chromatography Market ($MM) $9,400 $9,200 $9,000 $8,800 $8,600 $8,400 $8,200 $8,000 $7,800 $7,600 2014 2015 2016 2017 2018E Liquid Chromatography And Gas Chromatography – How Does It Work? LC instrumentation is generally composed of: (1) solvent delivery system, (2) sample injector, (3) separation column, (4) detector, and (5) data acquisition unit. The solvent delivery unit pumps the solvent through the LC system while the sample injector introduces the sample into the solvent flow (known as the mobile phase). The chromatography column then separates the sample into its components for analysis by the detector, which measures the presence and amount of constituents. The data acquisition unit then records and stores the information from the detector. The underlying principles of GC are similar to those of LC, with the key difference being that the mobile phase is a gas instead of a liquid. LC Is Often Combined With Mass Spec To obtain the mass spectrum of a single compound in a mixture, the individual components must be separated prior to MS analysis. Separation is necessary for unambiguous identification because multiple compounds present simultaneously create an overlapping or mixed spectrum. The most common separation techniques used in combination with MS are gas chromatography (GC) and liquid chromatography (LC). LC and MS from different vendors can be combined. LC is more commonly used as high temperatures required for GC make it incompatible with the compounds under analysis - this is a key reason why some cannabis testing labs prefer testing THC using liquid chromatography (to be clear, analysis using gas chromatography requires heating THC which changes its properties). Chromatography Market Estimates Figure 15 Chromatography Market Shares Other, 36% Shimadzu, 8% Merck KGaA/ Sigma Aldrich, 10% Agilent, 17% Waters, 16% Thermo Fisher, 13% This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company reports and Cowen and Company Source: Company reports and Cowen and Company Figure 16 Chromatography Market by Configuration Market H/UPLC GC IC LPLC Flash Other Market Share 100% 60-65% 22% 6% 6% 1% 4% Growth Rate 3-4% 4% 3% 4% 5% 3% 3% Market Leaders WAT A TMO GE Teledyne A Shimadzu Metrohm BIO Biotage Source: Company reports and Cowen and Company COWEN.COM 23 5/1/2016 8/7/2016 11/13/2016 2/19/2017 5/28/2017 9/3/2017 12/10/2017 3/18/2018 6/24/2018 9/30/2018 1/6/2019 2/16/2014 4/20/2014 6/22/2014 8/24/2014 10/26/2014 12/28/2014 3/1/2015 5/3/2015 7/5/2015 9/6/2015 11/8/2015 1/10/2016 3/13/2016 5/15/2016 7/17/2016 9/18/2016 11/20/2016 1/22/2017 3/26/2017 5/28/2017 7/30/2017 10/1/2017 12/3/2017 2/4/2018 4/8/2018 6/10/2018 8/12/2018 10/14/2018 12/16/2018 5/1/2016 8/7/2016 11/13/2016 2/19/2017 5/28/2017 9/3/2017 12/10/2017 3/18/2018 6/24/2018 9/30/2018 1/6/2019 5/1/2016 8/7/2016 11/13/2016 2/19/2017 5/28/2017 9/3/2017 12/10/2017 3/18/2018 6/24/2018 9/30/2018 1/6/2019 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Consumer Products Opportunities (Azer) In 2018, the CBD market in the U.S. has been estimated to have generated revenues ranging from ~$600 mm to as much as $2 bn. In our 2019 global cannabis outlook report (here), we had believed the CBD purchases in the U.S. likely skewed to the lowerend of that range. However, with new survey data from Cowen’s proprietary consumer survey, we can see that among our ~2,500 respondents (18+) in January 2019 nearly 7% reported using CBD as a supplement. Coupled with the diverse form factors reportedly being used (including close to 20% for beverages, which was surprising to us), we are now inclined to size the current market at closer to $2 bn. Indeed, looking at Google search trends, we can see that interest looks to have climbed steadily in 2016 and 2017, and accelerated meaningfully in 2018, which has continued into 2019. Figure 17 CBD Interest Has Been Increasing 100 80 60 40 20 0 Source: Google Trends and Cowen and Company U.S. Google Trends: CBD Encouragingly, interest has been rising consistently among different form factors, ranging from supplements like CBD gummies, to topicals and oils. The rising interest and popularity in this broad range of CBD offerings should support a diverse category and multiple competitors that cater to a large base of consumers with different needs, requiring various applications. Figure 18 Interest Broad Based from Edibles… Figure 19 …to Topicals… Figure 20 …To Oil This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 100 80 60 40 20 0 U.S. Google Trends: CBD Gummies 100 80 60 40 20 0 U.S. Google Trends: CBD Cream U.S. Google Trends: CBD Oil 100 80 60 40 20 0 Source: Google Trends and Cowen and Company Source: Google Trends and Cowen and Company Source: Google Trends and Cowen and Company 24 COWEN.COM Total < $50K $50K-$100K Total 18-34 35-54 55+ > $100K Total Caucasian Hispanic Asian African American 1/23/2013 6/23/2013 11/23/2013 4/23/2014 9/23/2014 2/23/2015 7/23/2015 12/23/2015 5/23/2016 10/23/2016 3/23/2017 8/23/2017 1/23/2018 6/23/2018 11/23/2018 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 21 Over 20K Hemp Oil SKUs Offered by Amazon Today... Source: Amazon and Cowen and Company Figure 23 CBD Over-Indexes with Low- Income… 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% # of Hemp Oil Products on Amazon Date # of Products Date # of Products 1/23/2013 4,975 11/8/2014 11,587 2/1/2013 5,039 2/7/2015 12,370 1/10/2014 8,507 3/2/2015 12,430 2/10/2014 9,642 3/20/2015 12,741 8/10/2014 11,694 7/7/2015 13,963 10/12/2014 11,904 1/2/2019 > 20,000 % Using CBD As A Supplement 6.9% 7.4% 6.5% 5.6% To further reinforce how CBD has been gaining interest over time, we analyzed the historical number of hemp oil products offered by Amazon (AMZN, John Blackledge), where we can see a continued increase in the number of products sold. Indeed, six years ago, Amazon had been offering roughly 5,000 products, which has quadrupled to over 20,000 products today. Figure 22 …Which Has Increased 4-Fold Over the Past 6 Years Source: Amazon and Cowen and Company With reported CBD use skewing toward younger consumers, it is perhaps not surprising to see that CBD also over-indexes to lower-income consumers (where younger consumers generally have lower household incomes). What is more, CBD seems to be the most popular among Caucasians, following by Hispanic / Latino consumers. Meanwhile, CBD use is slightly more popular among women (7.0% incidence), vs. men (6.7% incidence). Figure 24 ...Young Consumers (Ages 18-34)… 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% % Using CBD As A Supplement 6.9% 9.4% 25,000 20,000 15,000 10,000 5,000 7.2% 0 3.7% # of "Hemp Oil" Products on Amazon Figure 25 …And Caucasians 8.0% 6.0% 4.0% 2.0% 0.0% % Using CBD As A Supplement 6.9% 7.3% 6.8% 5.6% 4.4% This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Cowen Survey, N=~2500, January 2019 Source: Cowen Survey, N=~2500, January 2019 Source: Cowen Survey, N=~2500, January 2019 COWEN.COM 25 # of Posts in January COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 26 Instagram Analysis Reflects Competition From Emerging Brands 100 Blue Ridge Hemp 80 Pure Hemp Shop 60 40 20 0 Kush Queen CBDFX CWHemp Hemp Bombs Green Roads Recess Papa & Barkley Given increasing interest, younger consumer demographic trends, and a lack of paid advertising within the space, below we offer a snapshot of the Instagram landscape as a proxy for current company social media activity. We would caveat that this is not an exhaustive list, nor does the below chart factor in the impact of influencer marketing, which is a popular trend in order for these companies to drive brand momentum. That said, we believe the below chart reflects the competitive nature of the category as we are already starting to see momentum from less known, emerging brands. Of the companies analyzed, the below chart reflects the top 17 brands by absolute Instagram followers, while also providing data on the absolute number of posts over the month of January, as well as the average number of likes per post. Absolute Followers. As it currently stands, three companies have an Instagram following of over 100K people, with CBDFX leading the pack at 181K. Kush Queen and GT’s Kombucha also look to be well positioned with 168K and 145K followers, respectively. # of Posts. Blue Ridge Hemp was the most active over the month of January with 84 posts, followed closely by Hemp Bombs (79 posts) and Pure Hemp Shop (57 posts). Across the competitive set, the average number of posts for the month of January was 32. Avg Likes Per Post. In addition to having one of the largest number of absolute followers, GT’s Kombucha also led the way in average likes per post (1,863). This was followed by super premium CBD company, Lord Jones, with 1,318 average likes per post. Not Pot rounded out the top three with 1,257 average likes per post. We would note that while we consider the below analysis useful in terms of analyzing social media activity, it should not be used as a proxy for market leadership. Publicly traded companies such as Charlotte’s Web, CV Sciences and Elixinol have established themselves as market leaders within CBD, based on distribution / market penetration, consumer awareness, and brand equity. Top CBD Companies by Instagram Followers Credo Beboe Sunday Scaries Not Pot Lord Jones GT's This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. -20 cbdMD NuLeaf Naturals 0 250 500 750 1,000 1,250 1,500 1,750 2,000 Avg # of Likes In January CBDFX Kush Queen GT's Credo Lord Jones Beboe CWHemp Blue Ridge Hemp Green Roads NuLeaf Naturals Sunday Scaries cbdMD Papa & Barkley Pure Hemp Shop Hemp Bombs Not Pot Recess Source: Instagram and Cowen and Company Note: Bubble size reflects relative number of Instagram followers 26 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 From a consumer staples perspective, we see innovation across a host of form factors. To analyze the category’s potential, we focused on six specific consumer product categories, including: i. Nutraceuticals (tinctures, capsules, sprays, and gummy vitamins) ii. Topicals (for targeted pain relief, like Tiger Balm) iii. Beverages (water, energy drinks and beer) iv. Food (including confections and bars) v. Vapor vi. Beauty (including skin care, serums, lotions, and bath products) While our analysis was far from exhaustive, below we: i. Break down the above product categories by sub-segment to benchmark pricing, which we define as value, main, premium and super-premium, ii. Forecast run rate revenues by vertical over the next two years, iii. Offer company-specific detail on numerous private and public companies as part of our research on the CBD opportunity (primarily in the U.S.). Figure 27 Beauty Products Carry the Most Premium Pricing, While Tinctures and Gummies Offer the Best Value Proposition in Terms of Price / MG of CBD Tinctures Gummies Vape Confections Bath Bombs Capsules Bars Topicals Body Lotion $0.09 $0.12 $0.14 $0.10 $0.16 $0.19 $0.19 $0.17 $0.20 $0.28 $0.24 $0.23 $0.20 $0.24 $0.30 $0.38 $0.19 $0.31 CBD Form Factor Price Per MG $0.47 $0.33 $0.41 $0.30 $0.21 $0.46 $0.52 $0.43 $0.38 $0.24 $0.60 $0.57 $0.54 $0.41 $0.70 $0.71 $0.58 $0.75 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Body Oil $0.27 $0.45 $0.62 $0.80 Beverages $0.29 $0.56 $0.83 $1.10 Mask $0.36 $0.61 $0.85 $1.10 Balm $0.50 $0.95 $1.40 $1.85 Face Cream $0.82 $1.43 $2.05 $2.67 Face Serum $0.91 $1.60 $2.30 $3.00 $0.00 $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00 $2.25 $2.50 $2.75 $3.00 $3.25 Value Main Premium Super Premium Note: Price boxes represent the high-end of the form factor’s respective price segment. Source: Company Websites and Cowen and Company COWEN.COM 27 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2019E 2020E COWEN COLLABORATIVE INSIGHTS February 25, 2019 Nutraceuticals Figure 29 Mass Market Makes Up ~17% of Herb Retail Sales Given robust consumer interest in CBD products, we estimate that over the next two years, the nutraceuticals category (which includes tinctures, capsules, gummy vitamins, etc.) can generate revenues of $2.4 bn. Uncertainty around the timing of this revenue ramp reflects a lack of clarity on how quickly retailers, in particular mass market retailers, will begin to stock the products following the passage of the 2018 Farm Bill. Figure 28 We Estimate CBD Nutraceuticals Can Generate ~$2.4 BN in Sales Going Forward $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Source: Cowen and Company U.S. CBD Nutraceutical Sales ($ in mm) $1,100 $1,800 $2,400 2018 2019E 2020E Our $2.4 bn estimate is benchmarked against the herbal supplement market in the U.S. According to the American Botanical Council, herbal supplement retail sales were $6.4 bn in 2014, posting the 11 th year of consecutive growth. Between 2004-2014, the herbal supplement category grew its revenues at a ~4.2% CAGR. Extrapolating that growth out to 2019 would imply a total herbal supplement market of ~$8 bn over the next two years. Our $2.4 bn estimate for the CBD market would imply almost a 30% share of this market by 2020. The importance of retail adoption is reflected in the category makeup of the herbal supplement market, where we can see that over 17% of sales come from mass market retailers. Figure 30 Herb Retail Sales To Exceed ~$8 BN Assuming 4.2% CAGR This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. U.S Herb Retail Sales by Channel (2014) Natural & Health Foods 34% Mass Market 17% Source: American Botanical Council and Cowen and Company Direct Sales 49% U.S. Herb Retail Sales (All Channels, $ in mm) $8,222 $8,500 $7,894 $8,000 $7,500 $7,000 $6,500 $6,441 $6,000 $5,500 $5,000 $4,500 $4,000 Source: American Botanical Council and Cowen and Company 28 COWEN.COM Lord Jones Medix CBD Diamond CBD Green Roads baceae bella Premium Jane CV Sciences Mary's Medicinals Mary's Nutritionals Pure Kana Sunday Scaries Highline Papa & Barkley Veggimins Hemp Bombs Isodiol Elixinol gronCBD Endoca Canna Hemp Charlotte's Web Reliva cbdMD Curaleaf Hemp Green Mountain Lazarus COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 31 Notable Competition Within Tinctures Segment $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 Tinctures are the market leading form factor within CBD, which is reflected in the absolute number of companies that play across different price segments. On a price / mg CBD basis, Lord Jones leads the pack on premium pricing, with its tincture priced at $0.24 per mg of CBD. Lazarus falls at the opposite end of the price spectrum at $0.04 per mg of CBD. The vast number of price points throughout this segment reflects an abundance of choice for the consumer, providing options for all income cohorts. $0.24 $0.23 $0.22 $0.20 $0.17 $0.17 $0.17 $0.16 $0.16 $0.16 $0.16 $0.15 $0.14 $0.13 $0.11 $0.11 $0.11 $0.11 $0.10 $0.09 $0.08 $0.08 $0.08 $0.08 $0.07 $0.05 $0.04 Super Premium ( > $0.19) Source: Company Websites and Cowen and Company Premium ($0.15-$0.19) CBD Tinctures by Price Segment Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average Figure 32 Tinctures Are The Most Popular Form Factor Main ($0.09-$0.14) Value ( < $0.09) In our consumer survey, of respondents who use CBD, 44% of people use tinctures as a form factor, which looks to be equally popular among both male and females. Interestingly, tincture use looks to be the most prevalent form factor among older consumers, as two-thirds of respondents within this cohort indicated use of a tincture. Tinctures look to be the most popular form factor across all income demographics, with over 50% of people using within the $50K-$100K segment. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% CBD Tincture Use 66.7% 56.4% 43.6% 43.4% 43.8% 47.2% 37.4% 38.9% 31.5% Total Male Female 18-34 35-54 55+ <$50K $50K-$100K >$100K Gender Age Income Source: Cowen Survey, N=~2500, January 2019 COWEN.COM 29 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 33 Lord Jones Price Point Reflects Premium Positioning Source: Company Reports Figure 35 Papa & Barkley Currently Offer Tinctures Only Figure 34 CV’s Plus CBD Oil Competitively Positioned Within Premium Source: Company Website Figure 36 Reliva Tinctures Compete On Value This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company Website Source: Company Website 30 COWEN.COM Mary's Medicinals Mary's Nutritionals Sagely Naturals Hemp Bombs CWHemp Green Roads CV Sciences Premium Jane Pure Kana Lord Jones Canna Hemp Try The CBD Elixinol cbdMD Curaleaf Hemp Lazarus Green Mountain COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 37 Capsules Competitively Priced On Value $0.75 $0.60 $0.45 $0.30 $0.15 $0.00 $0.60 S. Prem. ( > $0.46) $0.43 Prem. ($0.34- $0.46) Source: Company Websites and Cowen and Company Along with tinctures, capsules represent one of the more mature form factors within CBD. Mary’s looks to be squarely positioned as the most premium brand across all companies analyzed, in particular for their Elite capsule line, which offers 150 mgs of CBD and retails for $90. For context, the closest price point to Mary’s comes from Sagely Naturals at $0.17 per mg. Brands look to be very competitively priced in terms of value, with seven of the brands coming in at $0.10 or below. CBD Capsules by Price Segment $0.17 $0.14 $0.12 $0.12 $0.12 $0.12 $0.12 $0.11 $0.10 $0.09 $0.09 $0.07 $0.05 $0.05 $0.05 Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average Figure 38 Capsule CBD Use Over-Indexes To Males And Skews Younger And Lower Income 30.0% 25.0% 22.1% 27.7% Value ( < $0.19) Utilizing our proprietary consumer survey, CBD capsule use looks to over-index with males, which shows over a 10 pt delta relative to women. In addition, on a relative basis to other form factors, CBD capsule use is more popular with younger, lower-income consumers, which perhaps explains the notable competition seen within the value segment. CBD Capsule Use 24.7% 22.2% 23.2% 21.8% This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 20.0% 15.0% 16.9% 14.8% 16.7% 10.0% 5.0% 0.0% Total Male Female 18-34 35-54 55+ <$50K $50K-$100K >$100K Gender Age Income Source: Cowen Survey, N=~2500, January 2019) COWEN.COM 31 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 39 Mary’s Capsules Are Priced At A Premium Source: Company Reports Figure 41 Elixinol Offers Differentiated Packaging Figure 40 CWeb is One Of The More Well Known CBD Capsule Providers Source: Company Website Figure 42 Lazarus Competes At The Low-End of Value This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company Reports Source: Company Website 32 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 43 Almost Half Of The Brands Analyzed Fall Into The Value Segment $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 $0.24 CV Sciences Super Premium ( > $0.20) $0.20 $0.20 Reliva Sunday Scaries For gummies, we analyzed 30 SKUs across 13 brands. Our analysis shows that CV Sciences’ CBD Oil Gummies are the most premium priced at an average $0.24 per mg of CBD. CV Sciences offers two SKUs with their 30 capsule bottle providing 150 mgs of CBD for $39.95, while their second SKU offers a slightly better value proposition, with a 60 count bottle providing 300 mgs of CBD for $64.95 ($0.22 per mg). Hemp Bombs had the largest number of SKU’s relative to the other brands analyzed (7), while also having the highest absolute price point ($139.99 for a 60 gummy bottle with 1,500 mgs of CBD), though the average price per mg of CBD positioned the brand within the main segment. Similar to its tincture offering, we would note that Highline falls broadly in the middle of its peers, as their direct-to-consumer business model allows the company to offer competitive pricing across its portfolio. Almost half of the brands analyzed fell into the value segment, all priced at $0.10 per mg of CBD or lower. Across all 30 SKUs, average retail price was ~$50 per offering, with an average 450 mgs of CBD offered per bottle. $0.18 $0.17 Green Roads Premium ($0.17-$0.20) Source: Company Websites and Cowen and Company CBD Gummies by Price Segment Medix CBD $0.12 $0.12 Hemp Bombs Main ($0.12-$0.16) Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average $0.10 $0.10 $0.09 $0.08 $0.08 $0.08 Highline CTFO cbdMD Premium Jane Value ( < $0.12) Pure Kana Diamond CBD Just CBD This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. COWEN.COM 33 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 44 CV Sciences Gummies Are Priced At A Premium Figure 45 Green Roads’ 300 MG Gummies Retail For $55 Source: Company Website Source: Company Website Figure 46 Highline Is Priced Competitively Figure 47 cbdMD Offers Two 30 Count SKUs (300 mgs and 750 mgs) This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company Website Source: Company Website 34 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Topicals Figure 48 U.S. Topical Category Generates ~$13 BN In Revenue $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 U.S. Addressable Topical Market ($ in bn) $12.8 $12.8 $12.8 2018 2019E 2020E Source: Company Reports and Cowen and Company Outside of nutraceuticals, we expect the topical CBD market to provide the largest contribution to industry sales. We believe the non-ingestible nature of the product makes it more attractive to consumers looking to experiment in CBD and can provide a source of trial into the category. While the CBD market clearly needs more clinical research into the benefits of the cannabinoid, it has been suggested that two of the primary benefits are anti-inflammation and muscle recovery, which can cater to a large and diverse consumer base. Over the next two years, we expect the topical CBD market to grow to $1.5 bn (almost $1 bn less than our outlook for nutraceuticals). We estimate that in 2018, the total addressable U.S. topical market, which includes both OTC and rx offerings was ~$12.8 bn. If we assume no growth in the category base, a $1.5 bn CBD category by 2020 would imply a ~12% share of the market, the largest market share among all of the categories analyzed, excluding nutraceuticals. Figure 49 We Believe CBD Topicals Could Be A $1.5 BN Market in 2 Years $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $500 Source: Cowen and Company U.S. CBD Topicals ($ in mm) $1,000 $1,500 2018 2019E 2020E Our below scenario analysis provides a wider incremental range of market share outcomes relative to other categories. We can see that every 5 pts of market share capture is worth over $600 mm in revenues. While our analysis contemplates a 2% share of the topical market, we believe that this is unlikely and view the floor at ~7%, which would imply almost $900 mm in revenues by 2020. Given the number of companies providing topical solutions, coupled with what we expect to be robust consumer demand, a market share between 12-17% is not unrealistic. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Figure 50 Topicals Expected To Be a Major Contributor to CBD 2020 Market Share Scenario Analysis Market Share 2% 7% 12% 17% 22% Absolute Sales ($ in mm) $220 $860 $1,500 $2,140 $2,780 Source: Cowen and Company COWEN.COM 35 Sagely Naturals CTFO Mary's Nutritionals Credo Curaleaf Hemp Kush Queen Mazz Hanna Vertly RX CannaCare Mary's Medicinals Green Roads Hemp Bombs Highline LEEF Organics Medix CBD Sopris gronCBD Canna Hemp X Bee's Knees Wildflower Pure Kana Canna Hemp Premium Jane Try the CBD lovebud cbdMD Reliva Green Mountain Lazarus Myaderm COWEN COLLABORATIVE INSIGHTS February 25, 2019 Benchmarking across the topical market, we would highlight the absolute number of brands offering a product, which while not exhaustive, provides context on the popularity of the form factor. Similar to most other verticals, Mary’s topicals fall into the super-premium segment, which we define as anything above $0.54 per mg of CBD. Of all the SKUs analyzed, the premium segment looks to be the narrowest, while mainstream and value segments are the most popular price point among the competitive set. Figure 51 Popularity in Topicals Are Reflected In The Overall Number Of Brands Playing Within The Segment $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 $0.71 $0.62$0.61$0.60 Super Premium ( > $0.54) $0.45 $0.40 $0.32$0.32$0.30 $0.26$0.25$0.25$0.23$0.23$0.22 $0.19$0.17$0.16$0.15$0.15$0.14$0.12$0.11$0.10$0.10$0.08$0.07$0.05$0.05$0.05 Premium ($0.38- $0.54) Source: Company Websites and Cowen and Company CBD Topicals by Price Segment Main ($0.21-$0.38) Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average Figure 52 Topical Use Is More Prevalent Among Younger, Lower Income Consumers Value ( < $0.21) According to our proprietary Cowen consumer survey, of respondents who use CBD, 26.2% of people use topicals as a form factor, which is the highest level seen after tinctures. Usage among men and women look to be similar, though younger, lower income use looks to be more prevalent when benchmarking to older, higher income cohorts. Similar to capsules, this could reflect the large number of brands we see playing in the value segment. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% CBD Topical Use 26.2% 26.5% 25.8% 30.1% 27.8% 29.3% 21.8% 22.2% 11.1% Total Male Female 18-34 35-54 55+ <$50K $50K-$100K >$100K Gender Age Income Source: Cowen Survey, N=~2500, January 2019 36 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 53 Mary’s Provides A Range Of Topicals, Including Muscle Freeze Figure 54 Curaleaf Hemp Lotion Priced On The Premium Side Source: Company Report Source: Company Website Figure 55 Highline Positioned Within Mainstream Figure 56 Reliva’s Pain Cream Retails For $19.99 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company Website Source: Company Website COWEN.COM 37 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Beverages Over the next two years, we believe that the beverage category can grow to a $900 mm revenue opportunity. Our conviction in this category is underscored by our proprietary consumer survey, which shows that almost 20% of CBD users consume beverages, which we view as an encouraging sign. For 2019, we are forecasting a notable acceleration in growth, with revenues more than doubling to $600 mm. Assuming growth moderates in 2020 (to 50%), we believe revenues will approach the $1 bn mark. Figure 57 Sales for Beverages Can Approach $1 BN Over the Next Two Years $1,000 $800 $600 $400 $200 $0 Source: Cowen and Company Total Beverage CBD Sales ($ in mm) $240 $36 $48 $156 $600 $90 $120 $390 $135 $180 $585 2018 2019 2020 Bottled Water Energy Drinks Beer $900 Below we provide a sub-segment build by category, where we believe CBD water will represent the lion’s share of sales at 65%. Energy drinks have been focused on health and wellness and we believe that CBD-infused energy drinks will represent a niche segment in a category that continues to see more competition. We expect CBD beer to have a place in the category, though should admittedly be smaller in scale, given less interest from a lack of THC. Figure 58 CBD Water Should Have An Outsized Contribution On Category Sales This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. CBD Sales Mix by Sub-Category Beer 15% Energy Drinks 20% Bottled Water 65% Source: Cowen and Company 38 COWEN.COM 2016-01 2016-04 2016-07 2016-10 2017-01 2017-04 2017-07 2017-10 2018-01 2018-04 2018-07 2018-10 2019-01 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Bottled Water Figure 59 Bottled Water Should Be The Most Popular CBD Beverage Source: Cowen and Company Figure 61 A 2% Share Implies Over $500 MM In Revenues $700 $600 $500 $400 $300 $200 $100 2020 Market Share Scenario Analysis Market Share 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% Absolute Sales ($ in mm) $159 $301 $443 $585 $727 $869 $1,011 U.S. CBD Water Sales ($ in mm) $156 $390 Consumer interest in CBD continues to gain momentum. For beverages, in particular water, this is evidenced by analyzing current Google Trends, where interest rose considerably over the course of 2018 and looks to still be achieving new highs, which is not surprising, given the recent passage of the U.S. Farm Bill. Figure 60 Increasing Interest Reflected In Google Search Trends 100 80 60 40 20 0 U.S. Google Trends (CBD Water) Source: Google Trends and Cowen and Company Over the next 2 years we believe that the U.S. CBD water category can generate close to $600 mm in revenues. In Nielsen, U.S. bottled water generated just over $13 bn in 2018. Assuming Nielsen channels account for 50% coverage of the category implies total revenues of over $26 bn. Applying the 4.2% CAGR the category has grown over the last 3 years and extrapolating out results in total revenue surpassing $28 bn by 2020. Our estimates are premised on CBD water achieving a ~1.5% market share in 2019 and a conservative ~2% market share of the U.S. bottled water category in 2020. We would note that a ~2% share of the bottled water category compares to a ~3% share for coconut water. With the amount of consumer interest and potential functional benefits that come along with CBD, we believe that a modest 2% share of the category is reasonable, in particular if multiple larger players within the beverage space enter the category and drive distribution. Above, we provide a scenario analysis on the revenue opportunity assuming different market share levels. $585 Figure 62 Bottled Water Category Growth Remains Healthy $30 $25 $20 $15 $10 $5 U.S. Bottled Water Sales ($ in bn) $23 $24 $25 $26 $27 $28 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. $0 Source: Cowen and Company 2018 2019E 2020E $0 2015 2016 2017 2018 2019E 2020E Source: The Nielsen Company and Cowen and Company Note: Assumes 50% coverage in Nielsen COWEN.COM 39 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Energy Drinks Figure 63 Almost $200 MM In Revenues Assuming 1% Share By 2020 $200 $150 $100 $50 $0 $48 Source: Cowen and Company U.S. CBD Energy Drink Sales ($ in mm) $120 Energy is another beverage category that we feel is ripe for CBD inclusion, as it continues to expand towards health and wellness propositions. This has been reflected in consistent strong growth from MNST’s Ultra line, which offers functional benefits without the sugar, Muscle Monster, which is high in protein, as well as the emergence of Bang, which contains BCAA. At their recent Analyst Day, MNST indicated that they will be launching a new product called Reign, which will offer 5x the amount of BCAA as Bang. As the lines between core energy drinks and health and wellness offerings continue to blur, we would expect all of the major players to come to market with offerings that contain CBD and provide incremental functional benefits (such as muscle recovery). We believe that by 2020 it is reasonable for CBD’s share of the energy category to reach ~1%, which we view as conservative as it is below the current market share run rate that Bang has already been able to achieve. A 1% share would imply revenues of ~$180 mm for the CBD segment, assuming that the category continues to grow at the same 4.3% CAGR it has delivered over the past three years. We can see below that implied category revenues for total energy would grow by over $1 bn over the next two years to ~$17 bn. $180 2018 2019E 2020E Figure 64 Extrapolating 4.3% CAGR Results In Category Revenues Surpassing $17 BN In 2 Years $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 $14 U.S. Energy Drink Sales ($ in bn) $14 $15 $16 $16 $17 2015 2016 2017 2018 2019E 2020E Source: The Nielsen Company and Cowen and Company Note: Assumes 75% coverage in Nielsen This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Below we provide a scenario analysis on CBD energy revenues associated with market share gains. We would note that a 0.3% share by 2020 would be at the low-end of our expectations and result in revenues of ~$50 mm. As a point of reference, recall that Mutant, which did not perform to expectations and has essentially been de-prioritized by MNST, has a current market share of ~0.2%. Figure 65 Blurred Lines Between Core Energy And H&W Make CBD Ripe For Entry Into Category 2020 Market Share Scenario Analysis Market Share 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% Absolute Sales ($ in mm) $52 $95 $137 $180 $223 $265 $308 Source: Cowen and Company 40 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Beer Figure 66 Hard Seltzer Achieved A 1% Dollar Share In 2018 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% U.S. Hard Seltzer $ Share 0.1% 0.3% We believe CBD infused beer can serve as a niche segment in a rapidly evolving beer category. With core beer under pressure, a continued theme from the key manufacturers within the space has been a focus on innovation, as well as a move away from alcohol into low and no-alcohol offerings (ABI is targeting 20% of portfolio to be low / no alcohol by 2025). On the innovation front, hard seltzer looks to be resonating with consumers, which we believe is sticky, as it offers consumers a new product and opportunity to drive incremental drinking occasions, while checking the box from a health and wellness standpoint. In 2018, the hard seltzer category achieved a 1% market share of the combined beer category, which includes, core beer, cider and FMBs. If we assume that CBD-infused beer is able to capture a modest fifth of that amount of share by 2020 (~20 bps), that could result in a revenue opportunity of over $130 mm. We have been hearing growing interest in companies looking to combine CBD in alcoholic beer to offer potential hangover relief. 1.0% 2016 2017 2018 Source: The Nielsen Company and Cowen and Company Figure 67 Assuming ~20 Bps Of Share For CBD Beer = $135 MM $150 $100 $50 $0 U.S. CBD Beer Sales ($ in mm) $36 $90 $135 2018 2019E 2020E Source: Cowen and Company These estimates are benchmarked to a category that has grown sales at a 1.6% CAGR over the past three years. If we assume Nielsen provides 50% coverage of the total category and extrapolate that growth out, total off-premise revenues should approach $72 bn by 2020. We provide a sensitivity analysis below on the 2020 revenue opportunity based on different levels of market share capture. We estimate every 5 bps of share is worth $36 mm. This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Figure 68 1.6% Growth Should Result In Category Revs Of ~$72 BN Figure 69 Each 5 bps Of Share Is Worth $36 MM In Revenue $74 $72 $70 $68 U.S. Combined Beer Sales ($ in bn) $71 $70 $69 $68 $67 $72 2020 Market Share Scenario Analysis Market Share 0.09% 0.14% 0.19% 0.24% 0.29% $66 Absolute Sales ($ in mm) $63 $99 $135 $171 $207 $64 $62 2015 2016 2017 2018 2019E 2020E Source: The Nielsen Company and Cowen and Company Note: Assumes 50% coverage in Nielsen; off-premise sales only Source: Cowen and Company COWEN.COM 41 CBD Living Cannaki Root Origins Isodiol Quantum Aurora Elixers Vybes Endo Brands Recess Mountjoy Diamond CBD Kickback CBDFX Willie's Cannabinoid Creations EVERx Nutrition Sprig Hemp Bombs GT's Reliva Rocky Mountain High COWEN COLLABORATIVE INSIGHTS February 25, 2019 There are a solid amount of beverage companies currently playing within the space, largely price positioned within the mainstream and value segments of the market. We would highlight that on a price per mg basis, beverages skew higher across the board, relative to tinctures, capsules and gummies. Figure 70 Beverage Price Points Are Premium Relative To Tinctures, Capsules, Gummies, And Topicals $1.25 $1.00 $0.75 $0.50 $0.25 $0.00 $1.10 $1.00 $1.00 $0.80 $0.63 $0.53 $0.53 $0.50 $0.50 $0.46 $0.42 $0.40 $0.35 $0.34 $0.26 $0.25 $0.21 $0.20 $0.16 $0.12 Super Premium ( > $0.83) Premium ($0.57- $0.83) Source: Company Websites and Cowen and Company CBD Beverages by Price Segment Main ($0.29-$0.56) Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average Figure 71 Popularity Among Younger Consumers Can Result In A Waterfall Effect Over Time 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 19.2% 20.5% 18.0% Value ( < $0.29) Based on our survey, of respondents that use CBD, 19.2% use beverages as a form factor, which is admittedly higher than we would’ve expected given the nascent stage of the category. Similar to both capsules and topicals, beverage use is a more popular choice among younger, lower income consumers (by a wider margin relative to other age cohorts compared to the other categories). This leaves us optimistic on the future prospects of the category as a waterfall effect can result in an increase in category mix. CBD Beverage Use 28.8% 15.3% Total Male Female 18-34 35-54 55+ <$50K $50K-$100K >$100K 3.7% 22.2% 16.4% 11.1% $0.01 This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Gender Age Income Source: Cowen Survey, n=~2500, January 2019 42 COWEN.COM COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 72 Recess Offers Impressive Packaging Source: Company Reports Figure 74 Shots May Overlap with Energy Over Time Figure 73 Sprig Offers A Variety Of Flavor Options Source: Company Website Figure 75 Willie’s Recently Came to Market with a Coffee This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. Source: Company Website Source: Company Website COWEN.COM 43 COWEN COLLABORATIVE INSIGHTS February 25, 2019 Beauty The U.S. beauty category, which is inclusive of skin care, cosmetics, haircare, fragrance, bath & body, salon styling tools, and other toiletries, is a ~$87 bn industry according to Euromonitor International and IBIS World Inc. Within mass beauty, the prestige segment grew 6%, accounting for almost $19 bn in revenue in 2018 according to NPD. If we extrapolate the 6% growth in prestige beauty out through 2020, that would result in segment revenues surpassing $21 bn over the next two years. Figure 76 Total U.S. Beauty Is A ~$87 BN Industry Figure 77 Prestige Can Grow To Over $21 BN By 2020 $100 $80 $60 $40 $20 $0 Total U.S. Beauty Industry Sales ($ in bn) $59 $65 $71 $74 $81 $87 2013 2014 2015 2016 2017 2018 Source: Company Reports and Cowen and Company Figure 78 CBD Beauty Sales Can Surpass $400 MM By 2020 $500 $400 U.S. CBD Beauty Sales ($ in mm) $420 $22.0 $21.0 $20.0 $19.0 $18.0 $17.0 $16.0 U.S. Prestige Beauty Industry Sales ($ in bn) $17.7 $18.8 $19.9 $21.1 2017 2018 2019E 2020E Source: NPD and Cowen and Company We expect that CBD beauty will become more of a focus for consumers, as large-scale manufacturers and retailers begin to roll out more products, which will presumably generate positive mix and result in a step-change in market share capture. As such, we believe that a ~1% share of the prestige market is achievable in 2019, doubling to 2% in 2020, which would equate to over $400 mm in sales. The below analysis provides a scenario of revenue outcomes based on share capture, ranging from ~$200 mm to over $600 mm. Figure 79 Each 50 bps Of Share Is Worth Over $100 MM In Revenue 2020 Market Share Scenario Analysis This report is intended for michael.cella@cowen.com. Unauthorized redistribution of this report is prohibited. $300 $240 Market Share 1.0% 1.5% 2.0% 2.5% 3.0% $200 $100 $0 $60 2018 2019E 2020E Absolute Sales ($ in mm) $209 $314 $420 $526 $631 Source: Cowen and Company Source: Cowen and Company 44 COWEN.COM Cannabliss Organic CTFO Mary's Nutritionals Pureblis Naturals Crave of 40 Winks Code of Harmony Skin Dope Joy Organics Ildi Pekar bella Dragonfly Botanicals Saint Jane Hora Veggimins COWEN COLLABORATIVE INSIGHTS February 25, 2019 Figure 80 Beauty Facial Products Command Meaningfully Higher Price Points $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $2.67 Cannabliss Organic $2.55 CTFO Super Premium ( > $2.05) Source: Company Websites and Cowen and Company $1.70 imbue botanicals Beauty products, and face treatments in particular, command price points notably above other form factors across the space, which will presumably offer by far the highest gross margins. Among high-end face creams, Cannabliss Organic and CTFO provide 30 mgs and 20 mgs of CBD respectively, while commanding price points ranging from $50-$80. $1.50 RX CannaCare Premium ($1.44-$2.05) CBD Face Cream by Price Segment $1.13 Mary's Nutritionals Main ($0.82-$1.43) Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average