agrios global holdings ltd. (cse: agro) – initiating ... · to their crop production (big data),...

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA. Econ

January 15, 2019

2019 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Agrios Global Holdings Ltd. (CSE: AGRO) – Initiating Coverage - Cultivation Facility Builders

Utilizing Technology to Unlock Strong Yields

Sector/Industry: Special Situations www.agriosglobal.com

Market Data (as of January 15, 2019)

Current Price C$0.40

Fair Value C$0.65

Rating* BUY

Risk* 4

52 Week Range N/A

Shares O/S 85,801,609

Market Cap C$34.32 mm

Current Yield N/A

P/E (forward) N/A

P/B 1.39x

YoY Return N/A

YoY CSE -51.24% *see back of report for rating and risk definitions. * All figures in US$ unless otherwise specified.

Investment Highlights Agrios Global Holdings Ltd. (“Agrios”, “company”) is an agricultural

technology and services company driven by data analytics. The company provides proprietary technology, property management, equipment leasing, and agronomy services to clients. Their initial focus is on the cannabis industry.

The company owns a dedicated production facility in Shelton, Washington. The facility has an implied yield of 183.33 grams per square-foot of growing canopy, compared to our estimated industry average of 120 grams per square-foot. The facility can also be repurposed to produce other high value crops.

Agrios specializes in the use of aeroponics, an agricultural cultivation method that uses up to 90% less water than conventional hydroponics methods.

The company has leased the canopy space to a company that is a Tier 3 cannabis producer under Washington’s cannabis regulations. In 2017, sales of cannabis products in the State of Washington hit US$1.37 billion.

We estimate the addressable precision agriculture market that the company could access with their aeroponics technology could be as large as $115 billion globally.

We are initiating coverage with a BUY rating and a fair value

estimate of $0.65 per share.

Risks

Strict regulatory environment. Fragmented competitive landscape. Potential contamination and other risks associated with biological

production processes. Access to capital and share dilution. Liquidity risk.

Key Financial Data (FYE - Mar 31)

(US$) FY2019 (6M) FY-2019E FY-2020E

Cash 8,824,935$ 6,783,739$ 9,035,300$

Working Capital 10,286,954$ 8,717,150$ 10,887,493$

Assets 33,514,830$ 34,180,559$ 36,604,574$

Total Debt 4,546,110$ 4,307,230$ 4,307,230$

Revenues 1,548,752$ 3,790,756$ 7,030,519$

Net Income $ -2,523,433 $ -3,952,652 $ -1,031,386

EPS (basic) -0.03 $ -0.05 $ -0.01 $



Corporate

Overview

Aeroponics

Agrios is an agricultural technology, services, and property management company, with operations currently focused on the U.S. cannabis industry. The company provides property and equipment for lease and agronomy services to agricultural crop cultivators, and draws on proprietary technology and knowhow to enhance the crop yields and quality of cultivators. Some of the company’s technological advancements, which are offered to tenant cultivators, include:

Precision agriculture techniques: sensors, data collection and networked monitoring.

Aeroponics: an enhanced process of crop growth in air/ mist environments without the use of soil.

Automation: ensuring homeostatic growing conditions, uniformity and inventory control.

At present, the company’s operations are focused in the state of Washington, reflecting management’s desire to work with operators in a jurisdiction with a relatively mature cannabis market and regulatory framework. Agrios owns a dedicated agricultural production facility in Shelton, Washington, which has been built to comply with state regulations regarding the cultivation of cannabis. As the company rolls out their operations in Washington, the company will derive its income streams in the form of leasing and servicing fees charged to the tenant cultivation license holders who will lease the Shelton production facility from Agrios. Though the company currently works with cannabis cultivators, their aeroponics technology is applicable to agricultural cultivation as a whole, dramatically increasing crop yields compared to mainstream cultivation techniques. While the company will focus on existing operations in the cannabis space, our discussions with management suggest that the company’s ultimate goal is to expand via the construction and leasing of identical facilities to their Shelton facility in different jurisdictions, which can be repurposed to produce any high value crop, including plants used extensively in Chinese herbal medicines, for example. One of the highest value-adds of the company’s aeroponics technology is that cultivation is driven by data analytics, resulting in a consistent, high-quality product. In practice, the company reports that this leads to Agrios producing some of the most consistent premium cannabis in the state of Washington, due to production being supplemented by big data and precise input control. A unique yield-enhancing cultivation technique employed by Agrios and its tenant license holders is the process known as aeroponics. The cultivation method was originally developed by Richard Stoner (an individual unrelated to the company) in conjunction with NASA and was developed as a viable method of producing food in zero-gravity environments. Aeroponics, as mentioned earlier, entails crop growth in a mist/ air environment, and does not use soil. As a result, the enhanced process removes the limiting factor of oxygen deficiency in the root zone that root bound plants have. The exposed roots of the cannabis plants, which are no longer covered in soil, are sprayed with nutrient rich mist. As a technologically advanced cultivation method, aeroponics is not as widely used as



conventional methods such as hydroponics. Though Agrios is not the first to use aeroponics, they are amongst few companies erecting dedicated aeroponics cultivation facilities, with the company’s key differentiator being the use of advanced data analytics to precisely control growing conditions to maximize yield. According to the company, aeroponics technology carries the following economic benefits:

70% reduction in labor required, resulting in significant operating cost savings. According to management, plant-management can even be done in real-time via smart-phones, demonstrating the degree of automation in the Shelton facility.

Precision and automated controls that provide uniformity in measurement, nutrient delivery, and environmental control.

90% less water required, relative to conventional hydroponics. According to the company, a cannabis plant requires 26.8 liters of water per day if grown using conventional hydroponics.

Significant yield increases, compared to hydroponics. In the image below, note the exposure of the cannabis plant roots, and the mist spray nozzles on the piping.

The Underside of a Growing Table at Agrios’ Shelton Facility

Source: Company

Apart from the cost effectiveness and yield enhancing benefits of aeroponics, Agrios also benefits from the use of their technology by utilizing the automation aspects of their facility to collect a wealth of data points. Management report that they currently collect and

analyze a substantial number of data points per minute per cannabis plant. This allows Agrios to quantify and measure every stage in the plant’s life-cycle, from seed to sale. Apart from allowing the company to precisely identify issues in the life-cycle of the plant, it also allows the company to hone in on individual inputs which can be altered to maximize productivity. As a result of the integration of data science into their agricultural cultivation processes, Agrios reports that its crops exhibit average THC potency of 21.4%. By comparison, the THC potency exhibited in cannabis products in the state of Washington averages at approximately 14-15%, according to management.



Precision

Agriculture

Advanced cultivation techniques which blend agriculture and technology to improve crop quality and productivity can be classed as precision agriculture. Precision agriculture refers to a farming management concept based on observation, measurement and response to variability in crops. In Agrios’ case, the capture and analysis of significant data points related to their crop production (big data), as well as the use of technology to optimize growing conditions based on analyzed data (aeroponics), demonstrates the impact of precision agriculture on agricultural cultivation performance. Precision agriculture is drawing increased interest from investors and general market observers, due to the growing issue of food security. According to the United Nations (“UN”), the world population is expected to rise to 9.7 billion by 2050. Given a current population of 7.70 billion, as reported by Worldometers, a website that provides real-time world population estimates, this implies a CAGR of 0.75% during the period. According to a document published by the UN Food and Agriculture Organization (“FAO”), the large increase in world population is likely to demand a 70% increase in overall food production by 2050. Despite the need for increased food production, crop production and crop yield have remained largely flat. As the chart below shows, major crops including maize, soybean, wheat and rice have seen relatively flat growth.

Source: FAO, FRC

Compounding tepid crop yield growth are distinct challenges that threaten food security for the global population moving forward. Arable land per capita has decreased since the 1960’s, suggesting that available farmable acreage is divided amongst a greater number of mouths.



Arable Land (Hectares/ Person)

Source: World Bank

Against a backdrop of stagnant yields, increasing food demand and lower availability of arable land, emphasis has shifted towards farming methods which can significantly increase productivity. As mentioned earlier, these methods are classed under the term precision agriculture. Precision agriculture can include productivity-improving farming techniques such as variable rate farming, which optimizes the distribution of inputs in order to reduce costs and maximize effective yield, and aeroponics, which we discussed earlier in this report. However, these methods are only a few of a growing multitude of productivity-enhancing agricultural technologies. Precision agriculture follows the disruptive development in seed genetics by companies such as Monsanto (NYSE: MON) that defined agricultural innovation since the 1960s, and is expected to drive the next phase of crop production growth. According to the AgTech Investing Report, approximately $10.10 billion was raised through agriculture technology deals in 2017 (up 29% YoY) globally.

Annual Financings (US$, billions)

Source: AgTech Investing Report

According to Markets and Markets Research, the global precision farming industry was



valued at $3.2 billion in 2016, and is projected to grow at a CAGR of 13.47% to $7.87 billion in 2022. However, a 2016 report by Goldman Sachs Investment research found that the total addressable market for precision agriculture was $240 billion. This was based on a global crop production value of $1.2 trillion, potential yield improvements of 70% implying $800 billion of value generated, and historical value capture rates of 30% for industry players. The broader precision agriculture market is further broken down into the following segments:

Precision Farming Addressable Market by Technology

Source:Goldman Sachs Investment Research, obtained from https://docdrop.org/static/drop-

pdf/GSR_agriculture-N1sH6.pdf

Among the segments listed, precision fertilizer, precision irrigation and precision

spraying are areas that we believe could be directly addressable by Agrios. The combined estimated addressable market value of these segments is $115 billion.

Source:Goldman Sachs Investment Research, obtained from https://docdrop.org/static/drop-

pdf/GSR_agriculture-N1sH6.pdf



Shelton

Facility

The economic potential of a precision agriculture technology such as aeroponics is vast, and not limited to a single high-value crop such as cannabis. Though the company’s current operations are in the cannabis space, we expect that success at the company’s current facility may result in expansion to other jurisdictions.

The Shelton Facility is a 70,000 square-foot cannabis production facility comprising 30,000 square-feet of canopy growing space, and 20,000 square-feet of processing space, with the remaining 20,000 square-feet dedicated to office, storage, mechanical and delivery space. Phase one of the facility, which comprises three grow rooms with 330 tables, is currently complete and has undergone several harvests. Phase two of the facility, which is expected to comprise five additional grow rooms with 650 tables, is expected to be completed at the end of Q2-2019, with the first harvest commencing 73 days after propagating (cultivating new plants within) each room. Management have reported that two of the five additional grow rooms from phase two are currently complete. According to the company, upon completion of phase two, the Shelton facility’s total production capacity should be approximately 5,500 kg per annum of premium dried flower and trim, assuming between five to six harvests per annum (industry average is three to six per annum) from 980 growing tables. That implies a yield of 183.33 grams per square-foot of growing canopy area. For comparative purposes, we believe the average cannabis yield per square-foot for most growing canopy spaces is approximately 120 grams per square-foot.

Images of the Agrios Shelton Facility Grow Rooms

Source: Company

With regards to ongoing CAPEX to build-out the remaining portion of the Shelton facility, the company has advised that the phase two development of the facility is budgeted at $3.50 million. According to management, phase one of the facility has already been paid for, though total CAPEX has not been disclosed. However, recent financial statements place the carrying cost of land, property and equipment at approximately $20.38 million. Moving forward, the company intends to position the facility to also become a leading provider of cannabis extraction and processing services, with approximately 20,000 square-feet available for this purpose. The company has advised that a budget of $0.10 million has been allocated to develop the processing portion of the facility, with plans to undertake the build-out upon completion of phase two of the cultivation area. The relatively low bill of the processing portion is due to the majority of the build-out being completed with phase two construction, and we believe that the $0.10 million pertains to dedicated extraction machinery. According to management, given expected completion of phase two by the end of Q2-2019, the



Washington

Cannabis

Industry

processing portion of the facility should be built out by the end of Q3-2019. Given available information, we estimate the total CAPEX for the entire facility at approximately $24 million. As discussed earlier, Agrios does not directly operate the Shelton facility, nor does Agrios derive income directly from the sales of cannabis produced at the facility. The company has leased the canopy space of the Shelton facility to a Tier 3 cannabis producer licensee (undisclosed). Agrios will assist the tenant in achieving enhanced yields and maximizing future sales, and will in turn generate revenue in payments from the tenant to cover leasing fees on property and equipment, management/ consulting fees, and royalty fees on Agrios’ unique Aeroponic technology. Management have not disclosed any revenue/ profit share agreement with the tenant. The following table outlines other notable cannabis producers with growing facilities in the state of Washington. Note that these selected comparables also exhibit yields higher than our earlier stated average of 120 grams per square-foot.

CompanyCanopy Area (SQ-

FT)Production (KG) Production/ SQ-FT

Marapharm Ventures Inc. 30,000 -$

Rubicon Organics Inc. 30,000 4,500 0.15$

Cannex Group Holdings 60,000 19,000 0.32$

Grow Op Farms 60,000 -$

Agrios Global Holdings 30,000 5,500 0.18$ Source: FRC, Public Disclosures

The company gained control of the Shelton facility on June 8, 2018, via the acquisition of TimberLand Bay Properties LLC (“TimberLand”), a Washington-based company with existing building and equipment which Agrios subsequently repurposed and developed further. It is unclear as to the state of the TimberLand facility at the time of acquisition and its previous use is undisclosed. The company issued 29.17 million common shares with a fair value of $11.25 million. In addition, Agrios committed to an additional $9 million, assuming $4.50 million in existing debt and advancing $4.50 million for Phase two facility development on the Shelton facility. The first U.S. state to legalize the full adult use of cannabis, Washington became a full adult use jurisdiction in late 2012, and the first recreational cannabis stores were opened to the public in 2014. Cannabis distribution and sale is regulated by Washington’s Liquor and Cannabis Board. The following chart outlines legal cannabis sales and cannabis product excise taxes in the state of Washington. Note that FY2018 has not yet been fully accounted for in the below chart. As demonstrated below, the cannabis industry in Washington has exhibited significant growth in sales, with a CAGR of 129.91% in sales between 2015 and 2017.



Washington Cannabis Sales and Excise Taxes

Source: Washington State Liquor and Cannabis Board

Though the market appears to be expanding at a prodigious rate, excess cannabis supply has led to a glut-induced crash in cannabis prices, as shown below.

Washington Dried Flower Pricing

Source: BDS Analytics, Potguide.com

The over-supply of cannabis in Washington state can be attributed to the dramatic increase in production since the legalization of cannabis. The following chart demonstrates that monthly production of cannabis in Washington, as tracked by the Washington State Liquor and Cannabis Board, has steadily increased over time.

Monthly Production of Cannabis in Washington State

Source: Washington State Liquor and Cannabis Board

The production of cannabis is tiered into three categories, with the categories dictating the maximum size of the growing canopy allowed to license holders. The license tiers are as follows:



Marijuana Producer Tier 1: Allows for 2,000 square-feet or less of dedicated growing

canopy. Marijuana Producer Tier 2: Allows for between 2,000 and 10,000 square-feet of

dedicated growing canopy. Marijuana Producer Tier 3: Allows for between 10,000 and 30,000 square-feet of

dedicated growing canopy. In addition to growing canopy restrictions imposed by the tier system, the Washington State Liquor and Cannabis Board also limits the issuance of cannabis production licenses to a maximum of three per entity. As a result, any producer in the state of Washington will be restricted to an absolute maximum of 90,000 square-feet of growing canopy. This is a stark contrast from the Canadian Licensed Producer space, where companies have already broken ground on sprawling mega facilities with square-footage far in excess of 90,000 square-feet. The below table outlines how Agrios compares to Canadian Licensed Producers on a productivity basis (note that the total facility area includes areas not used for growing such as offices etc):

Company TickerTotal Facility Area

(SQ-FT)

Production Capacity

(KG)

Grams per SQ-FT

(G/ SQ-FT)

Agrios Global Holdings CSE: AGRO 70,000 5,500 78.57

OrganiGram Holdings Inc. TSXV: OGI 487,228 113,000 231.92

Sunniva Inc. CSE: SNN 1,248,000 172,500 138.22

The Supreme Cannabis Company Inc. TSXV: FIRE 342,000 50,000 146.20

Emblem Corp. TSXV: EMC 143,500 17,000 118.47

Wayland Group Inc. CSE: WAYL 1,002,000 97,210 97.02

WeedMD Inc. TSXV: WMD 217,800 21,000 96.42

Aphria Inc. TSX: APH 2,460,000 230,500 93.70

CannTrust Holdings Inc. CSE: TRST 480,000 43,000 89.58

HEXO Corp. TSXV: THCX 1,300,000 108,000 83.08

Emerald Health Corp. TSXV: EMH 1,050,000 71,000 67.62

Vivo Cannabis Inc. TSXV: VIVO 500,000 32,400 64.80

Average 108.80 Source: FRC, Public Disclosures

The relatively small canopy area allowed per cannabis producer may have led to fragmentation (due to a single producer being unable to attain significant scale), with the state of Washington reporting a high number of tier 3 producers.



Management

Overview

Top 20 Tier 3 Marijuana Producers in Washington (by November 2018 Sales)

Source: 502 Data (DAB Software)

Though the maturing cannabis industry in Washington features a fragmented competitive landscape and declining prices, we believe that the declining cannabis price may be due to a lack of premium product available in the market. As they prepare to ramp up production of premium, high-potency cannabis, we believe that the company may be able to aid the tenant and extract higher margins and prices from the market despite the backdrop of declining prices. The company’s Board of Directors has six members, two of which are independent. We believe that a company’s board of directors should include independent or unrelated directors who are free of any relationships or business that could materially interfere with the director’s ability to act in the best interest of the company. Management currently owns

23.33 million common shares, or approximately 27.19% of the basic shares outstanding

– aligning their interest with investors. On a fully diluted basis, management currently owns 28.51% of fully diluted shares, after taking into account stock options and performance warrants.

% of basic % of fully

Shareholder Position Common Shares outstanding Options Performance Warrants diluted

Chris Kennedy CEO, President & Director 0.00% 550,000 2,500,000 2.86%

Herrick Lau CFO & Director 15,000 0.02% 450,000 0.44%

James F. Foster Director 21,583,334 25.15% 450,000 500,000 21.12%

Larry Ellison Director 1,708,333 1.99% 450,000 1,500,000 * 3.43%

John MacPhail Director 0.00% 300,000 0.28%

Savio Chiu Director 20,000 0.02% 400,000 0.39%

23,326,667 27.19% 2,600,000 4,500,000 28.51%

Dilutive Securities

Note: Options are exercisable at $0.60 for a period of five years and have a 18 month vesting period. Performance warrants are exercisable

at $0.25 for a period of five years based on predetermined milestones. * 1,000,000 of these performance warrants are exercisable at $0.05 for a period of five years.

Source: Company, FRC



Brief biographies of the senior management and board members, as provided by the company, follow: Chris Kennedy – CEO, President & Director

Mr. Kennedy has extensive experience in business development. Mr. Kennedy was Vice President of Strategic Initiatives and Operations for a digital health company based in Salt Lake City, Utah responsible for building innovative direct-to-patient programs with pharmacy and pharmaceutical partners and a former Managing Director at Inflection Point Strategies, LLC, a strategic advisory firm. Herrick Lau – CFO, Corporate Secretary & Director

Mr. Lau is an experienced investment banking professional who has conducted transactions in initial public offerings, reverse takeovers, financings, mergers & acquisitions, divestitures, and various advisory services. Through his over 20 years of experience in financial management and corporate finance, Mr. Lau is experienced in developing financing strategy, liaising with external parties, devising business development plans and maintaining compliance with corporate governance. Mr. Lau also has experience as a senior financial executive in public companies, having acted as CFO and/or director for various public companies listed on the TSX Exchange, the TSX Venture Exchange and the Canadian Securities Exchange. Mr. Lau obtained his bachelor and master’s degrees in business and Economics from Simon Fraser University in Vancouver, British Columbia, Canada and is a charterholder of the Chartered Financial Analyst (CFA) designation. James F. Foster – Director

Mr. Foster has commercial property holdings. Mr. Foster owns and operates a custom machine shop specializing in oilfield services equipment and several car wash facilities and service entities.

Larry Ellison – Director

Mr. Ellison is a CPA with over 50 years of expertise in finance, mergers and acquisitions, forensic accounting, business consulting, business management and auditing. He serves as the Chief Financial Officer of Agrios USA, and Timberland Bay Properties both subsidiary of Agrios Global. While a Partner and National Director of Quality Control at BKD LLP, Mr. Ellison completed the final review and approval of all S.E.C. audit and registration engagements. He left BKD LLP to serve as Executive Vice President of a large NYSE propane company in 1981 where he was involved in numerous public registrations. Mr. Ellison is also a former partner with KPM, CPA’s and with EllisonLiggett Litigation Services. He has also been active in over 30 civic entities including Make a Wish Foundation, the American Cancer Society and a National Treasurer and Director of the National Red Angus Association.

John MacPhail – Director

Mr. MacPhail is most recently the founder and CEO of I-5 Holdings Ltd. and is a board member of Mainstem Goods & Services, Green Stripe Naturals Inc. and East West Sciences Ltd. Prior to his involvement in the US cannabis space he was President of a regional



Financials

Canadian investment dealer and prior to that, the CEO of a national investment dealer he also served on the board of directors for 3 other Canadian investment dealers. As an Investment Banker he has assisted companies raise funds and advised management on corporate strategy for more than 20 years. Mr. MacPhail has also served on numerous industry boards and committees in the investment industry during his career as an investment banker.

Savio Chiu – Director

Savio Chiu is a Chartered Professional Accountant and holds a Bachelor of Commerce degree in Accounting from the University of British Columbia. He is currently the Senior Manager, Corporate Finance of Baron Global Financial Canada Ltd. Previously, he was a senior associate with Deloitte & Touche LLP. He is currently an officer of Confederation Minerals Ltd. (TSXV: CFM), a director of Jayden Resources Inc. (TSX-V: JDN), and a director of H-Source Holdings Ltd. (TSX-V: HSI). Mr. Chiu has previously held various management and directorship positions with other public companies. The company reported revenues of $1.12 million for Q2-FY2019, up 162.07% QoQ from $0.43 million in Q1-FY2019. For the six months, revenue was $1.55 million in FY2019. Note that we do not provide YoY revenue comparisons as the company did not generate revenues in FY2018. The company’s operations are summarized below: STATEMENTS OF OPERATIONS

(in US$) - YE Mar 31st Q2-2018 Q2-2019 2018 (6M) 2019 (6M)

Revenue 1,121,002 1,548,752

COGS 199,711 251,630

Gross Profit - 921,291 - 1,297,122

EXPENSES

SG&A Expense 787,191 3,260 1,208,963

Share-based Compensation 1,859,173 2,439,413

EBITDA - (1,725,073) (3,260) (2,351,254)

Depreciation & Amortization 54,858 69,932

EBIT - (1,779,931) (3,260) (2,421,186)

Financing Costs 18 44,998 101 56,247

EBT (18) (1,824,929) (3,361) (2,477,433)

Non-Recurring Expenses

Taxes 46,000

Net Profit (Loss) (18) (1,824,929) (3,361) (2,523,433)

FOREX 80,709 128,303

Comprehensive Net Profit (18) (1,744,220) (3,361) (2,395,130)

Weighted Average Shares outstanding 330,990 73,530,592 330,990 73,530,592

EPS 0.00- 0.02- 0.03- Source: FRC, Financial Statements

In Q2-FY2019, the company reported a gross margin of 82.18%, compared to 87.86% in Q1-



FY2019. For the six months, the company’s gross margin was 83.75% in FY2019. The high gross margins of the company reflects their business model – the cost of providing consulting and leasing services are generally quite low.

Margins Q2-2019 2019 (6M)

Gross 82.18% 83.75%

EBITDA -153.89% -151.82%

EBIT -158.78% -156.33%

Net -162.79% -162.93% Source: FRC, Financial Statements

The company reported EBITDA of -$1.73 million in Q2-FY2019, with Selling, General and Administrative (“SG&A”) expenses of $0.79 million and share-based compensation of $1.86 million. For the six months, the company reported EBITDA of -$2.35 million in FY2019, with SG&A of $1.21 million and share-based compensation of $2.44 million. After adjusting for stock compensation, the company had adjusted EBITDA of $0.13 million (11.96% adjusted EBITDA margin) for Q2-FY2019, and adjusted EBITDA of $0.09 million (5.69% adjusted EBITDA margin) for the first six months FY2019. We look upon the positive adjusted EBITDA as an impressive feat of the company, as they have only just recently initiated revenue generation, and we believe non-cash stock compensation is likely to fall over time as the company reaches maturity. For the quarter ended September 30, 2018, the company recorded a cash position of $3.29 million and working capital of $10.29 million. The company’s current ratio of 15.43x implies sufficient liquidity to handle short-term liabilities and obligations. The table below outlines the company’s general liquidity and capital structure.

(in US$) - YE Mar 31st

Liquidity & Capital Structure Q2-2019

Cash 3,288,488$

Working Capital 10,286,954$

Current Ratio 15.43

LT Debt 4,307,230$

Total Debt 4,546,110$

LT Debt / Capital 0.15

Total Debt / Capital 0.16

Total Invested Capital 25,871,053$ Source: FRC, Financial Statements

In addition to their cash holdings, the company also maintains a total of $5.54 million in interest-bearing term deposits, which we believe can be redeemed and reallocated to projects with higher potential returns. The company maintains a moderate level of debt, in the form of a mortgage payable totaling $4.55 million, which matures May 28, 2020, and bears an annual interest rate of 5.25% per annum. The company’s cash flows for the first six months of FY2019 are summarized below. The company had positive funds from operations (“FFO”), or operating cash flow before investment in working capital. This is again a positive indicator of the company’s ability to



Valuation

generate positive operating cash flows in the future, as the FFO is already positive despite only recently initiating operations. Note that the company acquired $4 million cash from the acquisition of Timberland.

Summary of Cash Flows

($, mm) 2018 (6M) 2019 (6M)

Operating -$0.00 -$1.68

Investing $0.00 -$0.97

Financing $0.02 $6.45

Cash from Timberland Bay Properties LLC $0.00 $4.14

Effects of Exchange Rate $0.00 -$0.55

Net $0.02 $7.38

Free Cash Flows to Firm (FCF) -$0.00 -$2.65

Funds from Operations (FFO) -$0.00 $0.03 Source: FRC, Company

Stock Options and Warrants: The company currently has 5.30 million options (weighted average exercise price – $0.60), and 15.61 million warrants (weighted average exercise price - $0.15) outstanding. We estimate that 13.73 million warrants and none of the stock options are currently in the money. We believe that the company may be able to raise up to $1.33 million if the in the money warrants are exercised. For valuation, we considered only the company’s existing Shelton facility, and do not consider additional facilities as they have not been announced. In order to value the company, we assume that Agrios will capture a variable portion of gross cultivation revenues from the Shelton facility. This is an approximation, as management has not disclosed the terms of their agreement with the facility’s tenant or pricing of their services. Our assumptions behind the company’s revenue streams are as follows:

PPE leasing fees: we estimate that the company will charge leasing fees to generate a return on CAPEX incurred in the build-out of the Shelton facility. We believe the entire Shelton facility will cost approximately $24 million to construct (including about $20.38 million already incurred). Based on a number of sources, we believe

an appropriate cap rate on industrial real estate similar to the Shelton facility is

10%, and as a result, we estimate leasing revenues of $2.40 million per annum. Agronomy consulting fees: we believe that the company should charge a consulting

fee equal to the marginal productivity gained by the tenant due to the company’s technology and services. As we mentioned earlier, the Shelton facility exhibits a yield of 183.33 grams per square-foot of canopy area, versus our estimated industry average of 120 grams per square-foot of canopy area. This implies extra yield of 63.33 grams, or 34.54% of production. We therefore project that the company will

generate consulting revenues equal to 34.54% of the facility’s total cannabis

revenues. We assume that the tenant benefits from a lower cost profile as well as premium pricing from higher quality products, both of which are due to working with Agrios.



The revenue projections for the company are presented below. Note that we use wholesale cannabis pricing to estimate Agrios’ consulting revenues.

2019E 2020E 2021E

Facility Production (KG) 1,850 2,750 5,500

Price per KG 5,000$ 4,875$ 4,753$

Facility Revenue 9,250,000$ 13,406,250$ 26,142,188$

Consulting/ Service Revenues 1,390,756$ 4,630,519$ 9,029,512$

Leasing Revenues 2,400,000$ 2,400,000$ 2,400,000$

Total Revenues 3,790,756$ 7,030,519$ 11,429,512$ Source: FRC

Our consolidated income statement projections, based on our above revenue estimates, are provided below:

STATEMENTS OF OPERATIONS

(in US$) - YE Mar 31st 2019E 2020E 2021E

Revenue 3,790,756 7,030,519 11,429,512

COGS 758,151 1,406,104 2,285,902

Gross Profit 3,032,605 5,624,415 9,143,609

EXPENSES

SG&A Expense 2,417,926 2,659,719 2,925,690

Share-based Compensation 4,268,973 3,201,730 2,401,297

EBITDA (3,654,294) (237,033) 3,816,622

Depreciation & Amortization 139,864 373,033 592,216

EBIT (3,794,158) (610,066) 3,224,406

Financing Costs 112,494 421,320 421,320

EBT (3,906,652) (1,031,386) 2,803,086


Taxes 46,000 588,648

Net Profit (Loss) (3,952,652) (1,031,386) 2,214,438

FOREX 128,303

Comprehensive Net Profit (3,824,349) (1,031,386) 2,214,438

Weighted Average Shares outstanding 85,801,609 85,801,609 85,801,609

EPS -0.05 $ -0.01 $ 0.03$ Source: FRC

In addition to our revenue forecasts, the above are based on the following assumptions:

Gross margin of 80%, based on actual high margins achieved by the company. Diminishing share-based compensation over time to reflect maturation of stock

compensation practices. CAPEX of $3.50 million in FY2019 to complete the Shelton facility. CAPEX in



future years will be for maintenance purposes. Financing costs based on disclosed repayment schedules in the company’s financials. U.S. corporate tax rate of 21%.

Discounted Cash Flow Valuation

Our DCF valuation on Agrios’ shares is $0.46 per share. DCF Model 2H-2019E 2020E 2021E Terminal

EBIT(1-tax) -1,372,972 $ -481,952 $ 2,547,281$

Non-Cash Expenses 1,899,492$ 3,574,763$ 2,993,513$

Investment in WC -432,011 $ 81,218$ -853,680 $

CFO 94,509$ 3,174,028$ 4,687,113$

CAPEX -2,525,885 $ -373,033 $ -592,216 $

FCF -2,431,376 $ 2,800,995$ 4,094,898$ 4,217,745$

PV -2,374,643 $ 2,442,534$ 3,188,257$ 36,487,826$

Discount Rate 12%

Terminal Growth Rate 3%

Total PV 39,743,973$

Cash - Debt 4,278,825$

Equity Value 44,022,798$

Shares O/S (dil) 96,198,964

Fair Value (US$) 0.46$ Source: FRC

For our discount rate, we utilized a weighted average cost of capital (“WACC”) of 12%. This is based on the average return on equity (“ROE”) and debt-to-capital structure exhibited by comparable sectors, outlined further below. We also used a return on debt that reflects the average rate of long-term corporate debt. An equity risk premium has also been added to the WACC to reflect additional risk related to cannabis operations and geopolitical risk associated with U.S. cannabis operations. Comparables Valuation

The following industries are sectors that we believe the company will begin to emulate in the long-term:

Sector EV/R EV/EBITDA P/E D/C ROE

Agricultural Products 1.00 11.40 17.00 44.50% 5.20%

Agricultural Services 1.60 12.50 21.80 37.10% 8.60%

Consulting Services 2.30 14.90 27.00 24.00% 15.20%

Non-Residential Building Operators and Lessors 10.30 19.60 8.50 22.10% 10.60%

Diversified Real Estate Activities 3.20 12.60 8.00 36.90% 9.50%

Average 3.68 14.20 16.46 32.92% 9.82% Source: FRC, Capital IQ



Risks

Based upon the above sector comparables, and the income statement projections we outlined above, we value the company’s equity at $37.03 million on an EV/R basis and $46.48 million on an EV/EBITDA basis. Our comparables valuation model is outlined below:

2021 Forecast (Gross Revenues) 11,429,512$ 2021 Forecast (EBITDA) 3,816,622$

Average EV/ Revenue 3.68 Average EV/ EBITDA 14.20

Expected EV (US$) 42,060,603$ Expected EV (US$) 54,196,027$

Discounted EV (US$) 32,748,068$ Discounted EV (US$) 42,196,619$

Expected Market Cap (US$) 37,026,893$ Expected Market Cap (US$) 46,475,444$

Value per Share (US$) 0.38$ Value per Share (US$) 0.48$

Comparables Valuation

Source: FRC

Based on our review of the company’s business model, the quality of the management

team and their execution plan, and our valuation models, we are initiating coverage on

Agrios with a BUY rating and a fair value estimate of C$0.65 per share. This is based on a review of our valuations, the closeness of the EBITDA multiple to DCF value, converted at a USD/CAD exchange rate of C$1.33. We believe the company is exposed to the following risks (list is non-exhaustive):

The company operates in an industry that is highly regulated and subject to material change from governmental intervention.

Maturity of the Washington cannabis industry could result in further price deterioration and cannabis oversupply. This could affect the valuation of Agrios.

The license to produce marijuana is not controlled by the company. As a foreign entity, Agrios is vulnerable to Washington state regulations.

Contamination risk and other risks associated with biological/ agricultural production. Access to capital and share dilution. Liquidity risk.

We are initiating coverage with a risk rating of 4 (Speculative).



Appendix

STATEMENTS OF OPERATIONS

(in US$) - YE Mar 31st 2019E 2020E 2021E

Revenue 3,790,756 7,030,519 11,429,512

COGS 758,151 1,406,104 2,285,902

Gross Profit 3,032,605 5,624,415 9,143,609

EXPENSES

SG&A Expense 2,417,926 2,659,719 2,925,690


EBITDA (3,654,294) (237,033) 3,816,622

Depreciation & Amortization 139,864 373,033 592,216

EBIT (3,794,158) (610,066) 3,224,406

Financing Costs 112,494 421,320 421,320

EBT (3,906,652) (1,031,386) 2,803,086


Taxes 46,000 588,648

Net Profit (Loss) (3,952,652) (1,031,386) 2,214,438

FOREX 128,303

Comprehensive Net Profit (3,824,349) (1,031,386) 2,214,438

Weighted Average Shares outstanding 85,801,609 85,801,609 85,801,609

EPS -0.05 $ -0.01 $ 0.03$



BALANCE SHEET

(in US$) - YE Mar 31st 2018 2019E 2020E 2021E

ASSETS

CURRENT

Cash and Cash Equiv. 51,412 1,247,292 3,498,853 7,260,908

A/R 1,777 2,274,454 2,109,156 3,143,116

Term Deposit 1,396,431 5,536,447 5,536,447 5,536,447

Prepaid Expenses 9,770 189,538 527,289 857,213

Related Parties 5,357,628

Due from TimberLand Bay Properties

Total Current Assets 6,817,018 9,247,730 11,671,745 16,797,684

PPE 23,688,625 23,688,625 23,688,625

Deposits

Intangibles 194,032 194,032 194,032

Goodwill 1,050,172 1,050,172 1,050,172

Total Assets 6,817,018 34,180,559 36,604,574 41,730,513

LIABILITIES

CURRENT

A/P 69,231 379,076 632,747 1,142,951

Income Taxes Payable 46,000 46,000 46,000

Due to Related Party 105,505 105,505 105,505

Current Portion of Instalments

Current Portion of Mortgage Payable

Total Current Liabilities 69,231 530,581 784,252 1,294,456

LT Portion of Mortgage Payable 4,307,230 4,307,230 4,307,230

LT Portion of Instalments

Deferred Income Tax Liability 3,881,115 3,881,115 3,881,115

Total Liabilities 69,231 8,718,926 8,972,597 9,482,801

SHAREHOLDERS EQUITY

Share Capital 6,833,871 25,103,094 25,103,094 25,103,094

Reserves 722,600 4,991,573 8,193,302 10,594,599

Deficit (753,461) (4,706,113) (5,737,499) (3,523,061)

AOCI (55,223) 73,080 73,080 73,080

Total shareholders’ equity (deficiency) 6,747,787 25,461,634 27,631,977 32,247,712

Total Liabilities and Shareholders Equity 6,817,018 34,180,559 36,604,574 41,730,513



STATEMENTS OF CASH FLOWS

(in US$) - YE Mar 31st 2019E 2020E 2021E

OPERATING ACTIVITIES

Net Profit for the Year (3,952,652) (1,031,386) 2,214,438

Adjusted for items not involving cash:


Depreciation 139,864 373,033 592,216

Income Tax Expense 46,000

Funds From Operations 502,185 2,543,376 5,207,951

Change in working capital

A/R (2,272,677) 165,298 (1,033,960)

Prepaid Expenses (179,768) (337,751) (329,924)

A/P 309,845 253,671 510,204

Inventory

NET CASH USED IN OPERATING ACTIVITIES (1,640,415) 2,624,594 4,354,271

INVESTING ACTIVITIES

PPE (3,500,000) (373,033) (592,216)

Deposits

NET CASH USED IN INVESTING ACTIVITIES (3,500,000) (373,033) (592,216)

FINANCING ACTIVITIES

Proceeds from Equity Issue 7,060,648

Cost of Equity Issue (486,242)

Related Parties 105,505

Repayment of Installment Obligations (179,149)

Repayment of Mortgage Payable (292,770)

Proceeds from Note Payable

Proceeds from units issued

NET CASH FROM FINANCING ACTIVITIES 6,207,992 - -

Foreign Exchange / Others 128,303

INCREASE IN CASH FOR THE YEAR 1,195,880 2,251,561 3,762,055

Cash Acquired from Timberland Bay Properties LLC 4,136,748

CASH, BEGINNING OF THE YEAR 51,412 1,247,292 3,498,853

CASH, END OF THE YEAR 5,384,040 3,498,853 7,260,908



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk

Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk

Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.

The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash

flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive

to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and

coverage ratios are sufficient.

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a

turnaround situation. These companies should be considered speculative.

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.

Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and

opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.

There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” do not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject

company. Fees were paid by AGRO to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure

independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for

negative reports are protected contractually. To further ensure independence, AGRO has agreed to a minimum coverage term including four reports. Coverage cannot

be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time.

The distribution of FRC’s ratings are as follows: BUY (73%), HOLD (7%), SELL / SUSPEND (20%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options.

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are

not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in

the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making

these forward-looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent

updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter.

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ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS

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