initiating coverage: funded for growth across...

of 25

3 February 2017

Special Situations

Russell Stanley, MBA, CFA | 647.794.1922 | [email protected]

Emblem Corp.

Initiating Coverage: Funded for Growth across Three Verticals

Projected Return: 46%

Valuation: 17.5x EV/2019E EBITDA

Emblem Corp.Market Cap. (Fully-Dil)

Net Cash (est.)

Enterprise Value

Basic Shares O/S

FD Shares O/S

Avg. Daily Volume (M)

52 Week High

52 Week Low

Financial Metrics31-Dec

Revenue

Adj. EBITDA

Diluted EPS

Operating CFPS

Valuation DataEV/EBITDA Current

Peers

Target

P/E Current

Peers

Target

Quarterly Data

Revenue 2017

2018

EBITDA 2017

2018

OCFPS 2017

2018

Company Description

431.2

34.7

396.5

69.6

119.8

0.46

4.60

2.52

2017E 2018E 2019E

7.0 35.1 94.0

(7.1) 5.6 35.5

($0.11) ($0.03) $0.16

($0.04) $0.05 $0.24

neg 70.3x 11.2x

76.2x 13.8x 10.7x

neg 110.6x 17.6x

neg neg 23.0x

276.3x 27.0x 7.2x

neg neg 33.6x

Q1 Q2 Q3 Q4

0.9 1.1 1.4 3.7

3.8 3.8 9.5 18.0

(1.4) (2.0) (2.4) (1.3)

(1.0) (1.1) 1.5 6.2

Emblem Corp. is a licensed producer and distributor of

medical marijuana. The Company is working to develop

three verticals, including marijuana production, health

care services (through GrowWise) and pharmaceuticals.

Emblem's 4-phase facility expansion plan contemplates

annualized production capacity of 21,100 kg, or

approximately $180M in potential annualized revenue.

The Company’s head office is in Toronto, and its

production facility is in Paris, Ontario. We completed a

site visit in January 2017.

($0.01) ($0.01) ($0.01) ($0.01)

($0.00) ($0.00) $0.01 $0.04

0.00

0.20

0.40

0.60

0.80

1.00

1.20

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

Dec-16 Dec-16 Jan-17 Jan-17 Feb-17

Volume (M) Price

Initiating Coverage: We are initiating coverage on Emblem Corp. with a Speculative Buy rating and 12-month target price of $5.25/shr. Potential catalysts include expansion announcements, improved financial results, regulatory announcements regarding the recreational cannabis market, and news regarding the development of cannabinoid-based pharmaceutical formulations. Our Speculative Buy rating reflects EMC’s limited operating history, although we expect significant near-term revenue and EBITDA improvement.

Investment Thesis: Emblem Corp. is a licensed producer (LP) and distributor of medical marijuana. The Company is working to develop three verticals, including marijuana production, healthcare services (through GrowWise), and pharmaceuticals. While the stock has had a great run, we view EMC as an attractive investment at current levels for the following three reasons.

Strong Balance Sheet Supports Expansion to 11,600 kg Annual Capacity – Including the

recently completed special warrant financing, we estimate that EMC has approximately

$40M in cash available to fund expansion. Its facility in Paris, Ontario, is currently

producing at an annualized rate of almost 700 kg. The Phase 2 expansion should triple

capacity with commissioning expected in April, and the Phase 3 expansion should take

total capacity to 11,600 kg (almost 16x current levels). The Company also has in-the-

money warrants/options outstanding that could generate an additional $36.5M in

proceeds, which could be used to fund a Phase 4 expansion to 21,100 kg. That capacity

could bring run-rate revenue to approximately $180M.

Vertically Integrated Model with Strong Management Depth – Emblem owns a 50% stake

in GrowWise, which operates education centres where patients receive personalized advice

on product selection, including varieties offered by other LPs. Mr. Harvey Shapiro, the CEO

of GrowWise, was the Co-founder and CEO of Dynacare, the third largest provider of clinical

laboratory services in North America, which was acquired in 2002 for almost US$500M.

Emblem is also developing a Pharmaceuticals division headed by Mr. John Stewart. He is the

former President and CEO of Purdue Pharma Canada and Purdue Pharma USA, one of the

largest privately held pharmaceutical companies in the world. We estimate that

management and the board own a combined 14% of the basic shares outstanding, having

invested $6M out-of-pocket to date.

The Cannabis Market is set to Rapidly Expand with Recreational and Pharmaceutical

Opportunities – As we discuss more thoroughly in our industry report published today,

the medical cannabis market has expanded far faster than many expected, creating

product demand that LPs are racing to meet. Health Canada reports that almost 100,000

patients have registered with LPs, and that number has been growing at 30-40%

sequentially over the past several quarters (i.e., at an annualized pace of roughly 200%).

While a number of LPs are undertaking significant capacity expansion plans, we expect

demand growth to absorb that capacity as it becomes available. Pending the introduction

of legislation this spring, the recreational market could be 10x the size of the medical

market in terms of users. Finally, the opportunity for the development of cannabis-based

pharmaceutical products is also significant, particularly in pain management applications

where alternatives to opioids are in great demand.

EMC-TSXV: $3.60

Speculative Buy

$5.25 Target

http://attachment.benchmarkemail.com/c106630/Cannabis_Theme_Report.pdf

Emblem Corp. (EMC-TSXV) | February 3 2017

of 25 Russell Stanley, MBA, CFA | 647.794.1922 | [email protected]

Emblem Corp. (EMC-V, $3.60) - Data Sheet Speculative BUY | PT: $5.25Company Description Consensus 3 Mths Ago Current Return

Rating: NA Buy

Target: NA $4.13 29%

Median: NA $4.13 29%

High: NA $4.75 46%

Low: NA $3.50 12%

Consensus Distribution

Sector Outperform/Buy 2

Sector Perform/Hold 0

Sector Underperform/Sell 0

# Est 2

Indexed Price Movements EBITDA Sensitivity to Realized Pricing / gram

CAPITAL IQ - Indexed Price Movements

Key Financial Metrics Financial Summary 2015A 2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E Key Statistics Value

Consolidated 52-Week High $4.60 28%

Revenue NA 1 1 1 1 4 7 35 94 52-Week Low $2.52 (30%)

Growth y/y NA NA NA NA NA NA 808% 400% 168% Avg Vol (3-Mo) 456

Cons. NA 0 NA NA NA NA 8 30 56 Shares Outstanding (FD) 120

Cons. 3 Mts. Ago NA NA NA NA NA NA NA NA NA Market Cap (FD) 431

Net Cash (est.) 35

EBITDA NA (4.6) (1.4) (2.0) (2.4) (1.3) (7.1) 5.6 35.5 Enterprise Value 396

Growth y/y NA nmf nmf nmf nmf nmf nmf nmf 530% Management/Board Ownership 14%

Margin NA (594%) (162%) (182%) (173%) (36%) (101%) 16% 38% FYE Dec 31

Cons. NA (5.5) NA NA NA NA (3.0) 5.3 17.8

Cons. 3 Mts. Ago NA NA NA NA NA NA NA NA NA

EPS NA ($0.23) ($0.02) ($0.03) ($0.03) ($0.02) ($0.11) ($0.03) $0.16

Growth y/y NA nmf nmf nmf nmf nmf nmf nmf nmf

Cons. NA ($0.11) ($0.01) ($0.01) ($0.01) ($0.01) ($0.05) $0.01 $0.08

Cons. 3 Mts. Ago NA NA NA NA NA NA NA NA NA

Net Cash NA 19.9 32.7 30.1 33.4 20.6 20.6 (2.7) 22.0

FCF NA (6.6) (2.0) (2.6) (6.7) (12.7) (24.0) (23.1) 24.7

FCF Yield NA (4%) (2%) (2%) (6%) (12%) (6%) (5%) 6% 2019E EBITDAReturn on Invested Capital (ROIC) NA (51%) (51%) (64%) (54%) (22%) (25%) (2%) 45% Valuation Sensitivity $32.3 $35.5 $39.0

Return on Equity (ROE) NA (34%) (14%) (20%) (19%) (14%) (16%) (5%) 29% 22.5x $6.02 $6.62 $7.29

20.0x $5.34 $5.88 $6.48

Other Metrics 2015A 2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E 17.5x $4.67 $5.14 $5.66

15.0x $4.00 $4.40 $4.85

Exit Annualized Production Capacity (kg) NA 700 700 700 2,100 2,100 2,100 11,600 11,600 12.5x $3.32 $3.66 $4.03

Sales (kg) NA 129 123 158 193 473 945 4,384 10,440

Realized Price/gram NA $5.95 $7.00 $7.00 $7.25 $7.75 $7.43 $8.00 $9.00

Cash Cost/gram NA $12.36 $3.30 $3.30 $2.75 $1.75 $2.41 $1.59 $1.55 Shares (M) Potential ITM

All-In Cost/gram NA $12.36 $5.89 $5.42 $4.56 $2.80 $3.99 $2.69 $2.10 Basic Shares Outstanding 70 - -

CAPEX ($M) NA 2 1 1 5 10 17 27 2 Warrants 30 $44.2 $33.7

Operating Cash Flow ($M) NA (4.0) (0.9) (1.4) (1.7) (0.8) (4.7) 6.0 28.4 Options 6 $2.8 $2.8

Operating Cash Flow PS NA ($0.09) ($0.01) ($0.01) ($0.01) ($0.01) ($0.04) $0.05 $0.24 Perform. Escrow Shares 14 - -

Total 120 $47.0 $36.5

Comparables

Licensed Funded Potential 2018E 2019E 2018E 2019E 2018E 2019E

Emblem Corp. $3.60 $4.60 $2.52 0.5 6 24 625 11,600 21,100 $35 $94 $5.6 $35.5 16% 38%

Canopy Growth Corporation $10.52 $17.86 $2.40 4.3 1,169 4,677 18,100 31,000 54,500 $315 $466 $82.0 $62.4 26% 13%

Aphria Inc. $5.50 $7.79 $1.04 2.1 585 2,341 3,600 18,000 39,000 $92 $129 $33.4 $47.4 36% 37%

Licensed Funded Potential Revenue EBITDA 2018E 2019E 2018E 2019E

Emblem Corp. $431 $40 $5 $396 $629 $34 $19 $0.0 ($4.2) 11.3x 4.2x 70.3x 11.2x nmf 23.0x

Canopy Growth Corporation $1,411 $102 $7 $1,317 $73 $42 $24 $24.0 ($1.3) 4.2x 2.8x 16.1x 21.1x 43.2x nmf

Aphria Inc. $676 $91 $8 $593 $165 $33 $15 $15.1 $2.8 6.4x 4.6x 17.8x 12.5x 30.6x nmf

Peer Average $289 $36 $19 NMF NMF 7.3x 3.9x 34.7x 14.9x 36.9x 23.0x

*Non-coverage names reflect consensus.WEED capacity figures are estimates including Mettrum.

EV / EBITDA

Last Q

Sales (kg)

Emblem Corp. is a licensed producer and distributor of

medical marijuana. The Company is working to develop

three verticals, including marijuana production, health care

services (through GrowWise) and pharmaceuticals.

Emblem's 4-phase facility expansion plan contemplates

annualized production capacity of 21,100 kg, or

approximately $180M in potential annualized revenue. The

Company’s head office is in Toronto, and its production

facility is in Paris, Ontario. We completed a site visit in

January 2017.

Debt ($M)FD EV

($M)

TTM Results ($M) EV / Sales

Annual Capacity (kg)Last Q

Annual

(kg)

Proceeds ($M)

Comparables

Multiples Analysis

FD Mkt.

Cap ($M)Cash ($M)

EBITDA MarginsEBITDARevenueComparables

and Peer AnalysisPrice

52-Week

High

52-Week

Low

90-Day

Vol (mm)

P / E

2018E 2019E

EV / Capacity ($000s/kg)

0

1

2

3

4

5

6

7

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Dec-16 Jan-17

Vo

lum

e (M

Sh

are

s)

Sto

ck P

rice

($

)

Last Sale Price 50-Day MA 200-Day MA

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0% Emblem Corp. Canopy Growth Corporation Aphria Inc.

$4.2

$14.6

$25.1

$35.5

$45.9

$56.4

-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$6.00 $7.00 $8.00 $9.00 $10.00 $11.00

20

19

E EB

ITD

A

Realized Price/gram

84.4x

21.1x12.8x

23.4x

6.9x 3.3x

0.0x

20.0x

40.0x

60.0x

80.0x

100.0x

2017E 2018E 2019E

EV /

Sa

les

& E

V /

EB

ITD

A

Mu

ltip

les

EV / EBITDA EV / Sales



Estimates & Underlying Assumptions

We present the highlights of our forecast in the exhibit below. We use the fully diluted share count in all of our per share estimates, and we assume that the Company is fully taxed at 27% during our forecast period. Full financial statements are presented later in this report. Our 2019 revenue/EBITDA estimates are notably higher than current consensus, which we attribute to giving fuller credit to the lift from the Phase 3 expansion.

Exhibit 1 – Highlights of Forecast

2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E

Exit Annualized Capacity (kg) 700 700 700 2,100 2,100 2,100 11,600 11,600

Sales (kg) 129 123 158 193 473 945 4,384 10,440

Realized Price/ gram $5.95 $7.00 $7.00 $7.25 $7.75 $7.43 $8.00 $9.00

Cost / gram $12.36 $3.30 $3.30 $2.75 $1.75 $2.41 $1.59 $1.55

Revenue ($M) $0.8 $0.9 $1.1 $1.4 $3.7 $7.0 $35.1 $94.0

EBITDA ($M) ($4.6) ($1.4) ($2.0) ($2.4) ($1.3) ($7.1) $5.6 $35.5

EBITDA Margin (594%) (162%) (182%) (173%) (36%) (101%) 16% 38%

Net Earnings ($M) ($10.0) ($1.5) ($2.0) ($2.3) ($1.7) ($7.6) ($2.1) $18.7

Diluted EPS ($0.23) ($0.02) ($0.03) ($0.03) ($0.02) ($0.11) ($0.03) $0.16

Operating Cash Flow ($M) ($4.0) ($0.9) ($1.4) ($1.7) ($0.8) ($4.7) $6.0 $28.4

Operating CFPS ($0.09) ($0.01) ($0.01) ($0.01) ($0.01) ($0.04) $0.05 $0.24

Return on Invested Capital (51%) (51%) (64%) (54%) (22%) (25%) (2%) 45%

Return on Equity (34%) (14%) (20%) (19%) (14%) (16%) (5%) 29%

Free Cash Flow ($M) ($6.6) ($2.0) ($2.6) ($6.7) ($12.7) ($24.0) ($23.1) $24.7

Free Cash Flow PS ($0.15) ($0.02) ($0.02) ($0.06) ($0.11) ($0.20) ($0.19) $0.21

Free Cash Flow Yield (4%) (2%) (2%) (6%) (12%) (6%) (5%) 6% Source: Company Filings, Echelon Wealth Partners estimates

The Revenue Model: Our model makes the following key assumptions for production, pricing, and costs.

Phase 2 – We understand that commissioning should be complete by April, and that the additional 1,400 kg of

annualized capacity should begin contributing to revenue by July/August.

Phase 3 – We expect management to pace construction based on anticipated timelines for the recreational

market. While legislation is expected to be introduced this spring, we assume that implementation would not

occur until late 2018/early 2019. On that basis, our forecast assumes that EMC will want to have the Phase 3

capacity fully available by Q418, so it would make a full year revenue contribution in 2019. We assume CAPEX of

$40M for this expansion, although we note that it includes infrastructure spending that will also support the

eventual Phase 4 plan. The majority of this can be funded with cash on hand, but we also assume that the 13.4M

warrants with a $0.75/shr exercise price are converted, generating gross proceeds of $10.1M, supporting the

Phase 3 CAPEX and working capital requirements.

Phase 4 – We do not include the benefit of Phase 4 in our formal estimates, as it is not yet fully funded and may

require external financing for its construction. In terms of capacity contribution, it should be similar to Phase 3 at

9,500 kg. We expect CAPEX to be approximately $20M, which is significantly lower than that of Phase 3 because

the Phase 3 plan includes the build-out of infrastructure to support Phase 4. As with Phase 3, we expect

management to pace construction to meet demand, based on implementation of legislation opening the

recreational market. We note that outstanding options and warrants represent potential in-the-money proceeds

of $36.5M; assuming full conversion, Phase 4 could be fully financed.



Realized Pricing – As shown above, we assume that realized pricing improves as the Company expands sales

beyond the wholesale market to the consumer/patient market (i.e., customer mix improvement), and as value-

added products are introduced (i.e., improved product mix).

Cash Costs & Margins – Primarily driven by scale economies, we expect significant improvement in production

costs as capacity is built and absorbed. Additional improvement could follow if the Company constructs a co-

generation facility, allowing it to go off-grid for its power needs. Moreover, the by-products (CO2 and heat) can be

fed back into the facility as inputs. Investments in SG&A will compress EBITDA margins at first, but EMC should

produce positive EBITDA beginning in 2018.

Sensitivity to Realized Pricing: In our view, the real question mark with respect to our forecast is the pricing that EMC will realize on production. Other LPs have announced significant plans for expansion, much of which has been financed by recent equity raises. While the medical market is currently seeing excess demand, and with the recreational market due to open up, the question is whether the market will continue to see pricing support from shortages, or will it tilt into oversupply. As shown in the next exhibit, our EBITDA estimates are naturally sensitive to realized pricing per gram.

Exhibit 2 – Sensitivity to Realizing Pricing

Base Case

2019E

Realized Price/ gram $6.00 $7.00 $8.00 $9.00 $10.00 $11.00

Sales (kg) 10,440 10,440 10,440 10,440 10,440 10,440

Revenue ($M) $62.6 $73.1 $83.5 $94.0 $104.4 $114.8

Gross Margin 65% 70% 74% 77% 79% 81%

Cost / gram $1.55 $1.55 $1.55 $1.55 $1.55 $1.55

EBITDA ($M) $4.2 $14.6 $25.1 $35.5 $45.9 $56.4

EBITDA Margin 7% 20% 30% 38% 44% 49%

Operating Cash Flow ($M) $5.5 $13.1 $20.7 $28.4 $36.0 $43.6

Operating Cash Flow PS $0.05 $0.11 $0.17 $0.24 $0.30 $0.36

$4.2

$14.6

$25.1

$35.5

$45.9

$56.4

-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$6.00 $7.00 $8.00 $9.00 $10.00 $11.00

20

19

E EB

ITD

A

Realized Price/gram

Source: Company Filings, Echelon Wealth Partners estimates

What Impact would Phase 4 have? Management envisions adding another 9,500 kg of annualized capacity as part of a Phase 4 expansion, which would bring total capacity to 21,100 kg. We have not formally included Phase 4 in our model or valuation, given that it cannot be funded by the existing balance sheet. However, EMC has in-the-money warrants/options outstanding that represent potential proceeds of $36.5M. If we deduct the $10.1M that we assume gets converted to fund Phase 3 that implies $26.4M of remaining, potential proceeds. Assuming Phase 4 CAPEX of $20M, and that essentially all of those warrants and options are converted, the Company could conceivably fund Phase 4 without external financing. As shown in the following exhibit, the incremental capacity would have a significant impact on Emblem’s EBITDA and cash flow generating abilities. Applying the same valuation approach to the resulting estimates would imply a target price of approximately $14.50/shr.

Exhibit 3 – Phase 4 Scenario

Phase 4 Implications Variable

Incremental Capacity (kg) 9,500

Total Production Capacity (kg) 21,100

Capacity Utilization 90%

Sales (kg) 18,990

Realized Selling Price / gram $9.00

Revenue ($M) $170.9

EBITDA ($M) $99.2

EBITDA Margin 58%

Operating Cash Flow ($M) $74.9

Operating Cash Flow PS $0.62 Source: Company Filings, Echelon Wealth Partners estimates



Valuation

Comparable Companies Approach: We value EMC based on comparable companies, with reference to the exhibit below. As we discuss in our industry report, the treatment of fair value gains on biological assets can create a lot of noise in accrual earnings. In our view, this renders P/E multiple-based valuation less relevant. We would ordinarily use price/operating cash flow (before working capital), but only a handful of companies have published estimates for 2018, and there are currently no such estimates for 2019, leaving us without a reliable basis for comparison.

We therefore focus on EV/EBITDA for our valuation. On an EV/EBITDA basis, the peer group currently trades at an adjusted average of 19x consensus estimates for 2018, and 11x consensus estimates for 2019 (excluding EMC). We also note that the range of multiples is high in both years.

We present a number of capacity-related metrics as well, and view the EV/fully funded capacity as the most relevant. As shown below, the group currently trades at approximately $31,000/kg of the production capacity that these companies can afford to build, based on their current balance sheets. To put that into context, a realized price of $8/gram represents revenue of $8,000/kg of capacity. Again, the range of multiples is considerable.

Exhibit 4 – Comparable Companies ex-EMC (top), EV/Funded Capacity (bottom)

Company Last Price52-Week

High

52-Week

Low

FD Mkt.

Cap. ($mm)

Net Cash

($mm)

FD EV

($mm)EV / Sales

EV /

EBITDAP/E P / CFPS EV / Sales

EV /

EBITDAP/E P / CFPS Licensed

Fully-

FundedPotential

EV / Registered

Patient ($000s)

Canopy Growth Corporation $10.52 $17.86 $2.40 $1,411.2 $94.4 $1,316.8 4.2x 16.1x 43.2x 8416.0x 2.8x 21.1x nmf nmf $73 $42 $24 $54

Aurora Cannabis Inc. $2.28 $3.95 $1.56 $874.2 $117.3 $756.8 2.6x 6.0x 8.3x nmf 1.7x 3.6x 5.0x nmf $138 $28 $11 $71

Aphria Inc. $5.50 $7.79 $1.04 $676.3 $83.3 $593.0 6.4x 17.8x 30.6x 220.0x 4.6x 12.5x nmf nmf $165 $33 $15 nmf

Supreme Pharmaceuticals Inc. $1.78 $2.05 $0.30 $409.0 $12.4 $396.5 7.6x 31.8x 44.5x 118.7x 3.1x 8.4x nmf nmf nmf $40 $8 nmf

Cronos Group $1.80 $2.00 $0.14 $312.2 $1.8 $310.4 7.0x 29.6x 32.7x 90.0x 3.9x 13.3x nmf nmf $119 nmf nmf $91

OrganiGram Holdings Inc. $2.79 $4.49 $0.62 $311.8 $57.8 $254.0 5.6x 16.2x 28.5x nmf nmf 15.8x nmf nmf $169 $15 $10 nmf

CanniMed Therapeutics Inc. $12.10 $13.18 $10.28 $296.3 $29.5 $266.8 4.2x 15.3x 25.9x nmf 2.2x 5.7x 9.4x nmf $38 $22 $4 $16

Emerald Health Therapeutics, Inc. $1.28 $1.90 $0.14 $113.7 $15.2 $98.6 18.3x nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf

THC Biomed Intl Ltd. $0.76 $1.50 $0.10 $78.8 $0.2 $78.6 nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf

Canabo Medical Inc. $0.74 $1.28 $0.66 $29.7 $8.4 $21.3 nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf

Average (Raw) 7.0x 19.0x 30.5x 2211.2x 3.1x 11.5x 7.2x nmf $117 $30 $12 $58

High 18.3x 31.8x 44.5x 8416.0x 4.6x 21.1x 9.4x nmf $169 $42 $24 $91

Low 2.6x 6.0x 8.3x 90.0x 1.7x 3.6x 5.0x nmf $38 $15 $4 $16

Adjusted Average 5.8x 19.0x 32.2x 169.3x 3.0x 11.1x nmf nmf $124 $31 $11 $62

Consensus 2018E Consensus 2019EEnterprise Value / Production

Capacity ($000s per kg)

$42$40

$34 $33$31

$28

$22

$15

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

WEED-T SL-C EMC-V APH-V AdjustedAverage

ACB-V CMED-T OGI-V

EV /

Fu

nd

ed C

apac

ity

($0

00

s p

er k

g)

Source: Company Filings, Echelon Wealth Partners, Capital IQ (Ratios are adjusted to calendar year equivalents, given differing FYE amongst the peer group. Market Capitalizations and EV are based on fully-diluted share counts).

In our view, our 2019 estimates are the best reference point for valuation, as that reflects a full year contribution of the Phase 3 expansion. We value EMC using a 17.5x EV/EBITDA multiple. While this multiple is higher than the peer group average, it is still well within the peer group range, and we believe it reasonable based on Emblem’s relative growth trajectory, and its early start in focusing on its pharmaceutical business. On that basis, we rate EMC a Speculative Buy with a 12-month target price of $5.25/shr. Our price target reflects our base line assumptions. Upward revisions to our estimates and valuations could follow if EMC’s expansion pace is faster than we have forecast and/or its revenue mix proves more advantageous than anticipated. The exhibit below illustrates the implied valuations for varying EV/EBITDA multiples and EBITDA estimates.



Exhibit 5 – Implied Valuation

$29.3 $32.3 $35.5 $39.0 $43.0

22.5x $5.47 $6.02 $6.62 $7.29 $8.02

20.0x $4.85 $5.34 $5.88 $6.48 $7.13

17.5x $4.24 $4.67 $5.14 $5.66 $6.23

15.0x $3.63 $4.00 $4.40 $4.85 $5.33

12.5x $3.02 $3.32 $3.66 $4.03 $4.44

2019E EBITDA

Source: Echelon Wealth Partners

Our DCF Valuation as a Check: While the comparable companies approach forms the basis of our target price, we have also performed a DCF analysis for investor reference. We use both our formal assumptions (i.e. Phase 3 only), as well as estimates that include the Phase 4 build-out, assuming it is fully-funded by warrant conversions (i.e. no external financing required).

Using our formal assumptions, as well as a discount rate of 12.5% and a terminal multiple of 15x EBITDA implies a value of $2.69/shr. However, that calculation uses the fully diluted share count of approximately 120M.

If we use only the Basic SO count, plus the warrants we assume are converted to support the Phase 3 build-out (83M shares total), that estimate improves to $3.89/shr. We view this estimate as more internally consistent. While the vast majority of the warrants and options outstanding are in-the-money, the proceeds of their exercise would likely be used to fund capacity expansion beyond Phase 3. This approach reflects Phase 3 estimates using only the share count required to finance them. We view this as our baseline valuation from a DCF perspective, based solely on the Company’s Phase 3 plans.

Exhibit 6 – DCF Using FD Share Count (left); Adjusted Share Count (right)

10.5% 11.5% 12.5% 13.5% 14.5%

20.0x $3.90 $3.76 $3.62 $3.49 $3.36

17.5x $3.40 $3.28 $3.16 $3.04 $2.93

15.0x $2.91 $2.80 $2.69 $2.59 $2.50

12.5x $2.41 $2.32 $2.23 $2.15 $2.07

10.0x $1.91 $1.84 $1.77 $1.70 $1.64

Discount Rate

Terminal

Multiple

10.5% 11.5% 12.5% 13.5% 14.5%

20.0x $5.63 $5.42 $5.22 $5.03 $4.85

17.5x $4.91 $4.73 $4.56 $4.39 $4.23

15.0x $4.20 $4.04 $3.89 $3.74 $3.61

12.5x $3.48 $3.35 $3.22 $3.10 $2.98

10.0x $2.76 $2.65 $2.55 $2.45 $2.36

Discount Rate

Terminal

Multiple


Viewed alternatively, our 12-month target price implies a terminal multiple of 20x, using a 12.5% discount rate.

If the in-the-money warrants and options were to be converted, we believe the proceeds would be sufficient to fund the Phase 4 expansion, which would add another 9,500 kg of annualized capacity (bringing total capacity to 21,600 kg). We use a 10x terminal multiple (vs. 15x used above) to reflect the fact that the expansion potential for an acquirer of EMC would be reduced following the Phase 4 build-out. Using the same discount rate of 12.5% implies a value of $5.09/shr.

Exhibit 7 – DCF Using FD Share Count, including Phase 4

10.5% 11.5% 12.5% 13.5% 14.5%

12.0x $6.59 $6.35 $6.12 $5.90 $5.69

11.0x $6.04 $5.82 $5.61 $5.40 $5.21

10.0x $5.48 $5.28 $5.09 $4.91 $4.73

9.0x $4.93 $4.74 $4.57 $4.41 $4.25

8.0x $4.37 $4.21 $4.05 $3.91 $3.77

Discount Rate

Terminal

Multiple




Company Background

While Newly Listed, EMC has been a Licensed Producer (LP) since August 2015: The operating business was originally founded as KindCann Holdings Limited in October 2014. During 2015, the Company invested $4.4M in building out its initial production capability, supported by $7.0M in financings (preferred shares, warrants, and a royalty interest in GrowWise) in December 2014, and another $14.4M raised in 2015 from equity and mortgage financing. Emblem completed facility renovations to comply with the Access to Cannabis for Medical Purposes Regulations (ACMPR), specifically the installation of security equipment and a compliant vault. The Company also completed installation of lights, tables, automated irrigation and nutrient delivery systems in mothering, propagation, vegetation and two grow rooms. EMC was granted its initial license from Health Canada to cultivate medical marijuana in August 2015, and in December, obtained its first seeds and clippings to begin growing.

Operational Focus in 2016 was First Production and Expansion: In July 2016, Emblem received its distribution license from Health Canada, and followed that in August with its first sale of medical marijuana through a bulk, wholesale transaction with another LP. The Company also applied for a license to produce derivative products (e.g., oils). The Company also recruited personnel in operations, finance, marketing and customer care, and planned development/expansion of its Paris operations to accommodate expansion plans.

November/December Financings Raise $24.4M, Setting Stage for Rapid Production Growth: The Company closed brokered and non-brokered subscription receipt financings at $1.15/receipt for gross proceeds of $21.6M. The receipts were converted to units on a one-for-one basis, with each unit including one share plus a one-half warrant with a $1.75/shr exercise price, expiring in December 2019 (three years). The shares from the units are subject to a four-month hold, and the shares issued upon exercise of the warrants are subject to a contractual twelve-month hold that began with the closing of the qualifying transaction (see below). The financing included a $13.6M non-brokered component, and an $8.0M brokered component. Shortly thereafter, it raised another $2M through a short-form offering document (SFOD) financing at $1.15/unit. As with the subscription receipt financing, these units included one-half warrant at $1.75/shr for three years. Finally, the Company raised another $0.8M through a non-brokered unit financing in December. The proceeds were earmarked for expanding production capacity, advancing pharmaceutical formulation development, and general corporate purposes.

RTO in December, followed by Name Change: In December 2016, the Company completed its public transaction through the reverse takeover of Saber Capital Corp., a capital pool company. Shareholders were issued 37.3M shares. It then changed its name to Emblem Corp., and began trading on the TSXV under the ticker EMC.

January Bought Deal Raised another $15.9M: The Company recently completed a $15.9M bought deal private placement at $3.63/special warrant (more than 3x the price of the November 2016 financing). The financing was originally announced as a $10M offering, and was increased based on demand. We estimate the Company’s post-financing cash balance at approximately $40M. EMC intends to use the proceeds to fund expansion of the facility in Paris, Ontario, and for general corporate purposes.

The securities are subject to a four-month hold, but the Company has agreed to use its best efforts to work towards prospectus qualification of the units within 45 days of the closing of the financing. Assuming EMC is successful, the warrants will convert into units on a one-for-one basis. If prospectus qualification does not occur before that deadline, investors will receive 1.05 units/special warrant (instead of 1.00), with the incremental units received effectively being compensation for the hold period on the securities. Each unit includes one share plus one-half warrant with a $4.75/shr exercise price, expiring January 2020 (three years). The Company has the option of accelerating the expiry of the warrants if the VWAP is $7.00/shr+ over a period of 10 consecutive trading days. Full exercise of the warrants would generate gross proceeds of $10.5M.



Business Overview

Emblem Corp. is a licensed producer and distributor of medical marijuana. The Company’s head office is in Toronto, and its production facility is in Paris, Ontario. Emblem is working towards the development of three business verticals, as illustrated in the exhibit below.

Exhibit 8 – Emblem’s Three Vertical Approach

Source: Company Reports

We discuss the verticals more thoroughly in subsequent sections, and summarize them here as follows.

Marijuana Production – The Company is currently producing at an annualized rate of 660 kg (vs. nameplate

capacity of 700 kg). Emblem’s Phase 2 expansion should triple capacity to 2,100 kg, with commissioning expected

this April. The Phase 3 expansion would take annual capacity to 11,600 kg. We believe Phase 3 is almost fully

funded, and could produce annualized revenue of almost $100M. The eventual Phase 4 expansion would add

another 9,500 kg, bringing total annual capacity to 21,600 kg or approximately $180M in annualized revenue.

GrowWise Health – EMC owns a 50% stake in GrowWise, which operates ten education centres (another four to

open soon) that help patients select the most appropriate cannabis product, including those offered by other LPs.

Pharmaceutical Division – Emblem is also developing a business line devoted to developing and marketing

cannabinoid-based medications. These formulations would be subject to approval by Health Canada, and would

be sold in traditional pharmaceutical formats.



Marijuana Production: Rapid Expansion Underway

Emblem has been Licensed to Produce since August 2015: The Company received its initial cultivation license in August 2015, and the license was amended to allow for distribution/sales in July 2016. The current license expires in January 2018, and would then require renewal.

Production Facility is Located Near Major Transportation Arteries: Emblem’s production facility is located in Paris, Ontario, southwest of Toronto, and conveniently located near Highway 403 and Highway 24A.

Exhibit 9 – Facility Location

Source: Google Maps

Site Visit Completed in January 2017: The Paris, Ontario, facility was a pre-existing agricultural facility. The facility includes a 23,500-square foot production building, and a separate (adjacent) 3,500-square foot administration building. We visited the facility in January 2017 and were impressed by the knowledge of the staff, the existing production capability, and significant room for expansion.

Exhibit 10 – The Paris Facility


EMC is Currently Producing at an Annualized Rate of 660 kg/year: Within the existing production building, the Company has three growing rooms – one for vegetation (2,400 square feet), and two for flowering (3,200 square feet in aggregate). The production building also includes drying, packaging, and fulfillment areas, as well as the vault area. Emblem is currently producing at a rate of approximately 55 kg/mo. (equivalent to 660 kg/year).



Phase 2 Expansion should Triple Production Capacity: The Company is also working on completing four additional growing rooms representing 6,800 square feet (the Phase 2 growing rooms). These should be commissioned by April 2017, following which initial production should be ready for sale by July/August 2017. Once complete, these rooms effectively triple the facility’s annual production capacity from 700 kg to 2,100 kg (approximately $17.8M in run-rate revenue, assuming realized pricing of $8.50/gram). The Company’s 300-square foot vault has a Level 8 rating, meaning it is authorized to store up to 625 kg.

Exhibit 11 – Phase 1 and Phase 2 Expansion


Phase 3 and 4 Expansions would take Annualized Revenue Potential to $180M: While the current production building occupies 23,500 square feet, it is located on approximately 4.1 acres – equivalent to almost 180,000 square feet – of industrial zoned land. This gives EMC significant room to expand production capacity, and its strong balance sheet can support rapid growth.

The expansion plan is illustrated in the next exhibit. The existing Phase 1 and Phase 2 production capacity is reflected in the top-left (rotated 90 degrees from the prior exhibit). Emblem’s plan contemplates a Phase 3 and Phase 4 expansion.

Phase 3 – This would involve the construction of another 20 growing rooms, each with an annual production

capacity of 478.5 kg (or just under 40 kg/month), for aggregate annual capacity of 9,500 kg. Management expects

to complete Phase 3 at a capital cost of $40M, or approximately $4,200/kg of capacity. Full capacity production

would generate annualized revenue of $80M, assuming a realized price of $8.50/gram. We note that this phase of

development would include building the infrastructure to support Phase 4. Our model assumes that management

paces construction to meet the opening of the recreational market, so our forecast reflects commissioning in

Q218 and production/sales beginning later in Q318. Management plans to construct Phase 3 as a ‘low-end’

pharma clean room. For example, this means constructing a dedicated, isolated HVAC system, so that the

production area is not sharing air with other parts of the facility. Upon completion of Phase 3, approximately half

of the Company’s land position would still be available for development.

Phase 4 – This phase would be similar in scale to Phase 3 (9,500 kg of annual capacity), although the CAPEX

requirement should be approximately $20M or $2,100/kg. The lower cost reflects the benefit of the

infrastructure build in Phase 3. As with the Phase 3 expansion, this project would be paced based on anticipated

demand from the recreational market.



Exhibit 12 – Phase 3 and Phase 4 Expansion Plans


As shown below, the Company had invested $11M in its facilities as of December 2016. Assuming a realized price of $8.50/gram, operating at full capacity of 21,100 kg would generate revenue of approximately $180M.

Exhibit 13 – Revenue Potential & CAPEX by Phase

PhaseAnnualized Revenue @

Capacity ($M, at $8.50/g)CAPEX ($M)

Planned Capacity

Add (kg/yr)Square Feet (ft) CAPEX / g

CAPEX / square

foot

Exp. Construction

Completion1st Sales

Phase 1 $6.0 700 4,800 August 2015 August 2016

Phase 2 $11.9 1,400 6,800 April 2017 June 2017

Phase 3 $80.8 $40 9,500 60,000 $4.21 $667 May 2018 August 2018

Phase 4 $80.8 $20 9,500 60,000 $2.05 $325 TBD TBD

Total $179 $71 21,100 131,600 $3.34 $536

$11 $5.24 $948

Source: Company Reports, Echelon Wealth Partners

The Patient Registration Process is Straightforward: Patients can register with Emblem by completing the registration form online (see next exhibit for the Company’s branded registration form) or by printing it and filling it out by hand. Both the registration document, and the required medical document from a physician, are submitted to the Company.



Exhibit 14 – Emblem’s Patient Registration Form (left), Medical Document (right)


Emblem’s Client Care team verifies the information with the patient’s doctor, and then notifies the patient by email that the registration is complete, allowing the patient to shop online or by phone.

Emblem Offers a Variety of Products, at Varying Price Points: Emblem currently offers four product categories, encompassing 12 strains, which are illustrated below.

Exhibit 15 – Emblem’s Strain Guide


Selling prices range from $8.00/gram to up to $12.00/gram. As we discuss more thoroughly in our industry report, sativa and indica are the two primary plants used to grow cannabis, although hybrids of the two are also produced. Within those plant types, there are specific strains. Emblem has given its own product names to the strains that it carries. For example, one of the Company’s elevate products category includes a strain known as Strawberry Cough, and it contains approximately 80% sativa/20% indica. It is reported to have been originally developed in 2000 in Connecticut. This strain is known to produce a relaxed and uplifting mood, without excessive tiredness. Emblem’s brand name for that particular product is Sweet Escape, and it currently sells for approximately $8.00/gram. It has a THC content of approximately 18-20%, which is on the higher end for EMC’s product suite. The main terpene – the therapeutic plant compound that produces flavour and fragrance – is linalool, and the resulting strawberry scent is believed to alleviate anxiety and depression.



Exhibit 16 – Emblem’s Strain Guide


GrowWise Health: Filling the Gap

Emblem also owns 50% of GrowWise Health, which provides cannabis education programs to both patients and physicians. GrowWise is being developed to fill the service/knowledge role that pharmacists provide with traditional pharmaceuticals. Emblem has taken a unique approach in developing this aspect of its business organically rather than through acquisitions, such as Aurora Cannabis’ (ACB-TSXV, NR) $10.3M acquisition of CanvasRx last year ($37M including potential milestone payments).

GrowWise Educators Help Patients Select Best Product, and Register with an LP: GrowWise Educators, all registered nurses or registered nurse practitioners (RNs or RPNs) provide personalized guidance for patients. Educators can explain the characteristics and potential side effects of different cannabis strains, and guide patients in strain selection and consumption options (dried flower vs. oils, or a mix for some) based on the patient’s symptoms and other health factors.

GrowWise staff also help patients navigate the registration and order placement systems of various LPs in order to expedite registration and product delivery.

Finally, Educators provide follow-up care and monitoring of patients to ensure that the strain selection and/or dosage is producing the desired outcome.

As of late November, GrowWise had registered over 700 patients with multiple LPs, and is currently seeing 50+ patient orders per week. Approximately 95% of patients register on-site with the help of GrowWise staff.



GrowWise can also help Physicians Gain more Comfort in Recommending Cannabis: Educators can provide physicians with the tools required to determine whether cannabis is appropriate for their patients, including the assessment forms and protocols required by The College of Physicians and Surgeons of Ontario (CPSO) and The College of Family Physicians (CFPC) guidelines. This also includes follow-up care materials and best-practice checklists.

Physician education is proving to be critically important in the cannabis market, as they have generally been slow to begin recommending cannabis out of caution. Education services such as those provided by GrowWise should give physicians further comfort in recommending it as an alternative treatment option. We believe that GrowWise’s CEO, Mr. Harvey Shapiro, is well connected within the general practitioner space, which should support referral volumes.

Exhibit 17 – GrowWise Education Services


Educators have Discretion in Recommending Brands and LPs: We recently had the opportunity to meet with Mr. Adam Saperia, the President of GrowWise, at the Toronto location. We understand that GrowWise has relationships with four LPs (in addition to Emblem) so that it has a full suite of products that it can help patients purchase, allowing Educators to match product characteristics to patient needs at a range of price points. This breadth is increasingly important given the short product supply. The first product choice may not be immediately available, so product depth becomes the key to recommending alternatives.

We understand that GrowWise Educators have full discretion in recommending specific brands, regardless of who the producer is. We believe referral fees are reasonably similar across products of equal price points.

More Locations are on the Way: GrowWise operates education centres within existing medical clinics, and as standalone medical cannabis clinics. In aggregate, it now has 10 locations, including centres in Toronto, North York, Brampton, and Kingston. This includes four centres operating within incumbent medical clinics, and one operating in a rehabilitation centre. The other locations are standalone medical cannabis clinics.

Additional GrowWise locations are expected to open by the end of February. Management expects to have 18 to 20 locations established in various markets in Canada, with a nominal working capital requirement of $2M. Locations are selected based on an assessment of the referral base, the patient population, and the degree of local competition.

EMC has the Option to Acquire the other 50% of GrowWise: The other 50% of GrowWise is owned by White Cedar, a company associated with Messrs. Gordon Fox (EMC’s CEO) and Harvey Shapiro (CEO of GrowWise), both of whom are also members of EMC’s senior management team and board. Emblem has the option of acquiring the White Cedar stake, with that option exercisable during the 15-day period prior to July 26, 2019, at a price equal to one-half of the net book value of GrowWise.



Pharmaceuticals: The Next Level

Somewhat unique amongst LPs, Emblem is also developing a business line devoted to developing and marketing cannabinoid-based medications. These formulations would be subject to approval by Health Canada, and would be sold in traditional pharmaceutical formats such as liquids, gel caps, oral sprays, and inhalers. This would involve extracting and purifying the active components in cannabis, and we expect EMC to employ contract manufacturers for production of the end product.

Management envisions focusing on formulations for pain management, as well as anxiety/sleep disorders. Pain management products would need to offer sustained release to limit the number of doses/day required by the patient. By comparison, anxiety/sleep disorder products need to be fast-acting.

Former Purdue President adds Significant Management Experience: As President of Emblem Pharmaceuticals, Mr. John Stewart is an important addition in this regard. He served as the President/CEO of Purdue Pharma Canada for 15 years, followed by another 7 years as the President/CEO of Purdue Pharma USA (2007-2013).

Purdue Pharma was founded in the late 19th century, and is privately held by the Sackler family. Industry sources estimate its annual revenue at approximately US$3B. Purdue is best known for pain medication, including MS Contin (extended release morphine) and OxyContin, which were launched during Mr. Stewart’s tenure with Purdue. We believe that Mr. Stewart brings a wealth of experience in formulation development and clinical trials, as well as in-depth knowledge of the pain management market and its players. This should benefit EMC as it develops cannabinoid-based drug formulations, specifically those targeting pain management as an alternative to the opioid products currently prescribed.

Pharmaceuticals Offer and Require Precise Dosing and Input Consistency: Part of the physician caution in prescribing cannabis can be attributed to the lack of consumption alternatives to smoking. Until relatively recently, the production and possession of oils, even for medical purposes, was not permitted. The development of pharmaceutical applications based on cannabis will mean standardized, quantifiable dosing that would allow physicians to better monitor and adjust patient consumption. They would also provide patients with a more discrete means of using cannabis as medicine. This kind of product also requires consistently high-quality cannabis as one of the raw materials.

From Emblem’s perspective, the development of drug formulations could represent a revenue opportunity that significantly exceeds the opportunity in the medical market. It would also enable the Company to more fully monetize plant production versus the dried flower that is currently sold. Moreover, it is an opportunity to create intellectual property, which could act as a strong barrier to entry to would-be competitors.

Formulation Development to Begin Shortly: Management expects to begin research in early 2017, and have formulations with Health Canada approval by the end of this year. Emblem intends to spend approximately $10M over the next two to three years to develop six to seven formulations. The Company identified pharmaceutical formulation development as one of the uses of proceeds for its recent financings. Management envisions a spring 2018 launch of pharmaceutical products such as liquids, gel caps, spays, inhalers, and pills.

Health Canada has already approved prescription drugs that use cannabinoids, including:

Cesamet – This is intended to reduce chemotherapy-induced nausea and vomiting (CINV). Unlike other

antiemetics, which turn off the signals that cause nausea and vomiting, Cesamet turns on the signals that prevent

nausea and vomiting;

Marinol – This is prescribed to patients suffering from loss of appetite associated with weight loss in AIDS

patients, as well as for CINV; and

Sativex – This is administered as a mouth spray, and is prescribed to patients suffering from muscle spasticity resulting

from multiple sclerosis. It may also have applications related to brain cancer, arthritis, and neuropathic pain.



Share Structure & Insider Ownership

Including the recently closed special warrant financing (and assuming full exercise of the overallotment), the Company now has just under 70M shares outstanding. We summarize that breakdown in the following exhibit.

Exhibit 18 – Breakdown of Share Ownership by Financing (M)

Shares Owned by / Issued to: OS (M)

Former Emblem Shareholders 37.3

November/December Financings 20.5

Saber (CPC) Shareholders 4.4

January Special Warrant Financing 4.4

Broker Warrants / Fees 2.9

Basic SO 69.6

Former Emblem Shareholders, 37.3,

54%

November/December Financings, 20.5, 30%

Saber (CPC) Shareholders, 4.4, 6%January Special

Warrant Financing, 4.4, 6%

Broker Warrants / Fees, 2.9, 4%

Source: Company Reports, Echelon Wealth Partners

On a fully diluted basis, the total share count approaches 120M. As shown in the next exhibit, the outstanding warrants and options represent significant funding potential for additional CAPEX. This includes $47M in potential proceeds, of which $36.5M is currently in-the-money. The difference reflects the warrants issued in the January 2017 special warrant financing, which have a $4.75/shr exercise price.

Exhibit 19 – Potential Proceeds from Warrant/Option Conversions

Category Shares (M)Proceeds

($M)

ITM

Proceeds

($M)

Basic Shares Outstanding 69.6 - -

Warrants 30.5 $44.2 $33.7

Options 5.7 $2.8 $2.8

Management Performance Escrow Shares 14.1 - -

Fully-Diluted Shares Outstanding 119.8 $47.0 $36.5 Source: Company Reports, Echelon Wealth Partners

The management and board own a meaningful stake in the Company, with an aggregate of 10M shares representing approximately 14% of the basic shares outstanding. The vast majority of this stock is subject to escrow agreements, with 15% of that stock being released every six months (the next release point being in June 2017).



Exhibit 20 – Share Ownership by Management & Board

Individual & Role Shares (M)% of

Basic SO

Harvey Shapiro - CEO of GrowWise 2.8 4.0%

Gordon Fox - CEO 2.7 3.9%

Maxim Zavet - President, Emblem Cannabis 1.7 2.5%

Daniel Saperia - COO 0.9 1.3%

John Laurie - CFO - -

John Stewart - CEO, Pharmaceuticals 1.8 2.6%

Total Senior Management 9.9 14.3%

Lorne Gertner 0.1 0.1%

Jeffrey Fineberg - -

Terry Johnson - -

Total Non-Management Directors 0.1 0.1%

Management & Directors 10.0 14.4% Source: Company Reports, Echelon Wealth Partners

The Balance Sheet: Strong, and Set for Growth

The Company only recently began commercial sales, so the historical financials are not extensive enough to allow for meaningful analysis. On a YTD basis through Q316 the Company had sold approximately 6 kg of dried flower at an average realized price of approximately $4.00/gram. These sales were done on a wholesale basis to another LP, so we expect meaningful price improvement as retail/consumer sales expand.

In November 2016, the Company obtained a new $5.4M interest-only mortgage facility, paying 8% over three years. The proceeds were used to repay $4.4M in mortgage financing, and a note payable of $0.9M. Outside of this, the Company has no debt.

As shown below, the Company’s recent equity financings have positioned it well to finance capacity expansion.

Exhibit 21 – Recent Financing Activity

Closed TypeGross Proceeds

($M)Price Details

Brokered Private Placement $8.0 $1.15

Non-Brokered Private Placement $13.6 $1.15

Short-Form Offering Document (SFOD) Financing $2.0 $1.15 Unit offering, 1/2 warrant for 3 years at $1.75/shr.

Dec-16 Non-Brokered Private Placement $0.8 $1.15 Unit offering, 1/2 warrant for 3 years at $1.75/shr.

Jan-17 Brokered Bought Deal Private Placement $15.9 $3.63Special warrants that convert to units upon prospectus

qualification. Units include 1/2 warrant for 3 years at $4.75

Aggregate Gross Proceeds ($M) $40.3

Nov-16

Subscription receipt offering, converted to units with 1/2

warrant for 3 years at $1.75/shr.

Source: Company Filings, Echelon Wealth Partners



Investment Risks

While this is not an exhaustive list, we view the following as the primary investment risks with respect to EMC. For additional risk considerations for cannabis companies, please refer to our industry report.

Forecasting Risk: Our forecast for revenue is contingent on expansion projects being completed within assumed time frames, subsequent sales volumes, and realized pricing estimates. Should any of these estimates prove materially inaccurate, our estimates for revenue and margins could be negatively impacted.

This is an industry-wide risk, as most LPs have announced significant expansion plans upon which analysts have based their forecasts for revenue and earnings. In the case of Emblem, the risk is somewhat higher because the Company has only recently begun commercial sales, so there is little trailing financial information we can reference in forming our estimates. We believe we have been appropriately conservative with respect to our assumptions for the pace of expansion and subsequent revenue.

Regulatory: There is currently a shortage of product available for medical purposes. The capacity expansions announced by various LPs contemplate continued demand growth, due in part to expectations for the opening of the recreational marijuana market. There is still considerable uncertainty regarding the specifics of the forthcoming legislation (e.g., what LPs will be allowed to do with respect to packaging and advertising), as well as the timing around implementation. These details are needed to more accurately assess the pace of growth. As with Forecasting Risk, this is an industry-wide challenge.

While we view the Pharmaceuticals vertical as offering significant growth potential, the Company will still be exposed to risks associated with drug development, specifically in seeking Health Canada approval. We believe the opportunity warrants the risk.

Competition: In the immediate term, the product shortages reflect an industry faced with excess demand. We expect new production capacity to be readily absorbed in the near term. However, there is the risk that overbuilding occurs at some point, which would pressure pricing. Moreover, producers of dried flower and oil will eventually find that those product categories become commoditized. LPs will need to minimize costs and/or develop distinctive, value-add products in order to prosper.

While EMC is somewhat unique in having already established a division to focus on pharmaceuticals, other LPs have noted plans to eventually expand in this direction. This suggests that competition will eventually intensify here, but we view pharmaceutical development as a competitive necessity.

http://attachment.benchmarkemail.com/c106630/Cannabis_Theme_Report.pdf



Financial Statements

Income Statements (FYE December 31) 2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E

Revenue 0.8 0.9 1.1 1.4 3.7 7.0 35.1 94.0

Cost of Sales (Recovery to Cost of Sales), Net Unrealized Gain on Change in FV 0.9 0.7 0.9 0.9 1.3 3.8 11.8 21.9

Gross Profit (0.1) 0.1 0.2 0.5 2.3 3.2 23.3 72.0

General & Administrative 1.7 0.7 0.8 1.0 1.3 3.8 7.7 14.1

Development 0.8 0.5 0.8 1.0 1.1 3.4 3.7 3.8

Sales & Marketing 0.8 0.3 0.4 0.7 1.1 2.6 7.6 19.7

Fulfillment 0.1 0.1 0.1 0.1 0.3 0.6 1.2 2.3

Depreciation & Amortization 0.6 0.2 0.2 0.2 0.3 0.9 2.8 3.4

Share-based Compensation 0.4 0.1 0.1 0.1 0.1 0.5 0.5 0.5

Advances to Associate 0.6 0.3 0.4 0.4 0.4 1.4 2.2 2.3

Expenses 5.1 2.1 2.9 3.6 4.5 13.2 25.8 46.1

Operating Income (Loss) (5.2) (2.0) (2.7) (3.1) (2.2) (10.0) (2.5) 25.9

Interest Expense 0.8 0.1 0.1 0.1 0.1 0.4 0.4 0.2

Other Expenses 0.1 - - - - - - -

Changes in Fair Value of Financial Instruments 4.4 - - - - - - -

Other Items 5.3 0.1 0.1 0.1 0.1 0.4 0.4 0.2

Earnings Before Income Tax (10.5) (2.1) (2.8) (3.2) (2.3) (10.4) (2.9) 25.7

Income Tax Expense (Recovery) (0.5) (0.6) (0.7) (0.9) (0.6) (2.8) (0.8) 6.9

Net Income (Loss) (10.0) (1.5) (2.0) (2.3) (1.7) (7.6) (2.1) 18.7

Basic WASO 43.9 69.6 69.6 69.6 69.6 69.6 69.6 69.6

Diluted WASO 43.9 119.8 119.8 119.8 119.8 119.8 119.8 119.8

Basic EPS ($0.23) ($0.02) ($0.03) ($0.03) ($0.02) ($0.11) ($0.03) $0.27

Diluted EPS ($0.23) ($0.02) ($0.03) ($0.03) ($0.02) ($0.11) ($0.03) $0.16

Revenue Growth na na 12150% 4671% 398% 808% 400% 168%

Gross Margin (IFRS) (13%) 16% 23% 37% 64% 46% 66% 77%

OPEX Margin 663% 251% 264% 258% 124% 188% 73% 49%

EBITDA (4.6) (1.4) (2.0) (2.4) (1.3) (7.1) 5.6 35.5

EBITDA Margin (594%) (162%) (182%) (173%) (36%) (101%) 16% 38%

EBITDA Growth nmf nmf nmf nmf nmf nmf nmf 530%

Return on Equity (34%) (14%) (20%) (19%) (14%) (16%) (5%) 29%

Return on Invested Capital (51%) (51%) (64%) (54%) (22%) (25%) (2%) 45%

Balance Sheets (FYE December 31) 2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E

Cash & Equivalents 25.2 38.0 35.4 38.7 26.0 26.0 2.7 22.0

Accounts Receivable 0.2 0.2 0.2 0.3 0.8 0.8 4.0 5.2

Biological Assets 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Inventory 1.0 1.1 1.5 1.7 4.5 4.5 12.0 15.7

Prepaid Expenses and Other Current Assets 0.1 0.1 0.1 0.1 0.3 0.3 1.4 1.9

Current Assets 26.5 39.6 37.4 41.0 31.7 31.7 20.3 44.9

Property & Equipment 9.6 10.1 10.5 15.0 24.2 24.2 43.6 36.4

Total Assets 36.1 49.6 47.9 56.0 55.9 55.9 63.9 81.3

Accounts Payable & Accrued Liabilities 0.5 0.6 0.7 0.9 2.4 2.4 12.0 15.7

Provision 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Current Portion of Mortgages Payable - - - - - - - -

Current Liabilities 1.1 1.2 1.3 1.5 3.0 3.0 12.6 16.3

Mortgages Payable 5.4 5.4 5.4 5.4 5.4 5.4 5.4 -

Non-Current Liabilities 5.4 5.4 5.4 5.4 5.4 5.4 5.4 -

Total Liabilities 6.4 6.5 6.7 6.9 8.4 8.4 18.0 16.3

Shareholders' Equity 29.7 43.1 41.2 49.1 47.5 47.5 45.9 65.1

Total Liabilities & Shareholders' Equity 36.1 49.6 47.9 56.0 55.9 55.9 63.9 81.3




Cash Flow Statements (December 31 FYE) 2016E Q117E Q217E Q317E Q417E 2017E 2018E 2019E

Net Income (Loss) (10.0) (1.5) (2.0) (2.3) (1.7) (7.6) (2.1) 18.7

Change in Fair Value of Financial Instruments 4.4 - - - - - - -

Change in Fair Value of Biological Assets (0.8) - - - - - - -

Loss on Class A Preferred Share Liability 0.1 - - - - - - -

Non-Cash Interest 0.5 - - - - - - -

Depreciation & Amortization 0.9 0.5 0.5 0.6 0.8 2.4 7.6 9.2

Advances to Associate 0.4 - - - - - - -

Stock-based Compensation 0.4 0.1 0.1 0.1 0.1 0.5 0.5 0.5

Non-Cash Items 6.0 0.6 0.6 0.7 0.9 2.9 8.1 9.6

Operating Cash Flow (before Working Capital) (4.0) (0.9) (1.4) (1.7) (0.8) (4.7) 6.0 28.4

Net Change in Working Capital (0.3) (0.1) (0.2) (0.1) (1.9) (2.4) (2.3) (1.7)

Cash From (Used In) Operating Activities (4.3) (1.0) (1.6) (1.8) (2.7) (7.2) 3.7 26.7

Mortgage Payable 1.4 - - - - - - (5.4)

Note Payable (1.0) - - - - - - -

Proceeds from Warrant Conversions - - - 10.1 - 10.1 - -

Proceeds from Private Placements (net costs) 28.6 - - - - - - -

Proceeds from SFOD (net costs) 1.9 - - - - - - -

Proceeds from Special Warrant Financing (net costs) - 14.9 - - - 14.9 - -

Cash From (Used In) Financing Activities 30.8 14.9 - 10.1 - 25.0 - (5.4)

Purchase of Property, Plant & Equipment (2.1) (1.0) (1.0) (5.0) (10.0) (17.0) (27.0) (2.0)

Investment in and Advances to Associate (0.5) - - - - - - -

Cash From (Used In) Investing Activities (2.6) (1.0) (1.0) (5.0) (10.0) (17.0) (27.0) (2.0)

Net Increase (Decrease) in Cash 24.0 12.8 (2.6) 3.3 (12.7) 0.8 (23.3) 19.4

Beginning Cash 1.2 25.2 38.0 35.4 38.7 25.2 26.0 2.7

Ending Cash 25.2 38.0 35.4 38.7 26.0 26.0 2.7 22.0

Operating Cash Flow (4.0) (0.9) (1.4) (1.7) (0.8) (4.7) 6.0 28.4

Operating Cash Flow per Share ($0.09) ($0.01) ($0.01) ($0.01) ($0.01) ($0.04) $0.05 $0.24

Growth (y-y) nmf nmf nmf nmf nmf nmf nmf 380%

Free Cash Flow (6.6) (2.0) (2.6) (6.7) (12.7) (24.0) (23.1) 24.7

Free Cash Flow per Share ($0.15) ($0.02) ($0.02) ($0.06) ($0.11) ($0.20) ($0.19) $0.21

Free Cash Flow Yield (4%) (2%) (2%) (6%) (12%) (6%) (5%) 6%




Senior Management

Gordon Fox – CEO

Mr. Fox is a former partner at Goodman & Carr LLP, where from 1979 to 1995 he practiced securities law. He is a Co-Founder of White Cedar Pharmacy, serving over 2,600 patients in Ontario. He also founded Lytton Capital, a Limited Market Dealer, in 1995.

Harvey Shapiro – CEO, GrowWise Health

Mr. Shapiro was Co-founder & CEO of Dynacare from 1988 to 2002. Dynacare was a TSX-listed medical diagnostic services company acquired by Laboratory Corp. of America in 2002. Mr. Shapiro also practiced Securities Law at Goodman & Carr LLP from 1973 to 1987, and he is closely connected within the Canadian pharmacy community.

John Stewart – CEO, Pharmaceutical Division

Mr. Stewart is former President and CEO of Purdue Pharma Canada (1991-2006) and Purdue Pharma USA (2007-2013), one of the largest privately held pharmaceutical companies in the world. He launched 11 new products, including Ms Contin, OxyContin, and Biphentin. Mr. Stewart has extensive experience in formulation development, clinical trials, and medical communications.

John Laurie – CFO

Mr. Laurie is former Treasurer and CFO with a number of Canadian public and private companies. Previously with Moore Wallace and George Weston Limited, he brings a broad range of financial experience including budgeting and budgetary control, capital expenditure management, internal controls design and monitoring, cash flow modelling, tax, and risk management.

Maxim Zavet – President, Emblem Cannabis

As founding partner of Levy Zavet PC, Mr. Zavet brings extensive experience within the medical marijuana industry. From his knowledge of the ACMPR in Canada and in-depth knowledge of medical marijuana to his vast, world-wide network of contacts, he holds a first-rate comprehension of genetics and cultivation and understands just about every aspect of the industry’s current and future needs.

Daniel Saperia – COO

Mr. Saperia commenced his career managing a boutique public accounting firm that serviced a group of very prestigious clients. He then served as President and CFO for a period of 15 years at two highly regarded international manufacturing companies. Mr. Saperia also continues to hold the position of President and COO of a leading specialty pharmacy company. Under his leadership, these companies developed reputations as industry leaders, while experiencing significant growth and enhanced financial performance.



Board of Directors

Gordon Fox – CEO (see prior section)

Harvey Shapiro – CEO, GrowWise Health (see prior section)

John Stewart – CEO, Pharmaceutical Division (see prior section)

Terry Johnson

Mr. Johnson has worked for Warner Lambert (Pfizer), Johnson & Johnson, Block Drug, and Organon Canada. He was also a partner at Lindley Billinghurst Johnson Advertising, one of the first pharmaceutical agencies in Canada specializing in pharmaceutical communications. In 1998, Mr. Johnson purchased Allard Advertising to form Allard Johnson Communications. He founded Veritas Communications, a public relations firm and became a partner in Integrated Healthcare Communications (IHC), specializing in physician education. Mr. Johnson is a member of the Pharmaceutical Marketing Hall of Fame and The Canadian Institute of Marketing.

Jeffrey Fineberg

Mr. Fineberg, B. Comm., L.L.B, is Counsel, Dentons Canada LLP, a position that he has held since February, 2011. Prior to that date, Mr. Fineberg was a Partner, Dentons Canada LLP from April 2007, and prior thereto, from February 1978, he was a Partner, Goodman and Carr LLP. Mr. Fineberg’s legal practice primarily consists of private mergers and acquisitions and financings, private equity and project finance matters, with particular emphasis in the real estate and healthcare sectors. Mr. Fineberg is a director of a number of private companies, including the parent company of White Cedar, which is a 50% shareholder of GrowWise, in which Emblem is the other 50% shareholder.

Lorne Gertner

Mr. Gertner is a businessman with experience in the fashion, retail, architecture, real estate, finance, and cannabis industries. Mr. Gertner is a Co-founder and former chairman of PharmaCan Capital Corporation and he is a Co-founder of Tokyo Smoke. Mr. Gertner is the current Chairman of RG2 Capital Corp., an investment merchant bank in the cannabis sector. Mr. Gertner is currently on the board of Hempco Food and Fiber Inc. (HFF-TSXV, NR) and on the board of the Design Exchange. Mr. Gertner is a graduate of The John H. Daniels Faculty of Architecture, University of Toronto, and has completed the ICD.D designation at the Rotman School of Management.



Important Information and Legal Disclaimers

Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the information is believed but in no way warranted to be reliable, accurate and appropriate. Echelon Wealth Partners Inc. employees may buy and sell shares of the companies that are recommended for their own accounts and for the accounts of other clients.

Research Dissemination Policy: All final research reports are disseminated to existing and potential clients of Echelon Wealth Partners Inc. simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list of Echelon Wealth Partners Inc. Clients may also receive Echelon Wealth Partners Inc. research via third party vendors. To receive Echelon Wealth Partners Inc. research reports, please contact your Registered Representative. Reproduction of any research report in whole or in part without permission is prohibited.

U.K. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. ECHELON WEALTH PARTNERS INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.

ANALYST CERTIFICATION

Company: Emblem Corp. | EMC: TSXV I, Russell Stanley, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. IMPORTANT DISCLOSURES

Is this an issuer related or industry related publication? Issuer

Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer? If Yes: 1) Is it a long or short position? Yes; and, 2) What type of security is it? Common shares

No

Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? No

Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? No

Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?

No

During the last 12 months, has Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer?

No

During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? No

Has the Analyst had an onsite visit with the Issuer within the last 12 months? Yes

Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? No

Has the Analyst received any compensation from the subject company in the past 12 months? No

Is Echelon Wealth Partners Inc. a market maker in the issuer’s securities at the date of this report? No



RATING DEFINITIONS

Buy The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time horizon.

Speculative Buy The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or financial risks that are higher than average.

Hold The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon.

Sell The security represents poor value and is expected to depreciate over the next 12 month time horizon.

Under Review While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price move.

Tender Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer.

Dropped Coverage Applies to former coverage names where a current analyst has dropped coverage. Echelon Wealth Partners will provide notice to investors whenever coverage of an issuer is dropped.

RATINGS DISTRIBUTION

Recommendation Hierarchy Buy Speculative Buy Hold Sell Under Review Restricted Tender

Number of recommendations 35 26 5 0 2 2 1

% of Total (excluding Restricted) 51% 38% 7% 0% 3%

Number of investment banking relationships 8 5 0 0 0 2 0

% of Total (excluding Restricted) 62% 38% 0% 0% 0%

PRICE CHART, RATING & PRICE TARGET HISTORY

Date Target Rating

3 Feb 2017 $5.25 Speculative Buy

Coverage Initiated: Feb 3, 2017

Data sourced from: Capital IQ

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Dec 16Dec 16Dec 16Dec 16Dec 16Jan 17Jan 17Jan 17Jan 17Jan 17Jan 17Jan 17Jan 17Feb 17

Emblem Corp. (TSXV:EMC)

Price Price Target Revisions



Toronto Wealth Management

1 Adelaide Street East, Suite 2000

Toronto, ON M5C 2V9

416-572-5523

Toronto Capital Markets

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Toronto, Ontario M5X 2A2

416-649-4273

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Calgary Wealth Management

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Vancouver Wealth Management and Capital Markets

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Victoria Wealth Management

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Oakville Wealth Management

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289-348-5936

London Wealth Management

495 Richmond St., Suite 830

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519-858-2112

Saskatoon Wealth Management

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306-667-2282

Tokyo Capital Markets

Holland Hills Mori Tower; RoP #603

5-11-1 Toranomon, Minato-Ku,

Tokyo, 105-0001, Japan

+81.90.1470.1684

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