Alex Cutulenco Hempco Food and Fiber...

Equity ResearchFood Processing | Canadian Small Cap

May 31, 2016

Alex [email protected]

Price Performance - since QT on Apr. 20, 2016

Market Data (TSXV:HFF)Price (May 30, 2016 close) $0.4352 Week Range $0.42 - $0.72Market Cap (mm) $12.8Shares Outstanding (basic, mm) 29.7Free Float 29%Average Daily Volume (30 days) 27,255

Total Debt (mm) $1.1Cash & Short-Term Investments (mm) $0.8Total Assets (mm) $4.0

Headquarters Burnaby, BC, Canada

Top ShareholdersCharles Holmes, CEO 33.6%Angela Holmes, COO 33.6%Varshney Capital Corp. 3.7%Praveen Varshney, CFO 0.5%

All figures in CAD unless otherwise stated.Source: Thomson Reuters (5/30/2016)

Hempco Food and Fiber Inc.(TSXV:HFF)

Global Leader and Distributor of Hemp-Based Foods: Initiating Coverage at Outperform

Company Description Hempco Food and Fiber Inc. (“Hempco”) is a Canadian-based processor of industrial hemp. The company sources hemp from local Canadian farmers, and uses its manufacturing facility in Manitoba to process the hemp into nuts, oil, and protein powder. Up until May 2016, Hempco was purely focused on bulk sales of the three product categories. However, recent growth effort have been put towards launching a retail brand, PLANETHEMP, with plans of distributing consumer packaged goods (CPG) into North America, Europe and Asia.

Investment Highlights• Family run business with 67% insider holding, providing high vested interest

for the company’s success. Additionally, CEO Charles Holmes has already built a successful hemp foods company prior to launching Hempco, and is one of the most experienced managers within the hemp industry. Collectively, the team has over 14+ years of industry expertise in organic food and hemp seed processing/manufacturing.

• Hempco is rising higher in the value chain by launching its own line of consumer packaged goods via a retail distribution channels under the brand name PLANETHEMP. Company has developed a relationship with 1000+ stores retailer in the UK, and shipped its first batch of products in early May of 2016.

• The pie is expanding, and Hempco is cutting itself a larger slice. Strong global demand for hemp-based products have pushed Hempco’s revenues to $4.0 million in 2015, a 25% Revenue CAGR over the past 4-year period. Hemp product sales in the United States are projected to hit $1 billion by 2020, with other visible growing demand in other parts of the world such as Asia and Europe.

Financial AnalysisThe company has generated $4 million in revenue over the last twelve months, earnings a rough 30% gross margin and breaking even after accounting for operating expenses. Looking at Hempco’s main geographic channels, we forecast a blended bulk sales growth rate of 22% over the next two years, with added CPG sales reaching $2.7 million by 2017. Valuation wise, Hempco’s 3.4x LTM sales multiple is dramatically smaller than that exhibited in the industry, and should rise as CPG sales start to pick up. We also note that exit multiples within the industry have averaged 3.2x sales, with Manitoba Harvest being sold to Compass (NYSE:CODI) for 4.1x sales, and Vega sold to WhiteWave Foods (NYSE:WWAV) for 5.5x.

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Ubika Research Hempco Food and Fiber Inc.

- May 31, 2016

Table of Contents

Investment Thesis ................................................................................................................................................. 3Building a Brand: PLANETHEMP Enters UK & Canada ................................................................................................................... 3

Management has Already Built a Successful Hemp Foods Company Before ..................................................................................... 3

Unique Access to Highly Regulated Supply Base ............................................................................................................................... 4

Hemp Consumption is Steadily Rising ................................................................................................................................................ 4

The Company ........................................................................................................................................................ 5Bulk Sales ............................................................................................................................................................................................. 5

Hemp Seeds ...................................................................................................................................................................................... 5

Hemp Oil .......................................................................................................................................................................................... 6

Hemp Protein ................................................................................................................................................................................... 7

Rising Demand in Asia .................................................................................................................................................................... 7

Retail Sales - Consumer Packaged Goods ........................................................................................................................................... 8

UK Launch ....................................................................................................................................................................................... 8

Canada Launch ................................................................................................................................................................................ 8

Upside: Product Expansion into Meat & Dairy Alternatives ................................................................................................................ 8

The Industry: Hemp Foods ................................................................................................................................. 9Regulation: Hemp Seed Cultivation & Processing in Canada ............................................................................................................. 9

Hemp’s Struggle for Consumer Approval: Hemp is NOT Marijuana ................................................................................................... 9

“Gluten-free” as a Case Study ...................................................................................................................................................... 10

Why Industrial Hemp? ........................................................................................................................................................................ 12

Competition ......................................................................................................................................................................................... 13

Key Performance Indicators .......................................................................................................................................................... 14

Financial Analysis, Forecasts & Valuation ....................................................................................................... 15Cap Table ....................................................................................................................................................................................... 16

Comparable Companies ..................................................................................................................................................................... 17

Risks ..................................................................................................................................................................... 18Prolonged sales periods may hurt the share price in the short term .................................................................................................... 18

Profit margins may be under pressure ................................................................................................................................................. 18

Foreign currency risk .......................................................................................................................................................................... 18

Conclusion ........................................................................................................................................................... 18Appendix A: Recent News ................................................................................................................................. 19Appendix B: Management & Board of Directors ............................................................................................ 20Appendix C: Background info. on Hemp ........................................................................................................ 21

Investment Thesis

Building a Brand: PLANETHEMP Enters UK & Canada Starting out as a research and development company in 2004, and eventually building up sales to reach over $4 million in 2015, Hempco is finally starting to take advantage of its superior product by launching its own retail line. The consumer packaged goods product line will be branded under “PLANETHEMP”, and is expected to hit stores in the UK (May 2016) and Canada (July 2016).

Entering retail will effectively build another revenue segment for Hempco which was not there before. Apart from the obvious projected boost in sales, a retail strategy generally commands higher margins, as the added packaging costs underweight the premium paid for the product. Additionally, building a brand presence is beneficial for Hempco in the long term as it ventures into new product categories such as meat and dairy alternatives.

We see the retail launch adding $2.7 million to the top line within the first full year of operations (2017), and earning a 40% gross margin. Competition for similar product categories is often accepted and encouraged amongst retail store chains (think about all the cereal boxes you see within the aisles), so we have no doubt about PLANETHEMP actually generating retail sales and stealing market share away from competition.

Management has Already Built a Successful Hemp Foods Company Before Charles Holmes and his sister Angela Holmes are Canadian pioneers within the hemp-based foods industry. Going through their own respective health challenges, the two went on to discover an ultimate superfood for humans - a vegan protein source called hemp – and have since developed their own proprietary technology to process the hemp. Thereafter, they formed their first company in 2002 called Living Harvest and grew the company to 10 employees and $6 million in sales by the 4th year.

Their eventual exit from Living Harvest was somewhat bitter, considering their equity holding was diluted after several rounds of financing. However, this sprung them to develop another company – Hempco, keeping their proprietary processing technology, product expertise, as well as adding some key members to the team.

One of those members being Praveen Varshney, a partner at a reputable Vancouver-based venture capital group. He was the co-founder of Mogo Finance, a Canadian consumer lending company, which later completed a $50 million IPO on the TSX. He was also co-founder to a predecessor of Mountain Province Diamonds (TSX:MPV), the largest new diamond mine in the world with partner De Beers. His capital group were also investors in several other interesting deals such as RentMoola, Skillsdox, Canada Zinc Metals, Carmanah Technologies and Coastal Contacts. He is a resourceful Canadian financier, which I have had a previous working relationship with, and I will help Hempco with corporate development and capital budgeting.

- May 31, 2016


Unique Access to Highly Regulated Supply Base Over the years, Hempco has developed close relationships with a number of farmers across Canada. Not only does this give them access to a regulated industrial hemp supply base, but it also gives them the ability to take advantage of their bargaining power for hemp purchases. This is a huge competitive advantage over potential industry entrants, who would need to build these types of relationships, as well as gain production expertise – another unique trait about Hempco. These relationships with farmers also guarantee product quality control.

Hemp Consumption is Steadily Rising Industrial hemp has many end-product channels. Besides processing hemp for nutritional consumption, the fiber from stalks can be used in making paper, textiles, rope, and construction materials. The Hemp Industries Association (HIA) estimates that retail sales of hemp food and body care products in the United States totaled $283 million in 2015 (up from $200 million in 2014), with total retail sales of all hemp products sold of $573 million is 2015.

The market is growing, and is projected to hit $1 billion in sales by 2020, in the United States alone. Other markets such as Australia, Korea and parts of Europe are also seeing strong industry growth. Europe now has a total hemp cultivation area of over 25,000 ha, which is roughly three quarters the size of Canada’s 34,000 ha of cultivated area. Clearly, other farmers around the world are also recognizing the strong demand for this foods category.

- May 31, 2016


The Company

Hempco Food and Fiber Inc. is a company which originated via a Qualifying Transaction (QT) of the assets of Hempco Canada Superfoods Inc. (formerly Dharma Distributors Ltd.) by a Capital Pool Company (CPC), Genview Capital Corp. Following the completion of the QT, the company changed its name to Hempco Food and Fiber Inc. (“Hempco”) and began trading on the TSXV under the ticker symbol “HFF” as of April 20, 2016.

Hempco has been operating since 2008, with a business model of buying industrial hemp from farmers, and processing the hemp into nuts, protein, and oil products for bulk resale.

Hempco is led by Charles and Angela Holmes - long-time pioneers and innovators in hemp research, advocacy and education. Charles spent years learning from experts in the foods and nutrition industry about natural solutions to his personal health challenges, which resulted in him building his first company – Living Harvest. Surprisingly enough, due to several capital raises by Living Harvest over the 2005-2010 terms, Charles’ ownership of the firm was heavily diluted. At which point, he stepped down, and started Hempco – with Living Harvest remaining as a current customer.

Up until May of 2016, Hempco was strictly focused on bulk sales of their processed products only. Building relationships with a number of key Canadian hemp seed farmers, Hempco processes the seeds at its 20,000 sq. ft. manufacturing plant in Manitoba and distributes their products to 7 countries.

Bulk SalesCompany’s bulk sales comprise of three products: nuts, oils, and protein powder. Some of the company’s key bulk sales customers include Specialty Commodities, Seoulutions (Korea), Naturally Splendid, Earth Circle Organics, Living Harvest, Vega, and others. Out of total sales, 75% are exported internationally to countries such as Germany, the United States, Mexico and others; while the other 25% is sold domestically in Canada.

Hemp Seeds

- May 31, 2016

Ubika Research

Figure 1: Hempco’s Hemp Seeds

Source: Company Website

Hempco Food and Fiber Inc.

Key Selling points:

• Certified organic and “beyond organic” SAFE certified (soil supplemented and responsibly grown - no spray of chemicals, pesticides or herbicides directly onto the crops)

• Complete and easily digestible highest quality edestin protein source

• Ideal ratio of Omega 3 to 6 Essential Fatty Acids

• Packed with vitamins and minerals

• Hemp seed is a one-seeded (same as a sunflower seed) and has no enzyme inhibitors like grains, nuts or legumes

• Gluten free which makes it easy to digest

Gross Profits: 50% - 60%

Hemp Oil

- May 31, 2016

Figure 2: Hempco’s Hemp Oil


Ubika Research

Key Selling points:

• Certified organic and SAFE certified

• Ideal balanced ratio of Omega 3 to 6 Essential Fatty Acids

• Extra virgin cool pressed (less than 50C), paper filtered and unrefined



Hemp Protein

Ubika Research

- May 31, 2016

Figure 3: Hempco’s Protein


Key Selling points:

• Certified organic and SAFE certified

• Has all 10 essential amino acids

• Protein powder is made from taking what’s left over after the hemp seeds have been pressed for oil, cold milling it, and carefully screening away most of the shells.

• Left with a protein powder superfood that is 50% protein


While most hemp proteins contain fewer grams of protein relative to generic whey protein, the abundance of omega 3 and 6 essential fatty acids, fiber, vitamins and minerals make it an appealing product, and most importantly, a substitute to high density protein powder.

Rising Demand in AsiaHempco has entered into an exclusive one-year distribution rights agreement with Seoulution Corp, an international South Korean trading company, to supply hemp food products, including hulled hemp seed valued at approximately CAD$3 million. The company will be distributing hemp to South Korea, Japan, China, Taiwan, Indonesia, Malaysia and Singapore.

Hempco has been supplying hemp seeds to Korean consumers since November 2015. A first order of 20,000 lbs was marketed on a home shopping channel, to test the Korean consumer market for hemp seed product demand. The products were successfully sold out within an hour. The results were a massive success in Korea and several more orders have been fulfilled. The $3 million backlog is currently being serviced by Hempco.


Retail Sales - Consumer Packaged Goods In an attempt to grow their business and gain global ground, Hempco launched a retail brand under the name “PLANETHEMP” in May 2016. The consumer packaged goods line will include packaged hemp seeds, hemp snacks, packaged oils, packaged protein powder, and supergreens.

- May 31, 2016

Figure 4: PLANETHEMP Products and Branding


Ubika Research

UK LaunchThe company has developed a working relationship with a giant retailer in the UK for the distribution of the PLANETHEMP product lines. This retailer has over 1,000 store locations, however the preliminary retail launch will occur in waves. The first launch occurred in the beginning of May of 2016, with products going out to a few select locations.

Canada LaunchHempco is currently in negotiations with several natural foods and grocery store distributors. The company is looking to enter into natural food stores such as Tree of Life and London Drugs, as well as larger distributors such as Costco.

Upside: Product Expansion into Meat & Dairy AlternativesApart from manufacturing protein, oils and seeds, the company is already considering additional product entry categories such as meat and dairy alternatives. Product development is already underway, and we should get further visibility into this product expansion in Q3/2016.

As stated earlier, the launch of the PLANETHEMP brand is an extremely important step for the company. With the launch of the new product categories, consumers will already be accustomed to the PLANETHEMP brand, overall speeding up product adoption and purchases.


The Industry: Hemp Foods

Regulation: Hemp Seed Cultivation & Processing in Canada In the 1980s and 1990s, there was increased interest for the cultivation of industrial hemp as a potential source of new jobs in the agricultural and industrial sectors. As well, there was an increased need to develop alternative sources of fiber. Research conducted between 1994 and 1998 showed it could be successfully grown in Canada as a separate entity from cannabis (marijuana). With the demand and encouraging research findings, Health Canada chose to give the agricultural and industrial sectors the opportunity to grow and exploit industrial hemp in a controlled fashion. Laws were there-onward amended to allow for the cultivation of industrial hemp.

The Industrial Hemp Regulations (IHR) enable persons/companies to cultivate and process industrial hemp for commercial purposes through a licensing system, with the first commercial license issued in May 1998 in Canada.

Hempco’ received their license in January 2003.

As for the United States, 28 states may currently grow hemp. The Industrial Hemp Farming Act was introduced in the US on January 2015, and if passed, the legislation would remove all federal restrictions on the cultivation of industrial hemp.

Hemp’s Struggle for Consumer Approval: Hemp is NOT MarijuanaAfter speaking with various friends, family members, and other retail investors, the conception of “hemp” as being conversely related to “marijuana” is undeniably evident. People still don’t understand the difference between hemp and marijuana, and this is a real obstacle for the industry as a whole to overcome, if it ever wishes to reach tremendous growth.

Analysts at Ubika Research surveyed 50 people across Canada (families, investors, engineers, students, and other), and asked them a simple question of “Do you know the difference between Hemp and Marijuana?”. From the survey, 41 out of the 50 respondents did not know the difference or gave a wrong explanation.

- May 31, 2016

Ubika Research

Figure 5: Hemp Survey: Do you know the difference between Hemp and Marijuana?

Source: Ubika Research (05/20/2016)

18%

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Did not know the difference

Gave a wrong explanation


- May 31, 2016

Ubika Research

This lack of knowledge is definitely a point of concern for industry participants as there is a certain level of education which will need to be enforced upon the consumers in order for them to buy the products. This enforced education will come out of the companies’ marketing budgets in the form of advertising, product samples, social media expert talks, and other.

In the meantime, please refer to “Appendix C: Background Info. on Hemp” to understand the difference between hemp and marijuana.

Long story short … Hemp and Marijuana come from the same plant - Cannabis Sativa L - whereas Hemp refers to the industrial use of cannabis stalk and seed for textiles, foods, papers; and Marijuana refers to the medicinal, recreational or spiritual use involving the smoking of cannabis flowers. The difference between the two is the THC content (Tetrahydrocannabinoids - the intoxicating ingredients that make you high). Industrial hemp contains only about 0.3% - 1.5% while marijuana contains about 5% - 10% or more THC. A maximum THC content of 0.3% is the regulation for hemp cultivation in the European Union and Canada.

“Gluten-free” as a Case StudyThe term “gluten-free” has been cleverly marketed over the last decade, as a must-have for dieters and healthy eating people across the world. Ask your friend’s girlfriend if she buys gluten-free bars and snacks, and the chances of her replying with a “yes” are almost guaranteed. Ask her if she is actually gluten-intolerant, and a “no” is almost also certainly guaranteed.

Figure 6: Google Trends: “gluten free” vs. “hemp”

Source: Google Trends (05/12/16), Ubika Research

A look at the Figure above shows just how much the term “gluten-free” has risen in interest (based on Google Trends) over the last 10 years. But what is it that has created all of this?Marketing.


- May 31, 2016

Ubika Research

Figure 7: Fastest Rising Trends in Food & Drink Product Launches (Global); Gluten-free Claims in Food & Drink Product Launches (by region); Sales of Products that Carry a Gluten-Free Label (U.S.)

Source: Mintel GNPD, Nielsen

The reality is that Celiac Disease (the medical term for gluten intolerance, in which the absorptive surface of the small intestine is damaged by gluten) affects less than 1% of the population. Yet despite the rarity of celiac disease, a growing number of people are adopting a gluten-free lifestyle. In Australia, for example, 1 in 10 people adopt a gluten-free lifestyle unnecessarily - in the mistaken belief that diets containing wheat are ‘unhealthier’, inadvertently putting themselves at risk of a nutritional deficiency.

Yet, this sort of marketing has created a $23 billion-dollar industry for gluten-free products in the United States alone.

We are not implying that this is a bad industry – just that the consumer packaged goods industry is strongly driven by marketing dollars. If hemp-based products are to experience the same growth pattern seen with “gluten-free”, then industry participants will need to focus a lot of their time and energy into educating consumers, and marketing their brand/product/idea.


https://consensus.nih.gov/2004/2004CeliacDisease118Program.pdf#page=40

https://consensus.nih.gov/2004/2004CeliacDisease118Program.pdf#page=40

http://www.norandapharmacy.com.au/health-articles/one-in-10-adopt-a-gluten-free-lifestyle-unnecessarily

- May 31, 2016

Ubika Research

Why Industrial Hemp?Industrial hemp cultivation has many end-product channels. Besides processing hemp for nutritional consumption, the fiber from stalks can be used in making paper, textiles, rope, and construction materials; while the industrial hemp grain can be used in food products, cosmetics, plastics and fuel. Additionally, the cultivation/farming process is environmentally sustainable, not requiring any use of pesticides or other agricultural chemicals, which reduces the overall costs for farmers.

Nutritionally speaking, hemp provides an ideal 1:3 ratio of Omega 3 (O3) to Omega 6 (O6) Essential Fatty Acids (EFA) – something that our body does not naturally produce, but needs. The necessity of EFAs in our diet is what made Fish Oil supplements so successful (another successful marketing ploy used by the fitness industry). However, the advantage that hemp has over fish oil is that hemp delivers both the O3 and O6 EFA, whereas fish oil only delivers O3 EFA.

We see strong demand arising for hemp as an alternative to meat/fish products. As is the case with Korea’s recently placed $3 million order for Hempco’s products.

Figure 8: Hemp Foods Sales in the United States

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Source: Hemp Industries Association, SPINS (May 9, 2016)

The Hemp Industries Association (HIA) estimates that retail sales of hemp food and body care products in the United States totaled $283 million in 2015 (up from $200 million in 2014), with total retail sales of all hemp products sold to be $573 million is 2015. To answer the question of “Why Industrial Hemp?” – because the market is growing, and is projected to hit $1 billion in sales by 2020, in the US alone.

Canadian sales are estimated to be approximately $20 - $40 million, and expected to rise to $40 - $80 million by 2020.


http://www.thehia.org/HIAhemppressreleases/4010402

- May 31, 2016

Ubika Research

CompetitionThe number of competitors and the degree of competition varies greatly within the food and food processing industry. Looking specifically at hemp based products, there appears to be a large selection of brands, which offer similar products.

The industry is mostly saturated by small private companies, with only a handful of publics. We believe that the current market leader in the industry is Manitoba Harvest, a company owned by Compass Diversified Holdings (NYSE:CODI). Manitoba Harvest carries its products in about 7,000 retail stores across the U.S. and Canada, and have generated $41 million in sales for 2015.

We believe that there are a couple of factors which differentiates companies within this industry, namely the breadth of the companies’ products, and its distribution channels.

Figure 9: Competition Matrix (Product Selection vs. Product Distribution)

Source: Hemp Industries Association, SPINS (May 9, 2016)

We think that Hempco ranks highest within this competition matrix because of its’ strong global product distribution. Moreover, they are product visionaries, already looking at building additional product channels.

Apart from these two measures, there are also other industry-specific metrics we would like to take a look at, as demonstrated on the next page.

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Distribution


http://www.thehia.org/HIAhemppressreleases/4010402

- May 31, 2016

Ubika Research

Key Performance Indicators

Profit MarginsAlthough profitability is important in any kind of business, it is especially true with Consumer Packaged Goods (CPG). The table below summarizes some of the companies we were able to gather info on. Although Hempco’s GP margin isn’t as high as Manitoba Harvest’s, the company still manages to record better net income margins.

Figure 10: Global CPG Brands’ Marketing Expenditure as % of Sales

Source: Ubika Research, Thomson Reuters (05/17/2016)

Although these are multi-billion dollar companies, the concept of high marketing spend still applies. As a percentage of sales, even the most well-known brands of the world spend anywhere from 5% to 27% on branding and advertising. This translates into billions of dollars annually just to remain present on top of consumers’ minds.

As a comparison to the hemp industry, Manitoba Harvest focuses the majority of marketing spend in three key areas: demonstrations/sampling, fixed trade spending and promotions. They distributed two million product samples in 2015 alone.

Hempco is looking to do the same. With the launch of the PLANETHEMP brand, the company is scheduled to host/appear in 6-8 product events in 2016, while also building a social media presence, giving product samples and running Google Ads campaigns.

$7.6 billion, 27%

$1.0 billion, 12%$878 million, 11%

$2.5 billion, 10% $4.0 billion, 9%$562 million, 8% $473 million, 7% $898 million, 7%

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Level of MarketingMarketing is the lifeblood of a good CPG company. To amplify this point, we would like to point your attention to the figure below.

Financial Analysis, Forecasts & Valuation

The company has generated $4 million in revenue over the last twelve months (LTM), earnings a rough 30% gross margin and breaking even after accounting for operating expenses.

- May 31, 2016

Figure 11: Bulk Sales Revenue & GP Margins

Source: Ubika Research, Sedar Filings

Ubika Research

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Up until the start of May of 2016, Hempco has solely focused on bulk sales of hemp seeds, protein and oil. Judging the company’s financial performance will need to be segregated into projecting its bulk sales line of business, as well as the newly introduced retail arm – PLANETHEMP.

Forecasting Hempco’s bulk sales will come down to two factors: overall growth in demand for hemp oils/protein/seeds within various geographies, and Hempco’s ability to develop client relationships. Considering that there is no significant product differentiation within bulk unit sales, this revenue line will be a function of hemp-based product demand growth.

Considering the recently announced high product demand arising from Korea, this geographic channel will account for a material chunk of the company’s overall revenues. Looking at Hempco’s main geographic channels, we forecast a blended bulk sales growth rate of 17% over the next two years.

We are also assigning a 5% growth premium to Hempco due to its already established client relationships and 8+ years of operational history. This premium is representative of our belief in the company’s positive future sales opportunities given its bulk hemp production expertise.


- May 31, 2016

Ubika Research

Figure 12: PLANETHEMP Operational Retail Growth Outlook

Source: Ubika Research

As for retail sales, we are forecasting immaterial figures for the rest of the 2016 Fiscal Year (ending August 31st), rising to $2.7 million in 2017. We are using Manitoba Harvest as a benchmark to forecast retail sales. Given MH’s $41 million in 2015 revenues via a distribution network of 7,000 retail locations, this implies revenues of $6k/store/year.

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Hempco has been cash flow positive since inception, however the growth into retail will incur upfront costs (such as gaining shelf space, marketing, packaging and increased G&A). Company plans to have an extensive marketing campaign centered around conducting product trade shows, in-store samples, athlete endorsements, social media campaigns, and other.

We forecast retail expansion costs to total $600k in the first year, and marketing spend of about $720k in 2017. As a percentage of revenues, this marketing spend represents 25%, which is on the high side of comparable studied in “Level of Marketing” on page 14, but is representative of a company going through a product launch stage.

Cap Table

Hempco’s QT was completed on April 15, 2016, and 20,000,000 common shares of the resulting company were issued to the previous equity holders of the acquired company (namely Charles and Angela Holmes). In connection to the company’s completed QT with Hempco, a private placement of 3,212,500 shares were issued at $0.40 per share for total gross proceeds of $1,285,000.


Comparable Companies The figure below summarizes the publicly listed players in the industry. We would like to bring your attention to the fact that out of the 5 comps, only 3 are revenue producing (with one other, Naturally Splendid, raking in a minuscule $300k in revenues). Also, keep in mind that Compass’ revenues are accounting for all the revenue items from all of their holding companies (Manitoba Harvest only generated US$41 million in 2015).

Additionally, 4 of the 5 comps are incurring operating losses, whereas Hempco is just breaking even, and is on route to profitability in 2016. Also, don’t be swayed by Compass’ positive operating profits - Manitoba Harvest incurred a US$3 million operating loss in 2015.

- May 31, 2016

Ubika Research

Figure 13: Comparable Public Companies within the Hemp Sales Industry

Source: Ubika Research, Thomson Reuters (05/20/2016)

Company Name Ticker Price Market CapTotal Revenue

(LTM)Operating Income

(LTM)Total Debt

(LFQ)EV/Revenue

Compass Diversified Holdings CODI.N $15.78 $1,123.4 $1,205.1 $80.4 $405.0 1.2xLaguna Blends Inc LAG.CD $0.10 $2.0 $0.0 -$8* $0.0 -Naturally Splendid Enterprises Ltd NSP.V $0.30 $17.0 $0.3 -$3.5 $0.3 55.9xLexaria Bioscience Corp LXRP.PK $0.11 $6.2 $0.0 -$2.4 $0.0 -Mettrum Health Corp MT.V $1.49 $59.0 $5.8 -$7.8 $3.9 8.9x

Average 22.0x

Hempco Food and Fiber Inc HFF.V $0.46 $13.7 $4.0 $0.0 $1.1 3.4x

Figures in CAD millions, except per share data. *9 months ended Dec. 31, 2015

Company Name Ticker TRBC Industry Name Business Description

Compass Diversified Holdings CODI.N Investment TrustsCompass Diversified Holdings acquires and manages a group of small and middle-market businesses. One of the Company's operating segments includes Fresh Hemp Foods Ltd. (Manitoba Harvest), which is engaged in manufacturing and marketing of branded, hemp-based food products.

Laguna Blends Inc LAG.CD Food ProcessingLaguna Blends is a multi-level marketing (MLM) company selling hemp-based beverages. The company has launched two products to date - hemp protein coffee called Caffé, and a hemp protein functionalbeverage called Pro369.

Naturally Splendid Enterprises Ltd NSP.V Food Processing

Naturally Splendid is a Canada-based company, which is engaged in the distribution of hemp-based foods in North America. Its products include hemp seeds, hemp protein powder, and hemp seed snack packs. The Company distributes the products under the NATERA brand. The Company also offers hemp-based pet care products, such as shampoo products, under the Pawsitive FX brand.

Lexaria Bioscience Corp LXRP.PK Food ProcessingLexaria is a Canadian based company which develops and sells hemp oil-based food products under the ViPova and Lexaria Energy brand names. The company sells hemp oil-infused black tea, and hemp oil-infused protein bars.

Mettrum Health Corp MT.V PharmaceuticalsMettrum Health Corp. is a Canada-based producer and processor of cannabis-based products. Company is a Health Canada licensed producer of medical marijuana, and also sells hemp infused protein, brownie, and pancake mixes under the brand Mmedibles.

The 3.4x LTM revenue multiple for Hempco is dramatically smaller than that exhibited in the industry, which makes the story even more attractive considering Hempco’s projected revenue growth and forecasted operating profitability for 2016/2017.

On a forward basis, Hempco is trading at 2.6x 2016E revenues of $5.2 million.


Risks

Prolonged sales periods may hurt the share price in the short termAlthough we continue to see catalysts driving demand for hemp-based products in high growth geographic regions such as Asia, United States, and some parts of Europe, the adherent risk involved with the timing of orders may hurt our projections, and the company’s concurrent share price in the short term.

Profit margins may be under pressureThe company is currently operating at breakeven. Greater competition within the industry may put pressure on producers to lower prices in the medium-long term. There is no assurance that the company will ever reach scalable and sustainable profits.

Additionally, retail expansionary costs and implementation may be another detrimental factor to the company’s profitability. Management has no prior experience with retail sales, and this inexperience may slow down growth and expansion.

Foreign currency riskThe company generates revenue through various geographies, exposing itself to currency exchange rate fluctuations.

Conclusion

Hempco Food and Fiber Inc. is a Canadian processor of industrial hemp, servicing a growing market for hemp-based foods consumption. Up until May of 2016, the company has been solely focused on bulk sales of its processed hemp seeds, oil, and protein – however, a retail launch of its own brand, PLANETHEMP, will surely drive additional sales for the company. The retail launch is a hugely impactful strategic move for Hempco, as it begins to build its own brand, and enter new product categories in the foreseeable future.

We are bullish on the hemp-based foods industry as a whole, as we see strong global demands growing within the United States, part of Europe, as well as Asia. We feel comfortable with Hempco’s management being able to execute on this rising demand, and effectively grow sales to $5.2 million in 2016, and $8.6 million in 2017. Although profitability might be of concern early on, as retail expansionary and marketing costs may bite into margins, we forecast a blended 40% GP margin going forward.

Investors should look forward to the next couple quarters of operation, as we will then receive further visibility into the company’s retail expansion success, as well as the progress into additional product category expansionary plans, such as meat and dairy alternatives.

- May 31, 2016


Appendix A: Recent News

Hempco Doubling Processing CapacityHempco is doubling its processing capacity of its hulled hemp seed nut processing facility from $7.5M to $15M per year due to new international customer demand. Further to the news release date April 25, 2016, Seoulution Corp. is experiencing higher than anticipated demand and would like to double their purchase orders from the previously announced C$3 million. Hempco is currently shipping over C$350,000/month of hemp nut to Seoulution Corp.

Hempco Food And Fiber Signs Exclusive Distribution Agreement with Major Distributor in South KoreaHempco has entered into an exclusive one year distribution rights agreement with Seoulution Corp., an international South Korean trading company, to supply hemp food products, including hulled hemp seed valued at approximately CAD$3 million with minimum monthly orders of 30 tons of hulled hemp seed. The exclusive territory includes South Korea, Japan, China, Taiwan, Indonesia, Malaysia and Singapore.

Hempco Announces Completion of Qualifying TransactionAs a result of the completion of the Qualifying Transaction, the Company has ceased to be a Capital Pool Company. The Company expects trading in its common shares to commence at the opening of the market on Wednesday, April 20, 2016. The common shares will trade under the symbol “HFF”. The Company completed the Qualifying Transaction through the acquisition of all of the outstanding equity securities of Hempco Canada Superfoods Inc. (formerly Dharma Distributors Ltd.). The company acquired all of the issued and outstanding equity securities of Hempco Superfoods from the holders thereof in exchange for the issuance of an aggregate of 20,000,000 common shares in the capital of the Company. Hempco Superfoods is now a wholly owned subsidiary of the Company.

- May 31, 2016

Ubika Research

April 18, 2016

April 25, 2016


May 31, 2016

Appendix B: Management & Board of Directors

Charles Holmes - CEOCharles founded Living Harvest, manufacturer of hemp-based consumables (milk, yogurt, and tofu) under the brand name “Tempt”. Charles has also launched Conscious Planet in 2005 – a “do it yourself” retreat center level educational program and a complete health rejuvenating product line. Charles also teaches and speaks on health and wellness.

Angela Holmes - COOHer career began in real estate sales and continued with the development of a number of pio-neering online marketing ventures. Following intensive study with Rosemary Gladstar and at the Dominion Herbal College, she became a chartered herbalist and clinical practitioner. She currently manages the office, logistics and finances of Hempco.

Symentha Holmes - Social Media, Sales & EducationA certified Hatha Yoga instructor, a Hypnotherapist, studied Taoism and Qi gong and became a health coach. Symentha recently launched her booklet, Bringing Hemp Home, is soon launching her second booklet, Hardwired for Hemp, and started an online hub to support those who would like to use hemp food products to ignite their own health transformations.

Preet Marwaha - Executive VPHe founded the popular Vancouver based OrganicLives™ line of raw organic food products, has worked with the UN Environment Program, India-Canada Organic Agriculture Associa-tion, World Wellness Project, and the Safe Planet Campaign; and developed and taught cur-riculums for Vancouver’s Institute of Holistic Nutrition. Preet also coaches people with acute or chronic illnesses, elite athletes and those who want to optimize their wellbeing.

Praveen Varshney, FCPA, FCA - CFOMr. Varshney obtained a Bachelor of Commerce degree from the University of British Co-lumbia and his C.A. designation in 1990. He’s a Director of Varshney Capital Corp. since 2000 and has had a long successful career in startups and the public markets. He is a long time member and past President of the Vancouver chapter of The Entrepreneurs’ Organization (EO) and a founding director of the Vancouver chapter of The IndUS Entrepreneurs (TiE). Mr. Varshney was a 12 year member of the Sauder School of Business Faculty Advisory Board, a former Director of The Vancouver Board of Trade, and a past recipient of Business in Vancouver’s 40 Under 40 Awards. He is also a director of the Varshney Family Charitable Foundation, a SVP Vancouver Partner, and a Director of OneProsper.org. and a Founding Member of instrumentbeyondborders.org. He’s also on the Advisory boards of Room to Read – Vancouver, Heart & Stroke Foundation – BC Yukon and The Thomas Edison Innovation Foundation in New Jersey, USA.

- May 31, 2016


Appendix C: Background info. on Hemp

Difference between Industrial Hemp and Marijuana The difference is in its use. Hemp and Marijuana both come from the same plant - Cannabis Sativa L. The term ‘Hemp’ commonly refers to the industrial/commercial use of the cannabis stalk and seed for textiles, foods, papers, body care products, detergents, plastics and building materials. The term ‘marijuana’ refers to the medicinal, recreational or spiritual use involving the smoking of cannabis flowers. Industrial hemp contains only about 0.3% - 1.5% THC (Tetrahydrocannabinoids, the intoxicating ingredients that make you high) while marijuana contains about 5% - 10% or more THC.

Hemp fiber is the longest, strongest and most durable of all natural fibers. Hemp cultivation requires no chemicals, pesticides or herbicides. Grown in rotation with other crops such as corn and legumes, hemp farming is completely sustainable. Hemp produces four times as much fiber per acre as pine trees. Hemp tree-free paper can be recycled up to seven times, compared with three times for pine-pulp based papers. Hemp is easy to grow, and actually conditions soil where it grows. The seed and seed-oil are high in protein, essential fatty and amino acids, and vitamins.

Industrial hemp has low THC levels compared to marijuana specifically cultivated for personal psychoactive use. The reason for the low THC content in hemp is that most THC is formed in resin glands on the buds and flowers of the female cannabis plant. Industrial hemp is not cultivated to produce buds, and therefore lacks the primary component that forms the marijuana high. Furthermore, industrial hemp has higher concentrations of a chemical called Cannabidiol (CBD) that has a negative effect on THC and lessens its psychoactive effects when smoked in conjunction.

- May 31, 2016


Industrial hemp also grows differently than THC-containing cannabis. Hemp is typically grown up, not out, because the focus is not on producing buds but on producing length of stalk. In this way, hemp is a very similar crop to bamboo. The stalk contains the fiber and hard, woody core material that can be used for a variety of purposes, even carpentry. Generally, THC-producing marijuana plants are grown to an average of five feet in height. Industrial hemp on the other hand is grown to a height of ten to fifteen feet before harvest.

The two also differ in the areas that they can be effectively grown. THC-producing Marijuana must be grown in generally warm and humid environments in order to produce the desired quantity and quality of THC-containing buds. However, since industrial hemp does not contain these buds, and the hardy parts of the plant are the more desired, it can be grown in a wider range of areas.

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