BestGROW Greenhouses Ltd. – Development of hydroponic … · hydroponic floating raft technology...

Siddharth Rajeev, B.Tech, MBA, CFA Analyst Alexander Changfoot, BSc, MM Associate

July 12, 2012

2012 Fundamental Research Corp. www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

BestGROW Greenhouses Ltd. – Development of hydroponic greenhouse for lettuce production in

Alberta

Sector/Industry: Agriculture www.bestgrow.ca

*see back of report for rating and risk definitions

Investment Highlights

- BestGROW Greenhouses Ltd., based in Calgary, AB, is proposing to

raise $4.0 million to acquire land and construct a greenhouse, using proven hydroponic floating raft technology, for producing lettuce. The greenhouse will be situated in Alberta. The total estimated cost of development is $10.75 million.

- The project will be funded through a combination of equity financing ($4 million gross) and a construction loan (approximately $7.5 million).

- BestGROW will engage Hydronov Inc., who specializes in the construction of hydroponic floating raft greenhouses. Hydronov has completed several similar greenhouses in North America, Asia and Europe.

- The hydroponic floating raft technology has the ability to allow 18 harvests per year (the traditional farming method allows only 3 harvests per year).

- Lettuce is the number one imported vegetable in Canada, and most of the consumption is imported from the U.S.

- Management estimates that the acquisition of land, construction and first harvest would take 11 months. The company plans to manage the operation for not more than 10 years. However, management intends to try to sell the project earlier when it is at full capacity and operating efficiently (which is when the project is likely to attain its maximum valuation).

- There are no management fees (however, management receives salary).

Risks

- The company has yet to secure financing. - The company has identified land prospects but will only secure them after

the completion of the offering. - The success of the company is highly dependent on lettuce prices so any

decline in prices may lead to lower investor returns. - Delays in construction and the proposed financing. - Management receives salaries until the project commences operations. - Investors are not guaranteed minimum distributions or return of capital. - Cost overruns. - Unfavorable movements in our base case assumptions will negatively

affect investor returns - No early redemption option.

Issuer BestGROW Greenhouses Ltd.

Offer $4.0 million

Type

Class B Voting and Participating Shares

with optional loan agreement or Class C

Registered Voting and Participating

Shares

Class B Shares

Optional loan agreement. These shares

will participate in profit sharing at a ratio

proportionate to the amount of shares

held over the total amount of shares

issued (all classes of shares).

Class C Shares

Able to be purchased through registered

trust plans. These shares will participate

in profit sharing at a ratio proportionate

to the amount of shares held over the total

amount of shares issued (all classes of

shares).

Price$1.00 Per share for Class B Shares;

$1.00 Per share for Class C Shares

Minimum

Subscription Amount

Class B Shares: $50,000

Class C Shares: $10,000

Purpose

Acquire land and engage Hydronov Inc.

(an unrelated third party), to use their

hydroponic floating raft technology in

order to produce and sell lettuce in

Alberta.

Fees

A fee of up to 10% of the gross proceeds

will be paid for finders and sellers. A

marketing fee of 2.5% of the gross

proceeds. No management fees (however

Management receives salary)

Auditor

D.N. Greenway Profession Corporation

(current). Management stated that

subsequent audits will be conducted by

Johnsen Archer LLP

Summary of the Proposed Offering

FRC Rating

Base-Case Return (IRR) 22.49%

Rating 3- (Good)

Risk 4 (Speculative)

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Background

and Terms of

the Offering

BestGROW Greenhouses Ltd., a new private corporation based in Calgary AB, is planning to raise $4.0 million (gross). The proceeds will be used for the development of a hydroponic floating raft greenhouse in Alberta to produce and sell lettuce. The total cost of the project is estimated at $10.75 million, which will be funded by the proposed $4 million (maximum) financing and a construction loan of approximately $7.5 million.

The proposed $4 million financing will be raised through two types of shares: Class B and Class C. A description of both shares are as follows: a) Class B Voting and Participating Common Shares

- Holders must invest a minimum of $50,000 at $1 per share with an optional loan agreement to the company (discussed later)

- Holders will participate in profit sharing according to the percentage of shares purchased relative to the amount of shares issued

- Automatically redeemed by company after 10 years or upon dissolution; there is no option for early redemption

b) Class C Voting and Participating Common Shares

- Holders must invest a minimum of $10,000 at $1 per share - Can be purchased by registered trust plans - Holders will participate in profit sharing according to the percentage of shares

purchased relative to the amount of shares issued - Automatically redeemed by company after 10 years or upon dissolution; there is no

Issuer BestGROW Greenhouses Ltd.

Offer $4.0 million

TypeClass B Voting and Participating Shares with optional loan agreement or Class C

Registered Voting and Participating Shares

Class B Shares

Optional loan agreement. These shares will participate in profit sharing at a ratio

proportionate to the amount of shares held over the total amount of shares issued

(all classes of shares).

Class C Shares

Able to be purchased through registered trust plans. These shares will participate

in profit sharing at a ratio proportionate to the amount of shares held over the total

amount of shares issued (all classes of shares).

Price $1.00 Per share for Class B Shares; $1.00 Per share for Class C Shares

Minimum

Subscription Amount

Class B Shares: $50,000

Class C Shares: $10,000

PurposeAcquire land and engage Hydronov Inc. (an unrelated third party), to use their

hydroponic floating raft technology in order to produce and sell lettuce in Alberta.

Fees

A fee of up to 10% of the gross proceeds will be paid for finders and sellers. A

marketing fee of 2.5% of the gross proceeds. No management fees (however

Management receives salary)

AuditorD.N. Greenway Profession Corporation (current). Management stated that

subsequent audits will be conducted by Johnsen Archer LLP

Summary of the Proposed Offering

2012 Fundamental Research Corp.


Purpose

Why Invest in

Agriculture?

option for early redemption

The purpose of this report is to analyze the BestGROW Greenhouses Ltd. specializeunder the ‘Agriculturalagricultural investments to an investment portfolio:

Diversification

an investment portfolio. As seen in the chart below, a negative correlation risk by adding agricultural investments to a portfolio.

Inflation Hedge

inflation hedge when compared to Canadian stocks, US stocks, Canadian long term bonds, and even gold (note that gold is


early redemption

The purpose of this report is to analyze the return to risk ratio of this offering.

ouses Ltd. specializes in the production of lettuce, and thereforericultural’ industry. The following factors describe the benefits of adding

investments to an investment portfolio:

Diversification – Agricultural investments offer significant diversification benefits to an investment portfolio. As seen in the chart below, US agricultural investments

relation to the S&P 500, indicating there is potby adding agricultural investments to a portfolio.

Inflation Hedge – As seen in the chart below, Canadian farmland is an excellent inflation hedge when compared to Canadian stocks, US stocks, Canadian long term

even gold (note that gold is a well-known ‘inflation hedge’).

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to risk ratio of this offering.

in the production of lettuce, and therefore, falls The following factors describe the benefits of adding

Agricultural investments offer significant diversification benefits to agricultural investments have

ential to lower portfolio

As seen in the chart below, Canadian farmland is an excellent inflation hedge when compared to Canadian stocks, US stocks, Canadian long term

known ‘inflation hedge’).

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Company

Overview

Source: Bonnefield Financial, Statistics Canada, Libra Investment Management, Ibbotson Associates

High Risk-Adjusted Returns – As seen in the chart below, over the past 60 years, Canadian farmland have achieved attractive risk-adjusted returns - higher than long term bonds and gold. Canadian farmland was also less volatile than gold, long term bonds, US timberland, Canadian stocks and US stocks.

Source: Bonnefield Financial, Statistics Canada, Libra Investment Management, Ibbotson Associates

Capital Preservation – Agricultural land, if managed properly, can potentially produce in perpetuity, thus making it a recurring source of income, while maintaining its value.

BestGROW Greenhouses Ltd. was formed on January 31, 2011, in the province of Alberta. Brief biographies of the management team, as provided by the company, follow on the next page.

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Robert J. Pascoe – Vice-President, Managing Director Mr. Pascoe is a successful businessman currently located in Port Alberni, B.C. with a second residence in Calgary, Alberta. As the principal in Pascoe Products, Mr. Pascoe is involved on a day to day basis in the green technology industry. Mr. Pascoe was born and raised in Calgary, Alberta and worked for many years in the family Engineering firm there. Because of his construction expertise and his many contacts in Calgary and surrounding area, Mr. Pascoe makes a perfect addition to the Bestgrow team. He has been intimately involved with numerous green energy and health related projects over the past 3 years and has been instrumental in bringing those projects to commitment. Robert Ranger - President Mr. Ranger has a background in accounting and heavy construction having started and developed business with revenues in excess of $2M annually. His construction background includes both residential and commercial properties. He is semi-retired since 2006. Mr. Ranger brings his extensive and successful construction experience to this project.

Alan D. Wilson – Product Marketing Manager Alan Wilson was a member of the CFL Football Team the BC Lions as an Offensive Center for 15 years. During his tenure with the Lions he was All-Pro 7 consecutive years, Best Offensive Lineman in the league in 1977, Captain of the team and winner of the Grey Cup in 1985. In 1997 Alan was inducted into both the BC and Canadian Hall of Fame. Alan has been involved with and operated various business ventures including: Canflex Manufacturing – the innovators of the Bambi Bucket, which is used extensively in fighting forest fires from the air; CanRain Ltd – involved in the development of run of river hydro and wind farm sites, and was involved in government lobbying, financing and First Nations negotiations; A member of the founding team of a Network Marketing firm that developed the largest customer base in the de-regulated long distance industry, and more. Alan brings key negotiating and sales skills to the team, enabling whatever is needed for the Company to be within reach for the sale of our produce to the food distributors.

Greg J. Kurjata – Financial Marketing Manager Greg Kurjata came from the commercial mortgage and real estate funding field before moving into joint ventures and strategic alliances in 2009. He has raised capital for numerous projects from business start ups to real estate developments. He brings innovative and creative marketing solutions to the project along with the experience and contacts to get the Company funding ready.

The management team does not have any significant experience in the agriculture

industry, which we believe is a risk. However, management seems to have reasonable

business experience. Note that the technical aspects of the project will be handled by

Hydronov Inc.

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Current

Offering

Land Selection

Technology

Details

BestGROW Greenhouses Ltd. is raising $4.0 million in order to acquire land and engage Hydronov Inc. (an unrelated third party), to use their hydroponic floating raft technology in order to produce and sell lettuce in Alberta. The project is currently in the development phase. The next page outlines the potential timeline for the project.

- Selection of land to build the greenhouse project (10-15 acres). - Completion of equity financing through this offering. - Upon completion of the equity financing, the company will acquire the selected land - Debt financing through Farm Credit Canada - Farm Credit Canada will only consider

financing upon acquisition of the land. BestGROW will need to first raise equity financing to purchase land.

- Engage Hydronov Inc. to start construction of the hydroponic floating raft greenhouses

- Proceed to production and sale of lettuce. The company estimates that the acquisition of land, construction and first harvest will take 11 months. The company plans to manage the operation for not more than 10 years. However, management intends to try to sell the project earlier when it is at full capacity and operating efficiently (which is when the project is likely to attain its maximum valuation). According to management, a minimum amount of $2.70 million (net of finders and sales commissions) must be raised in order to proceed with the project (management feels the remaining amount can be raised through third-party or personal loans – we believe, this is possible as projects such as this can support debt to capital of 75%). If this amount is not raised, management feels they might be able to scale back the size of the greenhouse from 10 acres to 7 acres, reducing the costs to build the project. Details on the option to scale back the project are not available to us at this time. Therefore, we consider delays in financing, or the ability to raise the minimum required capital, a risk. The company has yet to secure a parcel of land. However, management has done some work in the identification of prospects. According to management, the company has identified potential locations, sought out municipal district approval, and has conducted negotiations with the municipal district and the land owners (we have not received any documents regarding the potential acquisition of these properties). Currently, according to management, BestGROW has identified two land prospects at the south east edge of the City of Calgary. One of the most important aspects of this project is the use of the technology provided by Hydronov Inc.

Hydronov Inc. is a private company based in Mirabel, QC, and has been constructing

hydroponic greenhouses and aquaculture projects since 1982. They use a proven

floating raft hydroponic technology and have completed 18 similar projects in a variety of locations including: Canada, Mexico, Japan, China and the United States. Hydronov Inc.

will be involved in the construction and implementation of the hydroponic technology

for BestGROW.

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In order to get an understanding of the project as a whole, one must first understand the benefits of implementing the floating raft hydroponic technology in relation to the traditional growing of lettuces. What is Hydroponics? Most people are not familiar with the term hydroponics and their application in agriculture. Hydroponics is a proven technology that is used to grow plants without using soil. The way this works is that the necessary nutrients (vitamins and minerals) needed to stimulate growth and improve the health of plants is added directly into water. Multiple variables are controlled when using hydroponic systems including: nutrients, temperature, light, humidity – to allow the grower to control the nutrient uptake and yield of the harvest (Hydronov Inc. 2012). According to Hyrdronov, the floating rafts technology was developed at the University of Arizona in the late seventies and was adapted to commercial production by HydroNov in the late 1990s. Benefits of Hydroponics The main benefits that are associated with hydroponics are higher yield, natural production, and automation.

- Higher Yield: Growing in a hydroponic system requires a protected greenhouse environment where all environmental factors are controlled. Since the environment is controlled, there is an opportunity to optimize harvests and to create more harvests every year. According to Hydronov Inc., outdoor soil farming (traditional method) allows for 3 harvests per year, greenhouse protected soil horticulture allows for 5 harvests per year while protected hydroponic floating technology allows for 18 harvests per year. Using the hydroponic method will allow for greater yearly production of crops while reducing the amount of space needed.

- Natural Production: Since the environment is heavily controlled in a hydroponics system, no weed-killers and fungicides are used, and pesticide use is reduced to a minimum thus making this system ideal for natural produce production (Hydronov Inc 2012).

- Automation: The floating raft system used by Hydronov Inc. decreases the amount of

laborers needed to perform tasks. As most of the operation is mechanized using computer systems at specific stages of the plant growth cycle, fewer people are needed to process the crops.

As described above, there are several benefits to the floating raft hydroponics technology used by Hydronov Inc. However, the main challenge to such operations is the high capital cost needed to start operations – which is why, despite its benefits, we believe there are not many similar operations in Canada. There are multiple other types of hydroponic technologies, including ebb and flow, drip, and the nutrient film technique, to name a few. The two major technologies used in the lettuce



Energy Usage

market space are the nutrient film technique and the floating raft system. we found that the nutrient filmharvests a year. Hydronov Inc.’s floating raft system harvests per year – indicating the potential for higher yields than competing technologies. Below are pictures from a floating raft hydroponics facility in Mirabel, Quebec.

Source: Hydronov Inc. Typically, one of the highest overhead costtraditional greenhouse operations, heating and electricity account for 10operating costs. We received documentation on how the energy floating raft greenhouse is calculatedapproximately account for to have lower electricity/heating costs than other greenhouses due to the thermal effect of the pool of heated water in which the plants are grown. The facility in AB is expected to use natural gas for heating.trading at historical lows outlook on long-term natural gas pricenext 2 or 3 years (as supply is expected to be higher than demandprojections to changes in energy/electricity costs is shown later in this report.


are the nutrient film technique and the floating raft system. nutrient film technique hydroponic system is expected to allow

Hydronov Inc.’s floating raft system has the potential indicating the potential for higher yields than competing technologies.

Below are pictures from a floating raft hydroponics facility with Hydronov Inc.

Hydronov Inc.

ne of the highest overhead cost for greenhouses is electricity and heating. For traditional greenhouse operations, heating and electricity account for 10

We received documentation on how the energy raft greenhouse is calculated, and it is estimated that heating and electricity should

account for 5-10% of operating costs. The floating raft greenhouse is expected have lower electricity/heating costs than other greenhouses due to the thermal effect of the

heated water in which the plants are grown.

The facility in AB is expected to use natural gas for heating. Natural gas prices are istorical lows which should benefit the company. Although we have a positive

term natural gas prices, we do not expect a significant increase in priceas supply is expected to be higher than demand)

projections to changes in energy/electricity costs is shown later in this report.

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are the nutrient film technique and the floating raft system. From our research, expected to allow for 9-12

s the potential to allow up to 18 indicating the potential for higher yields than competing technologies.

Hydronov Inc.’s technology

electricity and heating. For traditional greenhouse operations, heating and electricity account for 10-20% of total

We received documentation on how the energy usage for Hydronov’s that heating and electricity should

The floating raft greenhouse is expected have lower electricity/heating costs than other greenhouses due to the thermal effect of the

Natural gas prices are currently benefit the company. Although we have a positive

significant increase in price in the ). The sensitivity of our

projections to changes in energy/electricity costs is shown later in this report.

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Lettuce

Demand in

Canada

In order to evaluate the viability of BestGROW Greenhouses Ltd., we have to evaluate the demand for lettuce in Canada and Alberta. Lettuce Production in Canada

Production of lettuce is divided into two different sectors, traditional farming production and greenhouse production. For the purpose of estimating demand, we must consider the production of lettuce from both of these sources. As seen in the tables below, there is far less greenhouse production of lettuce than the traditional farming method of lettuce (as seen by the farm gate values in 2010: greenhouse

lettuce value - $23.25 million and farmed lettuce - $59.43 million). Using the average price per head of lettuce from greenhouse lettuce production in Canada, we can extrapolate how many heads of lettuce were produced using the traditional farming method. The estimated total amount of lettuce heads produced using the traditional farming method in Canada in 2010 was 57.7 million. The estimated total amount of lettuce heads produced using the greenhouse method in 2010 was 22.5 million. The total amount of lettuce production in 2010 for both greenhouse and traditional farming method was 80.2 million heads of lettuce.

Production and Value Data for Greenhouse Lettuce in Canada

Production and Value Data for Farmed Lettuce in Canada

Source: Statistics Canada

According to the Food and Agriculture Organization of the United Nations, Canada produced 79,527 tonnes of lettuce and chicory in 2010. The chart below shows the historical data of lettuce and chicory produced by Canada from 2000 – 2010.

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Source: Food and Agriculture Organization of the United Nations

As seen in the chart below, the total exports of lettuce and chicory in 2009, were 29,976 tonnes; whereas the total production (as seen in the above chart) in 2009 was 108,228 tonnes. Thus, 78,252 tonnes of lettuce and chicory was held within Canada – indicating that over

70% of lettuce and chicory production in Canada is retained within the country for

consumption. The main domestic producer of lettuce in Canada is Quebec (Canadian Produce Marketing Association 2012).


Import Quantity of Lettuce and Chicory in Canada

The chart below enables us to get a much clearer picture of the demand for lettuce and

0

20000

40000

60000

80000

100000

120000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Canada Lettuce/Chicory Production (tonnes)

0

5000

10000

15000

20000

25000

30000

35000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Canada Lettuce/Chicory Exports (tonnes)



chicory in Canada. In 2009, Canada imported 290,271 tonnes of lettuce and chicory nearly triple the amount of lettuce and chicory produced in 2009.

total lettuce imports dropped from 2006 lettuce demand in Canada during the period; demand, however, picked up in 2010discussed later in this report


Lettuce is the number one most imported vegetablefruit/vegetable in Canada (as shown in the chart below).

260000

270000

280000

290000

300000

310000

320000

330000

340000

2000


In 2009, Canada imported 290,271 tonnes of lettuce and chicory

nearly triple the amount of lettuce and chicory produced in 2009.

total lettuce imports dropped from 2006 – 2009 (which we believe was n Canada during the period; demand, however, picked up in 2010

discussed later in this report).


Lettuce is the number one most imported vegetable, and number two most imported /vegetable in Canada (as shown in the chart below).

Source: Agriculture Canada 2010

2001 2002 2003 2004 2005 2006 2007

Canada Lettuce Imports (tonnes)

Lettuce Imports (tonnes)

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In 2009, Canada imported 290,271 tonnes of lettuce and chicory –

nearly triple the amount of lettuce and chicory produced in 2009. As shown in the chart, 2009 (which we believe was due to a drop in

n Canada during the period; demand, however, picked up in 2010 –


and number two most imported

2007 2008 2009

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All the data above clearly indicate a huge need for domestic lettuce production within

Canada.

Distribution of Lettuce to Canada from the United States

The majority of lettuce and chicory imported into Canada is produced in the U.S. (with the main producers being in Arizona and California) (Source: Food and Agriculture

Organization of the United Nations 2009). The chart below displays total US exports of lettuce against the exports of lettuce to Canada from 1989-2009. The majority of US lettuce exports (approximately 80-90% of lettuce exports) are to Canada.

0

100,000

200,000

300,000

400,000

500,000

600,000

Canada's Top 10 Imported Fruits and Vegetables

2009

2010

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Alberta Market

for Lettuce

Source: National Agricultural Statistics Service, USDA 2011

One of the main factors to consider is the transportation costs of lettuce into Canada. The

main competitive advantage that BestGROW will have over its competitors in the U.S.

is reduced transportation costs. The majority of lettuce transported from California/Arizona is by truck (AMS USDA 2004); thus, the transportation costs are substantial (estimated at $1.00-$3.00 per 24-head carton (California Agriculture 49(3):14-18. May-June 1995) which is approximately 5-25% of the cost of the carton (depending on the current price of lettuce).

In summary, we believe that the production and sale of lettuce in Canada is an excellent

opportunity to fulfill strong domestic demand.

In the next section, we will analyze the supply and demand for lettuce in Alberta. The chart below shows the Canadian average yearly consumption of lettuce in kilograms per person.

0

50,000

100,000

150,000

200,000

250,000

Total US Exports of Lettuce vs. US Exports of Lettuce to Canada

(metric tonnes)

Exports of Lettuce to Canada Total Lettuce Exports

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As mentioned earlier, lettuce consumption dropped from 2006 – 2009; but picked up in 2010 – which is encouraging. We, however, are not aware of any particular reason for the drop in consumption in those years.

The population of Alberta in 2011 was 3.78 million (Statistics Canada); which implies

Alberta consumed approximately 21,357 tonnes of lettuce in 2011; or 20-30% of the

entire Canadian production. As shown in the table below, Alberta has a very small portion of Canada’s greenhouse vegetable sector. In 2004, the total annual sales of locally produced greenhouse vegetables in Alberta was $40 million, while the total amount of greenhouse imports into Alberta was $75.9 million. Although these figures are a little dated, we presented this information to make a point that the greenhouse vegetable sector in Alberta does not meet demand. We believe that BestGROW Greenhouses Ltd. can take advantage of the lack of supply and fulfill a portion of the demand using the floating raft hydroponic technology.

6.08

5.77

5.53

5.4

5.65

5

5.2

5.4

5.6

5.8

6

6.2

2006 2007 2008 2009 2010

Canadian Average Lettuce Consumption (kg)

Average Lettuce Consumption (kg)



Lettuce Prices

Lettuce prices are highly variable and depend on the type of lettuce and wheAs an example, we provide the field leaf lettuce in Calgary

As shown in the tablefrom a low of $5.98 to a high of $17.48 per dozranged from a low of $due to seasonality and soften slightly or stay stream. For our financial projections, we and Edmonton in the past three years

Field-Leaf Red

Field-Leaf Green


Lettuce prices are highly variable and depend on the type of lettuce and wheAs an example, we provide the historical wholesale prices for red field leaf lettuce and

Calgary below:


shown in the table, in the past 3 years, prices of red field leaf lettuce in Calgary ranged from a low of $5.98 to a high of $17.48 per dozen; while, the prices of ranged from a low of $5.60 to $16.98 per dozen. We believe the variation in price

seasonality and the significant reliance on the U.S. for supplystay at existing levels as more domestic production

financial projections, we used the average wholesale price of lettuce sold in Calgary in the past three years, and discounted that by 15% for conservatism

Low High Low High$5.98 $12.98 $7.18 $17.48

Field-Leaf Green $6.48 $13.38 $6.06 $16.98

2010 2011

per Dozen

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Lettuce prices are highly variable and depend on the type of lettuce and where they are sold. d field leaf lettuce and green

lettuce in Calgary ranged en; while, the prices of green field leaf lettuce

believe the variation in price has been for supply. We expect prices to

at existing levels as more domestic production enters Alberta’s supply

average wholesale price of lettuce sold in Calgary that by 15% for conservatism. This is

Low High$17.48 $6.01 $13.48

$16.98 $5.60 $13.48

2012

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Deal Structure

also to account for the fact that we believe prices may soften slightly, or stay at current levels. We found the average price between 2010 - 2012 was $14.95 per dozen for the following lettuce varieties: Romaine, Red Leaf Lettuce, and Green Leaf Lettuce. We used these lettuce varieties as management intends to grow these types. In this section we describe the deal structure of the offering.

Source of Funding: - Debt: A construction loan of approximately $7.5 million will be obtained from Farm

Credit Canada. Management expects the construction loan to be granted subsequent to the equity raise. Although this is a risk, we believe management should not have too much difficulty securing a loan.

- Equity financing: There are five different classes of shares, with total equity financing expected at $4 million (gross). Class A, Class B, and Class C are common voting and participating shares. Class D and preferred shares are non-voting and participating shares. Class A, Class D and preferred shares are offered to the management team; while, Class B and Class C shares are offered to investors.

- Class A voting and participating shares: Class A shares are divided amongst four

individuals of the management team: 31% Robert J. Pascoe, 31% BestGROW Management Group, 23% Alan Wilson, and 15% Greg J. Kurjata. These are voting and participating shares. These shares will participate in profit sharing at a ratio proportionate to the amount of shares held over the total amount of shares issued (all classes of shares). Class A shares will only be earned if the following milestones are met:

o Completion of a minimum of $3,000,000 equity raise o Completion of the construction, commissioning of the greenhouse, and after

successful operations are achieved (which is when the greenhouse operates at capacity)

- Class B voting and participating shares:

o The holders of Class B shares have an optional loan agreement to the company. The optional loan agreement works in the following way, using the minimum subscription amount for Class B shares as an example:

� Investors invest $50,000 as a loan and receive Class B voting and participating shares

� Dividends distributed will pay back the principal of the loan – investors receive a tax benefit as the dividends are not taxable up to the principal amount (we highly recommend investors consult their tax planners about the tax benefits of Class B)

� After the $50,000 principal is paid back through the dividends, investors will receive dividends normally but, the dividends will be taxable as income

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o These are voting and participating shares. These shares will participate in profit sharing at a ratio proportionate to the amount of shares held over the total amount of shares issued (all classes of shares).

o There is a mandatory redemption on the 10th anniversary of its issuance

- Class C voting and participating shares:

o The holders of Class C shares are eligible to purchase these shares through registered plans (we highly recommend investors consult their financial planners to confirm the eligibility of Class C)

o These are voting and participating shares. o These shares will participate in profit sharing at a ratio proportionate to the

amount of shares held over the total amount of shares issued (all classes of shares).

o There is a mandatory redemption on the 10th anniversary of issuance at the net asset value of the share at the time.

- Class D non-voting and participating shares:

o 100% of Class D shares will be issued to Robert Ranger upon successfully raising capital through this offering.

o These shares will participate in profit sharing at a ratio proportionate to the amount of shares held over the total amount of shares issued (all classes of shares).

Below is a chart displaying the ownership of directors, officers, promoters, as well as the amount of shares available for investors of the company assuming completion of the maximum amount of equity financing.

Fees:

- BestGROW Greenhouses Ltd. has allocated up to 10% cash commission for sellers and finders (up to 7.5% and an additional bonus of 2.5% for volume selling).

- The company has allocated 2.5% of the gross proceeds for marketing expenses. - Below is an outline of the compensation paid to the management team.

Class A - Voting

and Participating

Shares

Class B - Voting

and Participating

Shares

Class C - Voting

and Participating

Shares

Class D - Non-

Voting and

Participating

Robert Ranger - President 100,000

Robert J. Pascoe - Vice-

President, Managing Director310,000

BestGROW Management Group 310,000

Alan Wilson - Product Marketing

Manager230,000

Greg Kurjata - Financial

Marketing Manager150,000

Investors 2,000,000¹ 2,000,000¹

Total 1,000,000 2,000,000 2,000,000 100,000

¹A cumulative total of 4,000,000 Class B and Class C will be raised in any combination totalling 4,000,000

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Note: The OM states that management will receive compensation as per above. According to

management, salaries will be paid only until the project commences operations. Thereafter,

management will receive compensation in the form of distributions from their shares.

Overall, we believe, the fees associated with this offering are slightly above the exempt market industry average. Project Cost Estimates:

- The following chart shows the use of the equity capital and construction loan funds that BestGROW Greenhouses Ltd. expects to obtain from Farm Credit Canada. These estimates were provided by Hydronov Inc.

The operating cost of the project is estimated at $6.82 per dozen.

Compensation

anticipated to be

paid by the issuer

in the most recent

fiscal year

Class A -

Voting and

Participating

Shares

Class D - Non-

Voting and

Participating

Shares

Robert Ranger - President $ 24,000 100,000

Robert J. Pascoe - Vice-

President, Managing Director $ 60,000 310,000

BestGROW Management Group $ - 310,000

Alan Wilson - Product Marketing

Manager $ 32,000 230,000

Greg Kurjata - Financial

Marketing Manager $ 25,000 150,000

Total 141,000$ 1,000,000 100,000$

Cost Summary

Land & services 1,000,000$

Greenhouse building 1,843,968$

Greenhouse equipment 2,125,760$

Services building + equipment 200,000$

Cold storage area 100,800$

Floating raft growing system 2,167,603$

Production equipment 1,456,936$

Delivery & insurances 114,240$

Installation & Concrete works 1,319,480$

Follow-up & Product Supplies 420,000$

Total 10,748,787$

Page 19



Valuation

Assumptions

*Note: According to these estimates, heating and electricity account for approximately 6% of

the total costs.

We contacted senior management at Hydronov Inc., as well as management from other

companies that have contracted Hydronov Inc. to construct a similar hydroponic

greenhouse (Shanghai Evergreen Vegetables based in China and Tanimura & Antle

based in the U.S.). We verified the cost, production data, and timeline information provided to us. For valuation purposes, to be conservative, we assumed that the amount of marketable plants that BestGrow will be able to sell is 75% (Hydronov Inc. estimates that 85% of the plants will be marketable). The assumptions we used in our base case projections follow.

The following are the assumptions that we used in our models:

- As mentioned earlier, we used a lettuce price of $12.71 per dozen. - The sales price of the project was calculated using the average of two valuation

methods: the Discounted Cash Flow (DCF) method and the Price to Earnings (PE) method.

- Debt of $7.5 million, amortized over 15 years.

Raw Materials

Seeds 0.29$

Growing Medium 0.16$

Nutrients 0.26$

Packaging 1.41$

Direct Labor

Direct Labor - Nursery 0.53$

Direct Labor - Harvest 1.23$

Overhead 1.93$

Finance Costs 1.01$

Cost Per Dozen 6.82$

Cost Breakdown Per Dozen

Growing Area 19,833m²

Plants per Square Metre 365

Total Plants for the growing area 7,239,045

Percent of Plants that are Marketable 75%

Plants for Sale (dozens) Per Year 452,440

Loan Amount 7,498,787$

Loan interest 6.50%

Loan Term 15 Years

Total Cost to Build Project 10,748,787$

Assumptions

Page 20



Financial

Analysis

- We used 6.50% as the cost of debt – the rate at which the company is estimated to borrow from Farm Credit Canada (as mentioned previously, the company is not able to obtain the loan until the equity raise is completed)

- We used a risk free rate of 2.40% (Bank of Canada long term bond rate) - We used a market rate of return of 9.58% - this was determined using the 5-year

annualized returns from the S&P Global 1200 Consumer Staples Index. - We used a Weighted Average Cost of Capital (WACC) of 10% – we calculated this

rate based on our estimate of the WACC of 7 mid-cap and 8 micro-cap companies in the vegetable production industry (S&P Capital IQ). We estimated the peer average WACC to be 5.3%. To be conservative, and as BestGROW is a start-up company, we used a WACC of 10%.

- We used a tax rate of 25% which is the average corporate tax rate for the province of Alberta (AlbertaCanada.com).

- We used a terminal growth rate of 3%. - We assumed that all excess cash will be distributed annually. - We assumed that the project will be sold in Year 5 - We assumed the salvage value of the land to be $1 million. - We used the vegetable industry average P/E ratio of 11.3x (Source: S&P Capital IQ) - We applied a 25% discount for illiquidity associated with a private corporation.

The following chart shows our projections:

As shown in the table above, the company has the potential to generate approximately $1.34

Terminal

Year 1 Year 2 Year 3 Year 4 Year 5

Sales 5,749,385$ 5,749,385$ 5,749,385$ 5,749,385$ 5,749,385$

Expenses

Raw Materials (957,665)$ (957,665)$ (957,665)$ (957,665)$ (957,665)$

Direct Labor (796,295)$ (796,295)$ (796,295)$ (796,295)$ (796,295)$

Overhead (873,210)$ (873,210)$ (873,210)$ (873,210)$ (873,210)$

Amortization (716,586)$ (716,586)$ (716,586)$ (716,586)$ (716,586)$

Sales & Administration (689,926)$ (689,926)$ (689,926)$ (689,926)$ (689,926)$

Interest (472,011)$ (451,693)$ (430,032)$ (406,940)$ (382,323)$

Debt Repayment (307,595)$ (327,914)$ (349,575)$ (372,666)$ (397,283)$

Total (4,813,289)$ (4,813,289)$ (4,813,289)$ (4,813,289)$ (4,813,289)$

Profit Before Taxes 936,097$ 936,097$ 936,097$ 936,097$ 936,097$

Tax Expense (310,923)$ (316,003)$ (321,418)$ (327,191)$ (333,345)$

Principal Repayment (5,743,754)$

Sale of The Project 15,291,920$

Sales Tax (1,260,786)$

Sales Commission (764,596)$

CF after tax 1,341,760$ 1,336,680$ 1,331,265$ 1,325,492$ 8,125,536$

Dividend Distribution

(Class A, B and C) (1,341,760)$ (1,336,680)$ (1,331,265)$ (1,325,492)$ (8,125,536)$

Page 21



million a year in cash flow (before distributions). The chart below summarizes our valuation of the project.

The following chart shows the expected IRR of each class of shares using our base case valuation (without accounting for the potential tax benefits associated with Class B).

As we can see in the chart above, if the project is sold for $15.3 million in year 5, investors can expect a 22.49% internal rate of return.

Sensitivity Analysis There are three key factors that will have an effect on the return: lettuce prices, operating costs and the actual production of lettuce. We conducted a sensitivity analysis to show the effect of each variable on investors’ returns.

DCF Method

WACC 10%

Growth Rate 3%

Terminal Cash Flow 2,003,363$

Fair Value 29,478,058$

PE Method

Average Industry PE (Vegetable Industry) 11.3x

Fair Value 11,300,394$

Average Valuation 20,389,226$

Average Valuation After a 25% Illiquidity Discount 15,291,920$

Expected IRR

Class B 22.49%

Class C 22.49%



Changes in Lettuce Price

As shown in the chartlettuce prices. If lettuce prices drop to costs, management is likely to (which is the value of the land)by 33% in the first year

Changes in Operating Costs

If operating costs increase by likely to stop productionof their capital in this case. Based on that had contracted Hydronov Inc., The key variable that may change is the cost of energy (heating and electricity). costs double, the expected IRR will d


hanges in Lettuce Price

shown in the chart, the project’s valuation and expected IRR aref lettuce prices drop 33% from our base-case estimate

anagement is likely to stop production, and sell the project at its (which is the value of the land). Investors will lose 100% of their capital if lettuce price

the first year of production – which, we believe, is highly unlikely.

Changes in Operating Costs

operating costs increase by 35% in Year 1, revenues will be equal likely to stop production, and sell the project for the salvage value. Investors will lose 100% of their capital in this case. Based on our discussions with managementat had contracted Hydronov Inc., we believe that the current cost estimates

variable that may change is the cost of energy (heating and electricity). the expected IRR will drop to 19.06%.

Page 22

www.researchfrc.com


and expected IRR are highly dependent on estimate, revenues will be equal

and sell the project at its salvage value will lose 100% of their capital if lettuce prices drop

which, we believe, is highly unlikely.

revenues will be equal to costs, management is Investors will lose 100%

our discussions with management and unrelated parties cost estimates are reasonable.

variable that may change is the cost of energy (heating and electricity). If energy



Changes in Production


Changes in Production

Page 23

www.researchfrc.com


Page 24



Rating

Risks

As we can see in the chart above, the expected IRR is not as sensitive to the project’s annual production as the other two metrics. Note that our models assume, for conservatism, that only 75% of the production will be marketable. However, Hydronov estimates that 85% will be marketable; which would lead to an expected IRR of 27.69%.

Based on our review of the offering and our projections, we assign a Rating of 3- (on a

scale of 1 to 7) on the units issued by BestGROW Greenhouses Ltd.

We assign a Risk 4 (Speculative) risk rating. The following risks, though not exhaustive, may cause our estimates to differ from actual results:

- The company has yet to secure financing from Farm Credit Canada and is unable to do so until the completion of this offering.

- The company has identified land prospects but will only secure them after the completion of the offering – the terms and conditions attached to the potential land prospects may change.

- The success of the company is highly dependent on lettuce prices so any decline in prices may lead to lower investor returns.

- Delays in construction and the proposed financing. - Management receives salaries until the project commences operations. - Investors are not guaranteed minimum distributions or return of capital. - Cost overruns (although we spoke to multiple sources and confirmed that the cost

estimates are accurate, it is still a risk for investors that the estimates may be incorrect)

- Unfavorable movements in our base case assumptions will negatively affect investor returns

- No early redemption option. - Competition – there is no major limitation or restrictions for new entrants in the

hydroponic lettuce market in AB.

FRC Rating

Base-Case Return (IRR) 22.49%

Rating 3- (Good)

Risk 4 (Speculative)

Page 25



Fundamental Research Corp. Rating Scale:

Rating – 1: Excellent Return to Risk Ratio Rating – 2: Very Good Return to Risk Ratio Rating – 3: Good Return to Risk Ratio Rating – 4: Average Return to Risk Ratio Rating – 5: Weak Return to Risk Ratio Rating – 6: Very Weak Return to Risk Ratio Rating – 7: Poor Return to Risk Ratio

A “+” indicates the rating is in the top third of the category, A “-“ indicates the lower third and no “+” or “-“ indicates the middle third of the category. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) 2 (Below Average Risk) 3 (Average Risk) 4 (Speculative) 5 (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 was provided 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” does 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 have been paid by the issuer to FRC to issue this report. 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. 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 performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com. To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm 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.

Rating - 1 - Risk - 1 -

Rating - 2 30% Risk - 2 -

Rating - 3 55% Risk - 3 33%

Rating - 4 5% Risk - 4 67%

Rating - 5 10% Risk - 5 -

Rating - 6 -

Rating - 7 -

FRC Distribution of Ratings

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