Tilray Economic Impact 2015

E C O N O M I C I M P A C T SO F T I L R A Y I N N A N A I M O

MARCH 2015

Photo Credit: Cinnabar Vista Productions

C O N T E N T S

FOREWORD

MESSAGE FROM HIS WORSHIP MAYOR BILL MCKAY

MESSAGE FROM THE CEO OF THE NEDC

EXECUTIVE SUMMARY

BACKGROUND ON TILRAY’S OPERATION & INVESTMENT IN NANAIMO

TILRAY’S ECONOMIC IMPACT & GROWTH FORECAST

NUMBER & SIZE OF FIRMS IN THE NANAIMO REGION

NANAIMO & REGION ECONOMIC OVERVIEW

ABOUT NEDC

ABOUT MNP

REPORT LIMITATIONS

ECONOMIC IMPACT ESTIMATES

METHODOLOGY

DATA SOURCES

ECONOMIC IMPACTS OF INITIAL INVESTMENT

ECONOMIC IMPACTS OF ONGOING OPERATIONS

ECONOMIC IMPACTS OF EXPANDED FACILITY

SUMMARY OF ECONOMIC IMPACTS

APPENDIX A

01

02

05

06

12

Nanaimo is a welcoming, friendly community offering extraordinary beauty, enviable lifestyle and first-rate infrastructure. The geographical centre of spectacular Vancouver Island, our region is an affordable west coast harbour city where people come to visit and return to live.

The Nanaimo region also offers great investment opportunities. A stable investment environment, combined with exceptional local talent and a business-friendly attitude, provide the necessary ingredients for future success. Our community is chosen by entrepreneurs, artists and families for our urban energy, unique history, outdoor recreation and lifestyle. The region truly is a place of infinite possibilities.

It is the NEDC’s pleasure to provide a forward to the economic impact analysis that has been conducted regarding Tilray’s investment in our community and the household sustaining jobs that they have generated for the citizens of our region. Not only is Tilray a significant employer in our region but their commitment to excellence, transparency and community has

quickly earned them the reputation of being an outstanding corporate citizen in the Nanaimo region.

As the lead economic development organization for our region, the NEDC was happy to assist with the development of this impact study, and fully endorses the information enclosed within. The Nanaimo Economic Development Corporation would like to thank MNP for their work in developing the models used for the study.

F O R E W O R D

Message from His Worship Mayor Bill McKay

Message from the CEO of the Nanaimo Economic Development Corporation

01

E X E C U T I V E S U M M A R Y

02

In early 2013 the Nanaimo Economic Development Corporation and Privateer Holdings (the parent company of Tilray) began discussions on the establishment of a medical cannabis research and production facility in the Nanaimo region. During this time a number of jurisdictions across Canada were also in contention as potential sites for the new facility, including communities in Saskatchewan and Ontario. While other communities provided incentive packages for Tilray to locate in their community, the NEDC was able to make the case for Nanaimo based on the region’s cost of doing business, renewable power, access to skilled labour, transportation logistics and strong commitment to support of new businesses in our region.

In January of 2014, with the support of the Nanaimo Economic Development Corporation and the City of Nanaimo, Tilray began construction on the state-of-the-art, 60,000 square foot research and production facility on Maughan Road in Nanaimo.

In less than a year, Tilray has quickly become a national leader in medical cannabis production and distribution due to their expert team, high-quality product and exemplary patient-centered service. They currently serve thousands of patients across Canada with consistent access to safe, pure and effective medicine made in the Nanaimo region.

The facility began operating in April of 2014 with a license from Health Canada and today employs more than 140 people in the Nanaimo region, already making Tilray amongst the top ten private sector employers in the region. Many of their employees have lived in Nanaimo for generations, while others have relocated to the Nanaimo region with their families to pursue new career opportunities with Tilray. The employment positions created by Tilray include PhD research scientists, patient advocates, security personnel filled by former RCMP officers, professional managers, manufacturing executives, botanists and horticulturalists. All of Tilray’s employees are industry leaders in their fields dedicated to advancing the science, safety and efficacy of medical cannabis for physicians and patients.

Even after only their first 9 months of operations, Tilray’s contribution to the Nanaimo region’s economic is impressive. Between the construction and operation phases, the initial investment of $26.9 million in 2014 generated a total of $48.1 million in total economic output and fostered 215 direct jobs and supported an additional 180 jobs, for a total of 395 positions.

Pending necessary regulatory approvals, Tilray is pursuing a second facility that would be 4-5 times the size of the existing facility. Once complete it is anticipated that Tilray will be the largest private sector employer in the region.

Tilray’s expanded facility will contribute $112.8 million in total economic output, and will provide nearly $19 million in tax revenue for all three levels of government, including approximately $1 million in municipal regional taxes.

Background on Tilray’s Operation & Investment in Nanaimo

Tilray’s Economic Impact & Forecast

Tilray’s second facility would create another 275 direct jobs in the Nanaimo region, in addition to more than one hundred indirect jobs related to construction, logistics and third party services.

140 New Positions Created in 13 Months

0

35

70

105

140

JAN

FEB

MA

R

AP

R

MAY

UN

E

JULY

AU

G

SE

PT

OC

T

NO

V

DE

C

JAN

FEB

03


There are just over 6,000 businesses in the Nanaimo region, 94% of which are small to medium sized businesses, having less than 25 employees. In this context Tilray is a significant employer in the region currently contributing just over $3.2 million in direct wages and salaries in the local market place and inducing a further 90 full time equivalent positions through their presence in the region.

Established in 2011, the Nanaimo Economic Development Corporation (NEDC) is a wholly owned subsidiary of the City of Nanaimo. The NEDC maintains two corporate operating divisions. The Economic Development Division provides a number of services, including, but not limited to business retention and expansion services, investment and labour attraction activities as well as economic data development activities. The Tourism Division, also known as Tourism Nanaimo, works closely with the NEDC’s Tourism Leadership Committee to market Nanaimo’s tourism experiences and attract visitors to the region and assist in the development of new tourism experiences.

An independent Board of Directors governs the Nanaimo Economic Development Corporation.

Nanaimo accounts for approximately 2.1 percent of BC’s GDP. Since 2009, Nanaimo’s GDP has grown by 6 percent to $3.9 billion. Growth in GDP has primarily been driven by the service producing sectors including health care, transportation and warehousing, educational services and food and accommodation. In the goods producing sector, construction and activities related to oil and gas extraction have been the primary contributors to GDP growth. Relative to BC, Nanaimo’s GDP has tended to grow at a similar rate.

Number & Size of Firms in the Nanaimo Region

About the Nanaimo Economic Development Centre (NEDC)

Nanaimo & Region Economic Overview

Top Private Sector Employers (FTEs)*

125

250

375

500

459

120120140150154

298

340

400

NFP

SH

AW

NO

RD

IA

SO

BE

YS

ISLA

ND

TIM

BE

RLA

ND

S

TILR

AY

EX

PAN

SIO

N

TILR

AY

CC

CU

WA

LMA

RT

*Based on company reported figures from the City of Nanaimo

The mission of the Nanaimo Economic Development Corporation is to build a prosperous community through economic opportunity.

Annual Operating Impacts (MILLIONS)

0

25

50

75

100

2014 CURRENTFULL CAPACITY

EXPANSION

88.7MILLION

35.3MILLION

12.7MILLION

04


MNP is the fastest growing major chartered accountancy and business advisory firm in Canada. Founded in 1945, MNP has grown from a single office in Manitoba to more than 70 offices and 3,000 team members across Canada. In British Columbia MNP has more than 450 staff located in 15 offices across the province.

MNP is a member of Praxity AISBL, a global alliance of independent firms, which enables us to access a broad range of industry specific expertise worldwide.

At MNP, our professionals are the driving force behind our success. They continue to demonstrate our culture and values which is integral to the way we conduct business, both internally and externally. As such, MNP is proud to be recognized as one of the 50 Best Employers in Canada by Report On Business magazine.

MNP provides a wide range of accounting, finance and business advisory services to clients. These include:

In preparing this report MNP carried out the following activities:

• Gathered information from Tilray on the expenditures associated with the construction and operation of the Nanaimo facility and the expansion of the facility.

• Gathered information from publicly available sources on commercial marijuana production in Canada.

• Developed economic impact estimates for the construction and operation of Tilray’s Nanaimo facility using an expenditure approach based on multipliers published by Statistics Canada.

About MNP Approach

• Assurance• Corporate Finance • Enterprise Risk Services • Consulting • Succession

• Taxation• Mergers & Acquisitions• Forensic Accounting• Insolvency & Corporate Recovery• Valuations & Litigation Support

05

R E P O R T L I M I T A T I O N S

This report is not intended for general circulation, nor is it to be published in whole or in part without the prior written consent of MNP LLP (“MNP”). The report is provided for information purposes and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for personalized, investment or business advice.

We have relied upon the completeness, accuracy and fair presentation of all information and data obtained from Crestview Strategy, Tilray and public sources, believed to be reliable. The accuracy and reliability of the findings and opinions expressed in the presentation are conditional upon the completeness, accuracy and fair presentation of the information underlying them. As a result, we caution readers not to rely upon any findings or opinions for business or investment purposes and disclaim any liability to any party who relies upon them as such.

The analysis contained in this report is based upon projections, founded on past events giving an expectation of certain future events. Future events are not guaranteed to follow past patterns and results may vary, even significantly. Accordingly, we express no assurance as to whether projections underlying the economic and financial analysis will be achieved.

06

1Estimates contained in this report are based on Statistics Canada’s Provincial Input-Output Multipliers, 2010

E C O N O M I C I M P A C T E S T I M A T E S

In general, economic impacts are viewed as being restricted to quantitative, well-established measures of economic activity. The most commonly used of these measures are output, GDP, government tax revenue and employment:

• Output is the total gross value of goods and services produced by a given company or industry measured by the price paid to the producer. This is the broadest measure of economic activity. • Gross Domestic Product (GDP), or value added, refers to the additional value of a good or service over the cost of inputs used to produce it from the previous stage of production. It is the incremental value created through labour or mechanical processing. Total GDP is a more meaningful measure of economic impact, as it avoids double counting during each round of impacts.

• Government Tax Revenues arise from personal income taxes, indirect taxes less subsidies, corporate income taxes and natural resource royalties.

• Employment is the number of additional jobs created. Employment is measured in terms of full- time equivalents (FTEs).

Economic impacts may be estimated at the direct, indirect, and induced levels.

• Direct impacts are changes that occur in “front- end” businesses that would initially receive expenditures and operating revenue as a direct consequence of the operations and activities of a facility.

• Indirect impacts arise from changes in activity for suppliers of the “front-end” businesses.

• Induced impacts arise from shifts in spending on goods and services as a consequence of changes to the payroll of the directly and indirectly affected businesses.

To estimate the economic impacts generated by Tilray’s investment and operations in Nanaimo, MNP employed an input-output methodology using economic multipliers published by Statistics Canada1. Input-output modeling is a widely-used and widely-accepted economic impact approach, making it recognizable by many different stakeholders and audiences. The structure of the approach also facilitates easy comparisons between reported results for different industries and events.

An overview of the steps used in developing the estimates contained in this report is provided in Appendix A.

Methodology

07


The data used in the economic impact modelling was provided by Tilray. The 2014 impact estimates are based on actual expenditures, while the estimated impacts for the proposed expansion are based on projections done by Tilray and a breakdown of expenditures developed by MNP in consultation with Tilray.

Data Sources

Tilray’s initial investment in establishing the Nanaimo facility was approximately $23.2 million2. Of this $23.2 million, approximately $20.3 million was spent in BC. This included expenditure on construction materials, contractors3 and production and lab equipment. The breakdown of this expenditure is provided in Table 1.

The estimated economic impacts in BC of this initial investment are provided in Table 2. The total direct, indirect and induced economic impacts are approximately:

• $35.4 million in total economic output in BC. • $17.5 million in provincial GDP. • $5.9 million in tax revenue for all three levels of government. • 114 full-time equivalents (“FTEs”) of direct employment and total employment of 208 FTEs in BC.

Economic Impacts of Initial Investment

Table 2 Estimated Impacts of the Initial Investment in Tilray’s Production Facility Source: MNP Calculations

DIRECT 20.3

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX17

(MILLIONS)

PROVINCIAL TAX18

(MILLIONS)

MUNICIPAL TAX19

(MILLIONS)

114 1.348.6 2.24 0.08

15.1 94 0.808.9 1.23 0.25

35.4 208 2.1417.5 3.47 0.33

INDIRECT + INDUCED

TOTAL

2 This does not include expenditure on purchasing existing buildings and land but does include transaction fees associated with the purchase.3 According to Tilray, local contractors employed included Heatherbrae Builders, RB Engineering, Coastal Architects, Canem Systems, Rocky Point Engineering, Archie Johnstone Plumbing and Heating, Herold Engineering Limited, ESC Automation and Alpha Integrated Systems.4 Expenditures are net of taxes.5 Estimate is based on applying a margin of 35.7% to total expenditure to account for equipment manufactured outside of BC.6 Includes real estate transaction fees and the rental of equipment and storage facilities.7 Tax impacts include corporate income taxes, personal income taxes and consumption taxes.8 Tax impacts include corporate income taxes, personal income taxes, property transfer tax and consumption taxes.9 Calculated based on municipal share of total taxes on production in BC in 2009 from Statistics Canada CANSIM Table 384-0007 - Taxes on production and imports, provincial economic accounts.

Table 1 Construction Expenditure in 2014 Source: Tilray

EXPENDITURE IN BC4

TOTAL

CONSTRUCTION 19.8

0.2

0.3

20.3

PRODUCTION & LAB EQUIPMENT

OTHER6

CONSTRUCTION EXPENDITURES

08


In 2014, Tilray’s facility was in operation for nine months. Operating expenses during this period were approximately $9.7 million, approximately $6.6 million of which occurred in BC. This includes expenditure on salaries, facility operations, and professional services.

At full capacity Tilray’s existing facility is projected to have operating expenditures that are approximately three times higher than those incurred in 2014. Of this total expenditure, approximately $19.3 million is projected to be spent in BC. Table 3 provides a breakdown of 2014 expenses as well as projected expenses when the existing facility is operating at full capacity.

The estimated direct, indirect and induced economic impacts in BC in 2014 of Tilray’s production facility areprovided in Table 4. In its first nine months of operation of the facility generated approximately:

• $12.7 million in total economic output in BC. • $9.9 million in provincial GDP. • $2.6 million in tax revenue for all three levels of government. • 101 direct FTEs and a total employment of 187 FTEs in BC.

Economic Impacts of Ongoing Operations

2014 (MILLIONS) AT FULL PRODUCTION (MILLIONS)

TOTAL EXPENDITURE IN BC

SALARIES & WAGES 7.02.9

7.81.4

2.51.0

0.10.1

1.91.2

19.36.6

PRODUCTION11

GENERAL & ADMIN12

SALES & MARKETING

PROFESSIONAL FEES13

Table 3 Operating Expenditure Estimates10 Source: Expenditure estimates provided by Tilray

Table 4 Estimated Impacts of Operations in 2014 Source: MNP calculations

DIRECT 6.6

OUTPUT(MILLIONS)OPERATING EXPENDITURES

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX14

(MILLIONS)

PROVINCIAL TAX14

(MILLIONS)

MUNICIPAL TAX15

(MILLIONS)

101 0.534.9 0.84 0.13

6.1 86 0.375.0 0.72 0.05

12.7 187 0.909.9 1.56 0.18

INDIRECT + INDUCED

TOTAL

10 Net of taxes.11 Production includes production and lab costs such as supplies, utilities, insurance, waste removal and research and development.12 General and Administration includes travel, meals and entertainment, and office supplies.13 Professional Fees includes legal, accounting, security and IT.14 Tax impacts include corporate income taxes, personal income taxes and consumption taxes.15 Calculated based on municipal share of total taxes on production in BC in 2009 from Statistics Canada CANSIM Table 384-0007 - Taxes on production and imports, provincial economic accounts.

09


The estimated direct, indirect and induced economic impacts in BC of Tilray’s production facility operating at full capacity are provided in Table 5. At full-capacity the facility is projected to generate approximately:

• $35.3 million in total economic output in BC. • $26.6 million in provincial GDP. • $7.1 million in tax revenue for all three levels of government. • 183 FTEs of direct employment and total employment of 411 FTEs in BC.

Table 5 Estimated Impacts of Operation of Current Production Facility at Full Capacity Source: MNP Calculations

DIRECT 19.3

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX16

(MILLIONS)

PROVINCIAL TAX16

(MILLIONS)

MUNICIPAL TAX17

(MILLIONS)

183 1.6013.7 2.27 0.22

16.0 228 0.9712.9 1.86 0.14

35.3 411 2.5726.6 4.13 0.36

INDIRECT + INDUCED

TOTAL

Economic Impacts of Expanded Facility

EXPENDITURE IN BC18 (MILLIONS)

INVESTMENT

64.1

17.6

6.4

64.7

0.3

48.4

0.6

19.4

4.7

CONSTRUCTION

SALERIS & WAGES

GENERAL & ADMINISTRATION20

TOTAL INVESTMENT IN EXPANSION

SALES & MARKETING

ANNUAL OPERATING EXPENDITURES

PRODUCTION & LAB EQUIPMENT

PRODUCTION19

PROFESSIONAL FEES21

OPERATING EXPENDITURES

Table 6 Projected Expenditures on the Second Facility Source: Tilray


Tilray’s proposed expansion is projected to increase its scale by four-five times and its of operationsing expenditures by approximately three times. The expansion of the facility will involve capital expenditures in BC of $64.7 million and is projected to have annual operating expenditures in BC of $48.4 million. The projected breakdown of these expenditures is provided in Table 6.

16 Tax impacts include corporate income taxes, personal income taxes and consumption taxes. 17 Calculated based on municipal share of total taxes on production in BC in 2009 from Statistics Canada CANSIM Table 384-0007 - Taxes on production and imports, provincial economic accounts.18 Expenditures are net of tax and a margin of 35.7% has been applied to Production and Lab equipment manufactured outside of BC. 19 Production includes production and lab costs, supplies, utilities, insurance, waste removal and research and development. 20 General and Administration includes travel, meals and entertainment, and supplies. 21 Professional Fees includes legal, accounting, security and IT.

10


22 Tax impacts include corporate income taxes, personal income taxes and consumption taxes.23 Calculated based on municipal share of total taxes on production in BC in 2009 from Statistics Canada CANSIM Table 384-0007 - Taxes on production and imports, provincial economic accounts.

The direct, indirect and induced economic impacts in BC that may be expected from the construction of the expanded facility are provided in Table 7. The impacts include:

• $112.8 million in total economic output in BC. • $55.8 million in provincial GDP. • 361 FTEs of direct employment and total employment of 662 FTEs in BC. • $18.9 million in tax revenue for all three levels of government.

The estimated annual direct, indirect and induced economic impacts in BC of the operation of the expanded facility are provided in Table 8. At full production the expanded facility is projected to generate annual impacts of approximately:

• $88.7 million in total economic output in BC. • $66.8 million in provincial GDP. • $17.8 million in tax revenue for all three levels of government. • 459 direct FTEs and total employment of 1,032 FTEs in BC.

DIRECT 64.7

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX22

(MILLIONS)

PROVINCIAL TAX22

(MILLIONS)

MUNICIPAL TAX23

(MILLIONS)

361 4.2727.3 7.09 0.26

48.1 301 2.5528.5 3.91 0.81

112.8 662 6.8255.8 11.00 1.07

INDIRECT + INDUCED

TOTAL

Table 7 Estimated Impacts of Construction of Tilray’s Second Production Facility Source: MNP Calculations

DIRECT 48.4

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX22

(MILLIONS)

PROVINCIAL TAX22

(MILLIONS)

MUNICIPAL TAX23

(MILLIONS)

459 4.0234.3 5.70 0.61

40.3 573 2.4432.5 4.67 0.35

88.7 1032 6.4666.8 10.37 0.96

INDIRECT + INDUCED

TOTAL

Table 8 Estimated Impacts of Operations of Tilray’s Second Production Facility Source: MNP Calculations



Tilray’s combined expenditure on construction and operation of its Nanaimo facility in 2014 was approximately$32.9 million, of which $26.9 million was spent in BC. The estimated impacts of this expenditure are summarized in Table 9.

Once the existing facility reaches full capacity, it is projected to generate annual economic impacts of:

• $35.3 million in total economic output in BC. • $26.6 million in provincial GDP. • $7.1 million in tax revenue for all three levels of government. • 183 FTEs of direct employment and total employment of 411 FTEs in BC.

Expansion of the facility is projected to produce additional impacts as summarized in Table 10.

Summary of Economic Impacts

DIRECT 26.9

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX24

(MILLIONS)

PROVINCIAL TAX24

(MILLIONS)

MUNICIPAL TAX25

(MILLIONS)

215 1.8713.6 3.07 0.21

21.2 180 1.1713.9 1.95 0.30

48.1 395 3.0427.5 5.02 0.51

INDIRECT + INDUCED

TOTAL

Table 9 Total Estimated Impacts of Tilray’s Current Production Facility in 2014 Source: MNP Calculations

Table 10 Estimated Impacts of Tilray’s Expanded Production Facility Source: MNP Calculations


OPERATING EXPENDITURES (ANNUAL)

DIRECT 64.7

OUTPUT(MILLIONS)

GDP(MILLIONS)

EMPLOYMENT(FTEs)

FEDERAL TAX24

(MILLIONS)

PROVINCIAL TAX24

(MILLIONS)

MUNICIPAL TAX25

(MILLIONS)

361 4.2727.3 7.09 0.26

48.4 459 4.0234.3 5.70 0.61

48.1 301 2.5528.5 3.91 0.81

40.3 573 2.4432.5 4.67 0.35

112.8 662 6.8255.8 11.00 1.07

88.7 1032 6.4668.8 10.37 0.96

DIRECT

INDIRECT + INDUCED

INDIRECT + INDUCED

TOTAL

TOTAL

11

24 Tax impacts include corporate income taxes, personal income taxes and consumption taxes.25 Calculated based on municipal share of total taxes on production in BC in 2009 from Statistics Canada CANSIM Table 384-0007 - Taxes on production and imports, provincial economic accounts.



A P P E N D I X A

12

MNP’s approach to economic impact modelling is based on published Statistics Canada multipliers (where applicable), and input-output modelling. A step-by-step overview of our approach to estimating the economic impacts of Tilray’s facility in Nanaimo is provided below.

Gather data on Expenditure from Tilray

Remove Non-Applicable Items (e.g. depreciation, debt payments)

Exclude Out-of-Province Expenditures

Remove Direct Taxes made on Purchases

Apply Retail & Wholesale Margins to Relevant Purchases

Assign Expenditure Categories to NAICS Industries

Apply Statistics Canada Multipliers to Remaining Expenditures

Estimate Federal, Provincial & Municipal Tax Revenue Impacts(Based on calculations of personal & corporate income taxes & sales taxes)

Estimate Induced Impacts (Based on a typical breakdown of household spending)

Documents

Tilray Economic Impact 2015