Alliance Growers Corp. (CSE: ACG): Cannabis Company ... · cannabis plantlets is estimated at approximately 40 million ... plant horticulture and tissue culture propagation. The “Chibafreen

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA

September 27, 2017

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Alliance Growers Corp. (CSE: ACG): Cannabis Company Developing Cutting Edge Production Facility

– Initiating Coverage

Industry: Cannabis www.alliancegrowers.com

Market Data (as of September 27, 2017)

Current Price C$0.10

Fair Value C$0.30

Rating* BUY

Risk* 5

52 Week Range C$0.07 – C$0.34

Shares O/S 41,672,268

Market Cap C$4.17 mm

Current Yield N/A

P/E (forward) N/A

P/B 16.8

YoY Return 20.0%

YoY TSXV -2.4% *see back of report for rating and risk definitions

Key Financial Data (FYE - Dec 31)

(C$) Q2-2017

Cash $2,670

Working Capital $70,300

Debt $0

Total Assets $528,842

Net Income (Loss) -$300,732

EPS -$0.01

Investment Highlights

� Alliance Growers Corp. (“Alliance”, “company”), along with partner Botanical Research in Motion (“B.R.I.M”), is planning to build a 40,000 square foot facility in British Columbia (“B.C.”), Canada, with an initial capacity to produce 3.5 million cannabis plantlets. Management estimates that the Canadian market for cannabis plantlets is estimated at approximately 40 million plantlets, which we believe is a reasonable assumption.

� Diversified business strategy creates opportunities for multiple revenue streams. Alliance also seeks to penetrate the Cannabidiol (“CBD”) oils market.

� The cannabis botany centre project, once completed, is adaptable to other plantlet strains. If the company does not receive a cannabis growing license, the centre can be adapted to produce other plantlets, such as blueberry strains.

� According to management, B.R.I.M’s cutting-edge, proprietary “Chifabreen Invitro Plant Production System” has the potential to mass-produce genetically superior cannabis plantlets.

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

estimate of $0.30 per share.

Risks

� The company is still in development stages and has yet to realize any revenues.

� Yet to receive an Access to Cannabis for Medical Purposes Regulations (“ACMPR”) license allowing it to legally grow cannabis.

� Significant CAPEX requirements for the company’s flagship project.

� Though recreational cannabis use is likely to be legalized next year, it is still uncertain and any delays to legalization can significantly impact our fair value estimate on Alliance.

� Alliance will only be able to earn-in 30% of the cannabis botany centre’s revenues. There is an option to increase this to 100% in 5 years, but this is not specified in any legally binding documentation.

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2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com


Overview

Growth

Catalyst:

Cannabis

Botany Centre

Alliance is a cannabis company offering diversified services via a unique “Four Pillars” business strategy. Organized into four divisions, the company’s business activities range from developing a cannabis botany centre with B.R.I.M, to the supply and distribution of CBD oils. The four pillars that comprise the company are as follows:

� Cannabis Botany Centre � Strategic ACMPR Investments � CBD Oil Supply & Distribution � Research & Development

Alliance’s initial operations will consist of the cultivation and sale of cannabis plantlets (young flowers in need of further cultivation) to both growers and retail clients. Alliance intends to leverage B.R.I.M’s proprietary plant production system in order to produce uniformly superior plantlets that allow cannabis growers to realize cost savings whilst maintaining premium product quality. Alliance intends to secure sales agreements and offtake agreements with cannabis growers via strategic investments, which we cover in a below section. Alliance estimates (based on the reported square footage of ACMPR licensed producers) that the market for cannabis plantlets could demand as much as 40 million plantlets in 2017, with that number approaching 76 million in 2019. With the lack of growers specializing in plantlet production, Alliance has joined with B.R.I.M to create Canada’s first dedicated cannabis botany centre. The botany centre will be a 40,000 square feet, multi-purpose facility geared initially to the production of cannabis plantlets. However, in the case that Alliance fails to attain the relevant licensing for the production and sale of cannabis plantlets, the centre can be adapted to produce other flora strains, such as blueberries. Management expects that only 20,000-square feet of the facility will be used in initial operations, representing a utilization rate of 50%. The company also expects that the botany centre will facilitate Testing Lab services, allowing Alliance to provide DNA tests for other growers in the cannabis space. Though not an integral part of the company’s business, and not included in our valuation models, Testing Labs in the cannabis space have proven to be exceedingly profitable as shown in the chart below.

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Source: Marijuana Business Daily

Management have indicated that Alliance will initially have a 30% revenue earn-in to

the cannabis botany centre project. Current discussions with their partners in the cannabis botany centre project suggests that the company will pay $3 million for the earn-in. As per standing discussions, Alliance will not be responsible for initial capital expenditures, but will be responsible for their share of expenditures in the case that the partners agree to expand the facility in the future. Current estimates from management place the cost of expanding the facility (which would increase the utilization rate to 100% and double production) at $1 million. We therefore predict that Alliance will be responsible for $0.30 million in capital expenditures in the future. Furthermore, management believe they will have the option to increase their share to 100% after 5 years. However, there is no legally binding documentation regarding this option

or the cost at which this option could be exercised, and we believe there is significant

uncertainty regarding this outcome. The main features of the proposed cannabis botany centre include:

� B.R.I.M’s proprietary “Chibafreen Invitro Plant Production System”: cutting edge clean tissue culture lab with the potential to produce 3.5 million culture plantlets a year. The design can be adapted to multiple different flora and is able to address the wider agricultural sector.

� B.R.I.M’s proprietary Cryotissue Cold Storage: It is a cold storage technology that allows for the long-term preservation and regeneration of tissue culture.

� Extraction Lab: provides extraction services for both cultivators and the retail market. � B.R.I.M’s proprietary cannabis research.

The company believes that the use of B.R.I.M’s proprietary “Chibafreen Invitro Plant

Production System” allows for consistent plantlet composition and purity. Furthermore, the development of a large facility that offers protection from insects and invasive pathogens,

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B.R.I.M

as well as outside weather, ensures that plantlet quality will be uniformly high. It is expected that plantlets produced at future cannabis botany centres will be disease free, geared for optimal growth, and possess the same genetic make up as its parent stock. We cover the technology in a section later in this report. Alliance is currently negotiating a Memorandum of Understanding (“MOU”) with B.R.I.M regarding the cannabis botany centre. Management estimates that the centre will take between 9-12 months to build and develop, and we predict that the centre will be ready in time for the scheduled legalization of recreational cannabis use in Q3-2018. In addition, the company is preparing for the ACMPR (“Access to Cannabis for Medical Purposes Regulations”) licensing process, to legally produce cannabis plantlets. The process consists of the following steps:

� Application intake and initial screening of applicant companies. � Detailed review and initiation of the security clearance process. � Issuance of the license to produce cannabis products. � Introductory inspection. � Pre-sales inspection. � Issuance of the license to sell.

As of May 25, 2017, Health Canada reports that 265 of 1,665 applications have been refused. Additionally, 858 applications were incomplete and subsequently returned to applicants. We expect that the percentage of ACMPR license applications refused will reduce moving forward, as the federal government streamlines the licensing process to meet expected demand. Alliance have partnered with B.R.I.M to develop the cannabis botany centre, with Alliance bringing their equity investment and marketing to help B.R.I.M leverage their technology to the cannabis space. B.R.I.M International is a laboratory-based services company that develops proprietary technology based on tissue culture science. B.R.I.M aims to provide cutting edge technologies in plant horticulture to the North American agricultural sector, with an initial focus on the cannabis market. Believing that the legal cannabis industry has grown to an extent that it requires efficient mass production methods, B.R.I.M International, aided by partner B.R.I.M Canada, have developed a “closed transplant production system” (covered below). Their aim is to cater to licensed cultivators by leveraging their proprietary production system to produce uniformly superior plantlets whilst minimizing resources and costs.

Source: Company

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“Chibafreen

Invitro Plant

Production

System”

B.R.I.M Canada, a partner of B.R.I.M International, is a private Canadian company based in British Columbia, Canada. B.R.I.M Canada is responsible for the development of the proprietary “Chibafreen Invitro Plant Production System”, and is the arm of B.R.I.M that works closest with Alliance on the botany centre project. Management believes that one of B.R.I.M Canada’s major assets is Dr. Fawzia Afreen, an academic in the plant science space who has been working with B.R.I.M since January 2014. Dr. Afreen holds a PhD in Plant Science, and previously taught graduate level courses at Chiba University in Japan where she worked as a Research Associate. She is an expert in plant horticulture and tissue culture propagation. The “Chibafreen Invitro Plant Production System” (“Chibafreen system) is B.R.I.M’s proprietary, semi-automated, in vitro plant production method that Alliance will seek to leverage in order to produce genetically superior plantlets for commercial sale. Conventional in vitro plant production systems consist of four stages:

I. The explant (growing point of the plant) is placed on a growth medium under sterile conditions.

II. Taking established explant from the previous stage and increasing their number. Explant undergoes rapid tissue/ shoot multiplication.

III. Individual shoots transferred to different growth mediums to induce root formation. IV. Plantlets from previous stage transferred to soil to continue growing and acclimate to

a greenhouse environment.

The Chibafreen system eliminates the third stage, reducing production period and

costs. The Chibafreen system is carried out under pathogen-free and optimized conditions in a closed system, minimizing resources required (fuel, labour, time, and space). The production system produces transplants that are genetically superior, tolerant to variable temperatures, uninfected by pathogens, and exhibit high growth under variable conditions. Furthermore, the Chibafreen system could be far superior than conventional greenhouse operations due to its technical advantage. The Chibafreen system may be up to 10 times more productive (in per floor area per annum), have a higher planting density, produce a higher percentage of salable plants (greater than 90%, due to normalcy and uniformity of production), and a production period that is between 30%-70% that of a greenhouse operation. In addition, we believe that the uniformity of high quality amongst plantlets could allow Alliance to charge a premium. Moving forward, the Chibafreen system will provide

the company a competitive edge that should allow it to claim a significant portion of the

cannabis plantlet market. Other key features of the Chibafreen system include:

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Strategic

ACMPR

Investments

Source: Company

In addition to the cannabis botany centre project, Alliance also seeks to grow via strategic investments in ACMPR licensed cannabis producers. The ACMPR program currently has

as few as 58 licensed producers who may legally supply and distribute medical

marijuana. That is against a rapidly growing number of ACMPR registered users, under 8,000 in mid 2014, to close to 130,000 by the end of 2016, who demand cannabis for medical use. Alliance is currently considering the following initiatives:

� A planned equity investment into Canna Companion Products Inc. (“Canna”). Canna, a wholly owned subsidiary of WFS PharmaGreen Inc., produces and sells hemp-based pet supplements. As part of the arrangement, Alliance would invest $300,000 into Canna, and receive exclusive long-term CBD oil supply contracts when Canna expand into the Canadian market (planned for mid 2018 or when recreational marijuana use is legal). PharmaGreen is a related party of B.R.I.M.

� Alliance Growers has closed the first tranche of its equity investment into New

Maple Holdings Ltd. (“New Maple”). New Maple is the parent company of Canwe Growers Inc. (“Canwe”), an Ontario-based cannabis grower applying for an ACMPR license. As Canwe is an important investment for Alliance and a significant catalyst in the long-term, we cover this company in depth in a below section.

� Alliance maintains a 50% stake in BC Maramed Production Ltd. (“BCMM”), a company that owns a leasehold interest and equipment to outfit a 11,000 square-foot growing facility in Kelowna, British Columbia. BCMM has applied for an ACMPR license to enter production, and upon receipt of the license, Alliance will be transferred an additional 12.5% ownership stake that will render the company majority shareholders of BCMM. Alliance has so far spent $225,000 to acquire its interest in BCMM.

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Canwe

� Alliance has entered discussion with an undisclosed private cannabis company in Ontario to acquire a non-dilutive 10% ownership stake. Alliance may invest $750,000 into the venture. The proposed agreement would also include a supply contract for cannabis plantlets from the cannabis botany centre.

Apart from allowing Alliance to break into the legal cannabis market, the company’s strategic investments also allow the company to build distribution networks and strategic partnerships. This includes securing long-term sales agreements for future cannabis plantlet production and flora off-take agreements for CBD oil. Additionally, Alliance expects that these strategic ACMPR investments will also facilitate expansion in to international markets such as Germany and Sri Lanka. However, these plans are longer term and beyond the

scope of our current analysis. Furthermore, Alliance is considering a joint venture with an Israeli medical marijuana company to develop pharmaceutical grade CBD oil. We believe that the joint venture could significantly impact Alliance’s future CBD oil business. Growth in this side of the business

could imply significant future profits, as the cannabis-infused products segment of the

cannabis industry exhibits impressive potential for profitability (see chart below):

Source: Marijuana Business Daily

Canwe is Alliance’s most significant strategic investment, as the company is making headway in the licensing process, and offers Alliance the future potential to access international markets with their plantlet product. The private company is based in Ontario and is currently in the review and security clearance stage of the ACMPR licensing process. The company has access to a 22-acre property, approximately 1.5 hours away from Toronto, that it plans to use as its state-of-the-art hydroponic growing facility. Canwe boasts a strong team of highly sought after industry veterans, some of whom formerly worked at ACMPR-licensed MedReleaf Corp. (TSE: LEAF). We believe that Canwe’s experienced team

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Advisory

Members

presents a unique competitive advantage to Alliance, who stand to benefit from holding

an investment in the cannabis cultivator space. The team also includes several University of Toronto alumni and quality assurance specialists from the food industry. Canwe plans to construct an initial 80,000 square foot cultivation centre, with the potential to expand the centre to 200,000 square feet over two floors. As per the deal terms, Alliance has subscribed for 375,000 New Maple common shares at a price of $1.00 per share, representing roughly 5% of total outstanding shares. The company has so far spent $62,500 for 62,500 shares, and intends to pay for the remaining 312,500 shares of their commitment by October 15, 2017. The deal also features a non-binding letter of intent for the purchase and sale of live cannabis plants, tissue culture and plantlets between Alliance and New Maple. This, however, is highly dependent on Canwe receiving its ACMPR license. In addition to the executive leadership and board of directors, which we address in the management overview section below, we believe that the company has a significant advantage due to their advisory members. A summary of each member, as given by the company, is presented below:

� Charles Rendina (Regulatory and Financial Advisor): Mr. Rendina is an international business lawyer, licensed to practice law in Washington and British Columbia, with over 26 years of experience advising business clients in the USA and Canada on various cross border transactional matters. Mr. Rendina has provided advice and services negotiating mergers and acquisitions, negotiating and documenting significant loan transactions, intellectual property license agreements, private placements and other financings.

� Robert Carveth (Biotechnology and Government Relations Advisor): Mr. Carveth

will act as the Biotechnology and Government Relations Advisor to Alliance, bringing his expertise in provincial, national, and international government, structure, function, processes, regulatory, and relations matters as well experience in early stage technology companies, university research and development, intellectual property, commercialization and licensing. As the Director, Industry Liaison, Office of the Dean of Science from 1996 to 2002, Mr. Carveth increased awareness within the business community and with venture capitalists, facilitating industry access to UBC-Faculty of Science research expertise, facilities and technologies. Mr. Carveth gained international business experience as the Director of Mexican Affairs from 2005 through 2007 for client Pacific Seafood Group, the largest seafood company in the United States, and as Business Development Advisor to Power Air Canada Corporation, a BC technology company organized to commercialize zinc air fuel cells. Robert Carveth has been the President of Consilium Enterprises Inc. since 2002 connecting innovative technology, finance, and management, for clients in Canada, United States, and Mexico.

� Edmund Obasi (Advisory Board): Edmund Obasi has 14 years of relevant business

experience, specializing in public companies business financing, private placements

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Cannabis and

Cannabidiods

Canadian

Medical

Marijuana

Market

and medical marijuana related investments. Mr. Obasi is currently serving as the Chief Executive Officer, Chief Investment Officer and Director of OBASI INVESTMENT LIMITED, a private investment company registered in Alberta. Over the past several years, Mr. Obasi has been focusing extensively on research and investments in cannabis related public companies and the cannabis sector.

We believe that these individuals provide material benefit to Alliance. Cannabis, or cannabis sativa, is the plant from which the psychoactive drug commonly known as marijuana is derived. In addition to medical uses, it has been used recreationally due to the psychoactive component that can cause feelings of euphoria, relaxation and a sense of well-being. There are a wide range of products that can be created or derived from cannabis, including but not restricted to:

� Dried marijuana products � Oils � Edibles (food products that contain variable amounts of cannabis)

Its consumption is done in various forms, most commonly through smoking, orally ingested through edibles or vaporized. The potency of cannabis derived products depends on the cannabinoid content. Of the many cannabinoids that make up the plant, the two most well-known are tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”). THC is responsible for the psychoactive component commonly associated with cannabis and is the substance that has been most researched. CBD is non-psychoactive. Both THC and CBD have therapeutic effects and have been used in a medicinal capacity by Canadians since MMAR’s (Marijuana Medical Access Regulations, the predecessor to MMPR and ACMPR) inception in 2001. As of August 2016, the Marijuana for Medical Purposes Regulations (“MMPR”) has been replaced with the ACMPR. The program authorizes the following activities for those who are deemed eligible for medicinal marijuana use:

� The use of dried marijuana leaves (flowers), up to a limit of 30 grams per person. � As of recently, the use of cannabis oils. � The growing of personal marijuana plants for eligible persons. � Lays down the framework for the commercial production and distribution of cannabis

by licensed producers. ACMPR also authorizes select suppliers to produce cannabis via the issuance of licenses. A map showing the geographical distribution of these licenses is given below:

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Source: Health Canada

Whilst plans for a July 2018 implementation of full cannabis legalization are in place, cannabis use in the interim period for all non-medical use is still illegal. Therefore, the current usage of legal cannabis is likely to arise from use by registered users who comply with ACMPR. Cannabis as a medicinal product is increasingly being used by Canadians, with Health Canada reporting that close to 130,000 Canadians had registered under ACMPR by the end of 2016. This is a significant increase from the under 8,000 in mid-2014, representing a staggering increase of 1,525% in less than 3 years. Health Canada further predicts that this number will hit 400,000 by 2024, though current growth trends are out pacing estimates, leading some sources to believe that the actual number will be higher.

Source: Health Canada

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Upcoming

Catalysts in the

Recreational

Cannabis

Market

Furthermore, Cannimed Therapeutics (TSE: CMED) reported that approximately 7,000 of Canada’s 75,000 physicians are prescribing medical marijuana to patients, close to 10%. This is unsurprising given the large range of conditions and ailments that marijuana is prescribed as treatment. Whilst the list is exhaustive and constantly increasing due to loosening regulations and increased research into the medical applications of cannabis, some of the main illnesses and conditions that cannabis treats include:

� Pain management � Appetite loss � Nausea � Arthritis

Data gathered from Health Canada regarding marijuana use shows that between April 1, 2016, and March 31, 2017, 19,780 kg worth of dried marijuana, and 13,702 kg worth of cannabis oil was sold to patients. By contrast, for the fiscal period 2014-2015, Health Canada reported a total of 2,772 kg worth of dried marijuana in sales, with oils not yet amended into ACMPR. In dried marijuana product alone, this implies a CAGR of the medicinal market (as measured by sales) of 167.13% between 2015 and 2017. Upcoming legislation regarding the legalization of cannabis for recreational use is driving the growth of the Canadian cannabis sector. The illicit status of cannabis, compounded by its widespread popularity, has resulted in a large cannabis black market which has arisen in order to address recreational cannabis demand. The Canadian government has estimated that this illegal cannabis market could be as large as $7 billion per year, costing $2.3 billion for the government to enforce. The liberal government under Trudeau has made it a goal to decriminalize recreational marijuana use and redirect cannabis revenues to legitimate channels, setting up the Task Force On Marijuana Legalization and Regulation with a mandate to:

� Reduce youth consumption of cannabis � Direct profits from cannabis sales to legitimate entities and away from criminals � Deter the sale of cannabis outside the legal framework via stricter enforcement � Establish and enforce stringent regulations regarding production and distribution of

cannabis � Introduce taxation to cannabis sales

With the Trudeau government proposing to fully regulate and legitimize the recreational cannabis industry, investors have now begun to put an estimate on the potential impact that marijuana legalization could have on the Canadian economy. Deloitte, in a recent publication, estimated that the base market for legal recreational cannabis could start at between $4.9 billion and $8.7 billion (depending on whether those who were likely to consume given legalization were taken into account):

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Source: Deloitte

At the higher end estimate, the size of the potential recreational market in Canada approaches the size of the Canadian wine market, which is reported at $9 billion according to the Canadian Vintners Association. However, the base market estimate is unlikely to capture the full economic impact of legalizing recreational cannabis use, which Deloitte predicts could be as large as $22.6 billion once all the ancillary services needed to support a legalized recreational market are accounted for. This foot print has the potential to be an even larger figure due to phenomena such as “drug tourism”. Colorado, which legalized recreational cannabis use in 2012, received close to $100 million in 2015, in “drug tourism” revenues (as measured by cannabis sales to leisure tourists), according to the Marijuana Business Daily. The Colorado Department of Revenue reported combined sales of $1.3 billion from both medical and recreational suppliers for 2016. This market is significantly smaller than the base Canadian retail market estimates given by Deloitte. This suggests the potential for Canadian “drug tourism” revenues to be significant; given the likely scenario that recreational cannabis becomes fully legalized next year.

Source: Deloitte

Whilst it is exceedingly difficult to forecast the growth rate for Canada’s recreational market due to uncertainties with regards to future regulation, forecasts for the entire North American cannabis market grant investors some insight in to the potential growth that the nascent recreational market could face. According to Arcview Market Research, North American marijuana sales could grow at a CAGR of 27% through to 2021. Arcview also estimates the 20+% growth could continue past 2021, as North American sales grow aided by continuing legalization throughout the United States.

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The CBD

Market

Source: Arcview Market Research

The market for CBD products, whilst a smaller segment of the wider cannabis sector, is still significant. Furthermore, it shares similar growth characteristics as the broader cannabis sector and is experiencing increasingly outsized demand against a relatively muted supply structure. CBD, which is derived from hemp, is a non-psychoactive cannabinoid that has multiple uses outside of its therapeutic applications. The myriad of hemp-based products in which CBD content is typically high includes products such as CBD oils, protein powders, lotions and shelled seed. A categorical breakdown of the U.S. hemp-based products is provided below:

Source: Hemp Business Journal

It is estimated that in 2016, the U.S. market for both hemp-based and cannabis-based CBD products was $202 million. Moving forward, the Hemp Business Journal have estimated that the entire U.S. CBD market could grow to $2.1 billion by 2020, with $450 million from hemp-based CBD products and the rest from marijuana-based CBD products.

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Management

Overview

Source: Hemp Business Journal

Alliance Growers’ management team and board of directors have significant legal and cannabis industry expertise, as demonstrated by their track records. The company’s board

has four members, of which, three are independent. We believe that the Board of Directors of a company 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 owns 7.5% of the outstanding shares, which we believe aligns management and investors’ interest. Brief biographies of the management team and board members, as provided by the company, follow:

Dennis Petke, CA - CEO, President and Director

Mr. Petke is a qualified Chartered Accountant in Canada, and is a member of the Institute of Chartered Accountants of British Columbia (1995). Currently serving as a director and/or senior officer for private and public companies, his responsibilities include strategic and overall corporate management for these companies. Mr. Petke has accumulated extensive experience in the area of corporate finance, including negotiating and implementing private and public company mergers, as well as facilitating private placement, preference share, convertible debenture, special warrant and debt financings.

Harvey Lawson - CFO

Harvey Lawson has had many years of experience in the management of public companies. He served as CFO of Trade Winds Ventures from 2001 to 2011 until the Company was purchased by Detour Gold Corp. on December 1, 2011. Prior to this, Harvey taught Financial Management at the National University of Singapore, Hong Kong Polytechnic and the BC Institute of Technology. Harvey is an active member of several Angel Investor groups in Vancouver and the Pacific North West where he offers his expertise in reviewing the financials of companies presenting to the Angels, as well as in the Due Diligence process of companies under consideration for investment. Harvey also mentors many young

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entrepreneurs in the Technology sector.

Rupert Shore - Director

Rupert Shore has been a barrister and solicitor in good standing with the Law Society of British Columbia since November 1989. Prior to this Mr. Shore attended the University of Victoria, obtaining a Bachelor of Arts majoring in Geography (Resource Management) in 1983 and a Bachelor of Laws in 1988. Following graduation from Law School Mr. Shore served as a clerk to the Judges of the Vancouver County Court. For the past 26 years Mr. Shore has practiced in both large and small legal firms and has appeared as counsel in all levels of Court in the Province of British Columbia. Since 2004, Mr. Shore has practiced law as a sole practitioner primarily in the area of commercial litigation. During his time at Campney & Murphy, Mr. Shore’s practice focused on commercial litigation including strata property issues and was defence counsel in a landmark decision of the Supreme Court of British Columbia in favour of his client which established law in the area of shareholders’ remedies. Mr. Shore views corporate litigation as involving far more than appearing in court. His goal is to resolve legal issues for clients in the most cost effective manner possible. He has employed such things as mediation and settlement conferences before judges to resolve disputes, provide certainty to clients in the most cost effective manner possible.

Sina Pirooz - Director

Mr. Pirooz is a registered and practicing pharmacist and a professional member of the College of Pharmacists of British Columbia since 2002, with over ten years of pharmaceuticals and pharmacy management experience. As President of SP RX Services, an established pharmacy consulting company, Mr. Pirooz provides consulting, pharmacist and pharmacy management services to many of Canada’s largest and established drug store chains, pharmacy chains and independent pharmacies and drug stores, including Shoppers Drug Mart, Rexall Drugs, Pharmasave and Guardian Pharmacies. He is also actively engaged in the sales, marketing and export of pharmaceuticals and OTC drugs and health supplements to the Middle East. As owner of a compounding pharmacy in Vancouver, Mr. Pirooz has been compounding and dispensing pharmaceuticals for over ten years. Mr. Pirooz will be assisting Alliance with certain product development with his expertise in compounding, sales, marketing and export of pharmaceuticals.

Ian Lambert - Director

Mr. Lambert holds a Bachelor of Commerce degree in quantitative analysis and computer science from the University of Saskatchewan. His strengths are in corporate management, structuring and strategic planning, regulatory compliance with both the SEC and Canadian regulatory authorities, public financing arrangements and investor and institutional marketing activities. Mr. Lambert’s broad exposure to a wide range of business activities includes oil & gas development, marketing, manufacturing, mobile technology, data processing operations and software development, as well as precious metals and mineral exploration and development. He is currently a director and / or officer and advisor to several Canadian public and private companies. In addition to serving as management of a variety of public companies, he has acted as Chair of several corporate committees, including Corporate Governance, Audit, and Compensation.

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Financials

Valuation

At the end of Q2-2017 (ended June 30, 2017), the company had cash and working capital of $2,670 and $70,300, respectively. The following table summarizes the company’s liquidity position:

(in C$) Q2-2017

Cash $2,670

Working Capital $70,300

Current Ratio 1.25

LT Debt / Assets -

Cash from Financing Activities $712,866

As of May 31 2017, the company had 2.95 million options outstanding (weighted average exercise price of $0.09 per share) and 4.76 million warrants outstanding (weighted average exercise price of $0.15 per share). Currently, we estimate that 1.25 million options and nil warrants are in-the-money. The company can raise up to $62,500 if all these in-the-money options are exercised. To project the company’s future cashflows, we modelled two scenarios to capture a base-case scenario and an alternative scenario. In the base-case, Alliance will maintain a revenue earn-in of 30% indefinitely. The alternative case is based on the assumption that Alliance will increase its interest to 100% by year 5. The following table shows our base-case projections for the company, through 2024:

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2018E 2019E 2020E 2021E 2022E 2023E 2024E

Cannabis Plantlets - 3,500,000 3,500,000 3,500,000 7,000,000 7,000,000 7,000,000

Price per Plantlet 5.00$ 5.00$ 5.00$ 5.00$ 5.00$ 5.00$ 5.00$

Cannabis Plantlet Revenue -$ 17,500,000$ 17,500,000$ 17,500,000$ 35,000,000$ 35,000,000$ 35,000,000$

Cost per Plantlet 1.00$ 1.00$ 1.00$ 1.00$ 1.00$ 1.00$ 1.00$

Cannabis Plantlet COGS -$ 3,500,000$ 3,500,000$ 3,500,000$ 7,000,000$ 7,000,000$ 7,000,000$

Other Plantlets 1,750,000 - - - - - -


Other Plantlet Revenue 1,750,000$ -$ -$ -$ -$ -$ -$


Other Plantlet COGS 875,000$ -$ -$ -$ -$ -$ -$

CBD Oil Production - 359 1,436 2,153 2,871 3,589 4,307

Price per (bottle/100ml/ etc) 25,000$ 25,000$ 25,000$ 25,000$ 25,000$ 25,000$

CBD Oil Revenue -$ 8,975,000.00$ 35,900,000$ 53,831,250$ 71,775,000$ 89,718,750$ 107,662,500$

Cost per (bottle/100ml/ etc) 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

CBD Oil COGS -$ 897,500.00$ 3,590,000$ 5,383,125$ 7,177,500$ 8,971,875$ 10,766,250$

Total Revenues 1,750,000$ 26,475,000$ 53,400,000$ 71,331,250$ 106,775,000$ 124,718,750$ 142,662,500$

COGS 875,000$ 4,397,500$ 7,090,000$ 8,883,125$ 14,177,500$ 15,971,875$ 17,766,250$

Gross Profit 875,000$ 22,077,500$ 46,310,000$ 62,448,125$ 92,597,500$ 108,746,875$ 124,896,250$

Gross Margin 50% 83% 87% 88% 87% 87% 88%

Operating Costs 743,750$ 11,251,875$ 22,695,000$ 30,315,781$ 45,379,375$ 53,005,469$ 60,631,563$

EBITDA 131,250$ 10,825,625$ 23,615,000$ 32,132,344$ 47,218,125$ 55,741,406$ 64,264,688$

EBITDA Margin 8% 41% 44% 45% 44% 45% 45%

Depreciation Expense 121,000$ 242,000$ 242,000$ 257,000$ 257,000$ 257,000$ 257,000$

EBIT 10,250$ 10,583,625$ 23,373,000$ 31,875,344$ 46,961,125$ 55,484,406$ 64,007,688$

EBIT Margin 1% 40% 44% 45% 44% 44% 45%

Tax Rate 26% 26% 26% 26% 26% 26% 26%

Net Income 7,585$ 7,831,883$ 17,296,020$ 23,587,754$ 34,751,233$ 41,058,461$ 47,365,689$

Net Margin 0.43% 30% 32% 33% 33% 33% 33%

Alliance Growers Earn-in 30% 30% 30% 30% 30% 30% 30%

Alliance Growers Net Income 2,276$ 2,349,565$ 5,188,806$ 7,076,326$ 10,425,370$ 12,317,538$ 14,209,707$

CAPEX 3,000,000$ 300,000$

Alliance Growers Actual Cash Flow 2,908,185-$ 2,528,645$ 5,367,886$ 6,966,506$ 10,615,550$ 12,507,718$ 14,399,887$

We used the following assumptions in the base-case cashflow projection:

� The botany centre will be constructed and ready to produce by the end of Q2 2018. However, as we conservatively estimate that the company’s ACMPR license will not be available until the following year, cannabis production will not commence until 2019. In the second half of 2018, we forecast Alliance will produce other plantlets with lower margins.

� Pricing and costs are estimated by management. We believe they are reasonable given our due diligence on listed prices for plantlets and per gram costs of CBD oils.

� Plantlet production is estimated at 3.5 million plantlets per year, given that the company will initially utilize only half the available square footage. We believe that production will double to 7 million plantlets per year once the facility is expanded. As Alliance expects there to be demand for 76 million plantlets per year (based on ACMPR licensed producers entering the market), we believe that Alliance’s market share (less than 10%) assumption is reasonable.

� Regarding CBD oils, management estimates an initial production capacity of 2,871 liters/ year. In our models, we assume production to begin at 359 liters in 2019, growing to 4,307 liters by 2024. We assume that future expansion of the production facility and joint ventures with other companies will allow CBD production capacity

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to increase. � Capital expenditures reflect the initial buy-in to the cannabis botany centre to receive

revenue share and future expansion costs. This represents $3 million (30% revenue earn-in) and $300,000 (30% of projected $1 million expansion cost).

� Revenue earn-in stays at 30% indefinitely. The following table shows our alternative case cash projections for the company, through 2024:

2018E 2019E 2020E 2021E 2022E 2023E 2024E






Other Plantlets 1,750,000 - - - - - -







CBD Oil Revenue -$ 8,975,000.00$ 35,900,000$ 53,831,250$ 71,775,000$ 89,718,750$ 107,662,500$


CBD Oil COGS -$ 897,500.00$ 3,590,000$ 5,383,125$ 7,177,500$ 8,971,875$ 10,766,250$

Total Revenues 1,750,000$ 26,475,000$ 53,400,000$ 71,331,250$ 106,775,000$ 124,718,750$ 142,662,500$

COGS 875,000$ 4,397,500$ 7,090,000$ 8,883,125$ 14,177,500$ 15,971,875$ 17,766,250$

Gross Profit 875,000$ 22,077,500$ 46,310,000$ 62,448,125$ 92,597,500$ 108,746,875$ 124,896,250$

Gross Margin 50% 83% 87% 88% 87% 87% 88%

Operating Costs 743,750$ 11,251,875$ 22,695,000$ 30,315,781$ 45,379,375$ 53,005,469$ 60,631,563$

EBITDA 131,250$ 10,825,625$ 23,615,000$ 32,132,344$ 47,218,125$ 55,741,406$ 64,264,688$

EBITDA Margin 8% 41% 44% 45% 44% 45% 45%


EBIT 10,250$ 10,583,625$ 23,373,000$ 31,875,344$ 46,961,125$ 55,484,406$ 64,007,688$

EBIT Margin 1% 40% 44% 45% 44% 44% 45%

Tax Rate 26% 26% 26% 26% 26% 26% 26%

Net Income 7,585$ 7,831,883$ 17,296,020$ 23,587,754$ 34,751,233$ 41,058,461$ 47,365,689$

Net Margin 0.43% 30% 32% 33% 33% 33% 33%



CAPEX 3,000,000$ 300,000$ 70,000,000$

Alliance Growers Actual Cash Flow 2,908,185-$ 2,528,645$ 5,367,886$ 6,966,506$ 10,615,550$ 28,751,359-$ 47,555,869$

2018E 2019E 2020E 2021E 2022E 2023E 2024E






Other Plantlets 1,750,000 - - - - - -







CBD Oil Revenue -$ 8,975,000.00$ 35,900,000$ 53,831,250$ 71,775,000$ 89,718,750$ 107,662,500$


CBD Oil COGS -$ 897,500.00$ 3,590,000$ 5,383,125$ 7,177,500$ 8,971,875$ 10,766,250$

Total Revenues 1,750,000$ 26,475,000$ 53,400,000$ 71,331,250$ 106,775,000$ 124,718,750$ 142,662,500$

COGS 875,000$ 4,397,500$ 7,090,000$ 8,883,125$ 14,177,500$ 15,971,875$ 17,766,250$

Gross Profit 875,000$ 22,077,500$ 46,310,000$ 62,448,125$ 92,597,500$ 108,746,875$ 124,896,250$

Gross Margin 50% 83% 87% 88% 87% 87% 88%

Operating Costs 743,750$ 11,251,875$ 22,695,000$ 30,315,781$ 45,379,375$ 53,005,469$ 60,631,563$

EBITDA 131,250$ 10,825,625$ 23,615,000$ 32,132,344$ 47,218,125$ 55,741,406$ 64,264,688$

EBITDA Margin 8% 41% 44% 45% 44% 45% 45%


EBIT 10,250$ 10,583,625$ 23,373,000$ 31,875,344$ 46,961,125$ 55,484,406$ 64,007,688$

EBIT Margin 1% 40% 44% 45% 44% 44% 45%

Tax Rate 26% 26% 26% 26% 26% 26% 26%

Net Income 7,585$ 7,831,883$ 17,296,020$ 23,587,754$ 34,751,233$ 41,058,461$ 47,365,689$

Net Margin 0.43% 30% 32% 33% 33% 33% 33%



CAPEX 3,000,000$ 300,000$ 70,000,000$

Alliance Growers Actual Cash Flow 2,908,185-$ 2,528,645$ 5,367,886$ 6,966,506$ 10,615,550$ 28,751,359-$ 47,555,869$ The assumptions for the alternative case cashflow projections remain the same as the base-case except for the following:

� Revenue earn-in for Alliance is maintained at 30% for 5 years, at which point it increases to 100%.

� The current agreement between Alliance and its partners values a 30% earn-in at $3 million, which implies a cost of $7 million to acquire the remaining revenue share. However, there is little certainty regarding whether the partners would agree to be bought-out at cost, and so we have applied a heavy premium to capture this

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Risk

uncertainty. We assumed a conservative purchase price of 10 times the initial $7 million cost.

The net present value of our base-case cashflow forecast is $19.3 million based on a

discount rate of 30%. The net present value of our alternative case cashflow forecast is

$35.2 million based on a discount rate of 30%. To arrive at the 30% discount rate used in our valuation, we used the 25-year return on venture capital investments shown in the table below. We believe that this long-term return reflects the base risk of Alliance’s operations, which are pre-revenue, require significant investment, and exhibit a large degree of uncertainty regarding outcome.

Source: Cambridge Associates LLC

On top of the 25.8% base 25-year return, we also add an industry specific and company specific risk premium. We believe this is appropriate as the cannabis industry in Canada is still undeveloped and Alliance Growers is pre-revenue and has very few comparables. To arrive at our fair value, we took the average valuation of the two cases under consideration and further discounted it by 50% due to the early stage nature of the company. We will revise our valuation and discount rates as the company releases news of progress in any of its initiatives. Based on our review of the company’s business plan, prospective

operations, and our valuation models, we are initiating coverage on Alliance with a

BUY rating and a fair value estimate of $0.30 per share. We believe that the company is exposed to the following risks (list is non-exhaustive):

� Lacks track record and has yet to achieve revenues. � Significant uncertainty regarding the ACMPR license process. In the case that

Alliance fails to receive an ACMPR license, their fair value will be significantly impacted due to the loss of high margins on cannabis plantlet production.

� Significant uncertainty regarding the timing of the cannabis botany centre project. The project is highly dependent on achieving the necessary financing, and there is

Page 20



significant uncertainty regarding the sourcing of capital. � Significant uncertainty regarding the legalization of recreational marijuana use in

Canada. Delays in the legalization process will significantly impact Alliance Grower’s margins.

� Alliance’s future CBD oil business is speculative and depends largely on strategic partnerships that have yet to be consolidated. This could affect the company’s margins and fair value.

� Most of Alliance’s strategic ACMPR investments are in companies that have yet to be granted ACMPR licenses.

� There is significant uncertainty regarding Alliance’s ability to obtain 100% ownership of the cannabis botany centre in 5 years. Though there seems to be a definitive understanding, there is no legally binding document.

Given the company’s risk factors, we have a risk rating of 5.

.

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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” own shares of the subject company, but 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 ACG 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, ACG has agreed to a minimum coverage term including an initial report and three updates. 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 (72%), HOLD (8%), SELL (4%), SUSPEND (16%). 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. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

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Alliance Growers Corp. (CSE: ACG): Cannabis Company ... · cannabis plantlets is estimated at approximately 40 million ... plant horticulture and tissue culture propagation. The “Chibafreen