inner spirit holdings ltd. (cse: ish) initiating coverage: a leader in canada...

Siddharth Rajeev, B.Tech, MBA, CFA

Colin Tang, B.Com

November 28, 2019

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

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Inner Spirit Holdings Ltd. (CSE: ISH) – Initiating Coverage: A Leader in Canada’s Cannabis Retail

Industry

Sector/Industry: Cannabis Retail Click here for more research on the company and to share your views

Market Data (as of November 28, 2019)

Current Price $0.10

Fair Value $0.40

Rating* BUY

Risk* 3

52 Week Range $0.07 - $0.30

Shares O/S 206,236,295

Market Cap $20.62 million

Current Yield N/A

P/E (forward) N/A

P/B 3.60x

YoY Return -52.38%

YoY CSE -44.50%

*see back of report for rating and risk definitions.

*$ denotes C$ unless otherwise specified.

Highlights ➢ Inner Spirit Holdings Ltd. (“company”, “Inner Spirit”) is a retail and

franchising company with retail dispensary brands called “Spiritleaf” and

“Watch It!”. The company boasts the first franchise business model

within the cannabis retail recreational space and is focused on growing

its Spiritleaf operations.

➢ The company has secured more than 100 cannabis franchise agreements

and is expected to be operating 44 Spiritleaf retail stores by the end of

2019. The company currently leads Canada’s cannabis retail

industry with 38 operating stores.

➢ Spiritleaf retail stores are highly rated by customers. Through Google

reviews, we found the weighted-average rating of Spiritleaf stores to

be 4.4/5, with a range of 3.9/5 to 5/5.

➢ It was estimated that consumer cannabis spending in Canada will

compound at an annual growth rate (“CAGR”) of nearly 45% from 2018

to 2024 – rising from $569 million to $5.2 billion over the period.

Provinces where the company operates retail stores are anticipated

to comprise approximately 74% of Canada’s legal cannabis market

by 2024.

➢ The company has a highly experienced management team and Board of

Directors. Most notably, Darren Bondar (Founder and CEO of Inner

Spirit) holds over 20 years of experience in the franchising and retail

space and was a runner-up for Entrepreneur of the Year in the 2019

Canadian Cannabis Awards competition.

Risks ➢ The company operates in a highly regulated industry subject to

governmental intervention. Additionally, the illicit cannabis market may

limit the ability of the legal cannabis market to gain market size.

➢ Poor-performing franchised-stores may adversely impact the company’s

brand image.

➢ The cannabis retail space in Canada is new and highly competitive.

➢ There is no guarantee that the company will be able to secure additional

licenses to operate additional retail stores. This will significantly impact

our valuation on the company.

© 2019 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Company

Overview

Large Retail

Footprint

Inner Spirit Holdings Ltd. (“Inner Spirit”) was founded on March 16, 2017, and is a retail

and franchising company with retail dispensary brands called “Spiritleaf” and “Watch It!”.

In this report, we will be primarily focused on its cannabis retail brand (“Spiritleaf”)

as management has indicated a desire to spin-off operations of Watch It! imminently. Watch

It! is a brand involved in the sale of watches, sunglasses and related accessories.

Inner Spirit is the first retail cannabis company to be granted membership into the Canadian

Franchise Association (“CFA”) and boasts one of the first franchise business models within

the cannabis retail space. Additionally, the company is the first cannabis retail and franchise

company to complete an Initial Public Offering (“IPO”) in Canada – completing its IPO in

July 2018. The company’s goal is to create a large network of stores under its Spiritleaf

brand and become Canada’s leading and most trusted source of recreational cannabis.

Retail stores will be primarily franchised with select corporate-owned stores situated in

high-visibility locations in major centers to promote brand awareness. The company has

formed strategic partnerships with cannabis industry leaders such as HEXO (TSX: HEXO),

Tilray (NASDAQ: TLRY), Auxly Cannabis Group (TSXV: XLY) and High Times

Magazine. Details regarding these strategic partnerships will be discussed later below.

Inner Spirit currently has secured more than 100 cannabis retail franchise agreements

and, as of November 27, 2019, features a total of 38 franchised, corporate-owned and

retail partnership Spiritleaf cannabis stores. The 38 operating retail cannabis stores

consist of 30 franchised stores and eight corporate-owned stores across Canada. Across its

Spiritleaf retail network, management has noted that more than 400 people are employed.

Spiritleaf Retail Network Alberta British Columbia Saskatchewan Ontario

Franchised 24 4 1 1

Corporate 8 0 0 0

Total: 32 4 1 1

Source: Company


Layout of

Spiritleaf

Retail Store

The following are images of a typical Spiritleaf retail store.

Layout of Spiritleaf Retail Stores

Source: Company

Management has stated expectations to be operating 44 Spiritleaf retail stores by the

end of 2019. The company has not disclosed how locations are selected for franchised

stores but noted that the geographic area of focus for corporate stores is in high-visibility

locations. In addition, the company has noted that primary provinces of focus are Alberta,

British Columbia, Saskatchewan, and Ontario (rationale discussed later in the report).

Referencing the images above illustrating Spiritleaf retail stores, we believe that the

company has closely aligned its Spiritleaf brand image to its brick-and-mortar stores. We

found the décor and aesthetics of the Spiritleaf retail stores (shown above) to be well-

designed and aesthetically pleasing. As such, we believe that Spiritleaf retail stores are

likely to invoke a unique in-store customer experience.


Spiritleaf

Retail Store

Ratings

Shown below, Spiritleaf has generated substantially positive customer reviews. From

performing a Google (NASDAQ: GOOGL) search on Spiritleaf retail stores, we found, in

total, 27 Spiritleaf stores which had ratings ranging from 3.9/5 – 5/5. We found the

weighted-average rating of Spiritleaf stores to be 4.4/5. The large majority of reviews

cited (1) reasonable pricing, (2) great selection and (3) friendly staff members. This is

extremely upbeat and, we believe, outlines that the company is providing remarkable

customer service. Readers should note that with Google reviews, we are unable to

determine if the reviews are from actual customers or from friends/families/employees

(which could positively skew store ratings). Given that there are under 1,000 reviews across

all Spiritleaf stores, the number of reviews may not be sufficient enough to form a strong

judgment on Spiritleaf stores. Readers can refer to the image below for ratings of individual

Spiritleaf stores.

Google Reviews

Source: Google Reviews

Having discussed the typical store layout of a Spiritleaf retail store and reviews from

customers, we briefly outline what a franchise business model is, how Inner Spirit generates

revenue from its franchise stores, and the benefits and drawbacks of a franchise business

model (from the perspective of Inner Spirit).


Franchise

Business

Model

A franchise, according to the CFA, is a working business relationship where a franchisor

(Inner Spirit) grants a license to a franchisee (a company or individual) to use the

franchisor’s trademark, brand and business operation system for an initial franchise fee. In

return, the franchisee generally provides a share of its revenue or income back to the

franchisor (called a royalty). As such, Inner Spirit’s franchise business model can be

visually represented as follows:

Franchise Business Model

Source: FRC

In Inner Spirit’s franchise business model, the company collects an upfront franchise

fee of $25,000 upon granting a license to the franchisee. The company generates a 5%

royalty on gross sales from franchised stores. In addition, the company collects 1% of

gross sales from franchised stores for the company’s advertising fund. The company’s

franchise business model is very similar to the franchise business model of other

companies. For example, according to Business Insider (“BI”), McDonald’s (NYSE: MCD)

charges an upfront franchise fee of US$45,000 and a 4% royalty on gross sales from

franchised stores.

Below, we outline the key benefits and disadvantages of this model.

Benefits of a Franchise Business Model

• Low Capital Expenditure (“CAPEX”) Requirements: CAPEX is incurred by the

franchisee when they establish their store front – Inner Spirit is not responsible for

costs related to building the franchisee’s store-front.

• Minimal Contingent Liabilities: The franchisee is responsible for the lease and

relevant contracts needed to operate their franchised store.

• Greater Speed to Market: Inner Spirit is able to expand operations more quickly

(as opposed to building out corporate stores) through working with franchisees.

• Ease of Operations: Franchising provides Inner Spirit with less daily oversight

requirements.


Spiritleaf and

Canadian

Franchise

Association

Drawbacks of a Franchise Business Model

• Lack of Control: Inner Spirit has lack of control regarding how franchised stores

are representing the company’s brand. There is no guarantee that the franchisee will

be able to live up to the quality standards set out by the company or offer

exceptional customer service as required by the company. Management has

indicated that they have controls (such as site visits) to mitigate this risk.

• Challenges in Implementing Change: Changing business plans, operations, or

implementing innovations are tougher with franchised stores compared to corporate-

owned stores.

• Franchise-related Costs: Inner Spirit incurs costs related to creating a successful

franchise business plan, legal documents, marketing materials, franchisee

recruitment costs, operations manuals, etc. In addition, Inner Spirit must provide

training to franchisee employees and ongoing operational support.

Having outlined the potential benefits and drawbacks of a franchise business model, we

believe that benefits significantly offset the drawbacks, especially for companies such as

Inner Spirit, that are aggressively expanding their footprint. The cannabis retail space in

Canada is new and highly competitive – we suspect that speed to market is extremely

important to establishing a strong economic float in the cannabis retail space. It is our belief

that companies that are able to quickly establish retail stores are able to benefit from having

greater brand exposure. We view a franchise business model, as opposed to a traditional

retail business model, as a strong method to provide greater speed to market.

We now outline the investment and start-up capital required for a Spiritleaf franchised store

and compare it to the capital requirements of other franchise opportunities.

As mentioned, Inner Spirit is a member of the CFA – an online franchise directory that

provides franchise opportunities for potential franchisees. CFA markets itself as the most

comprehensive online directory of legitimate franchise business investments available. On

the website of CFA (www.cfa.ca), Inner Spirit is listed under the category “retail” and is

featured on top of the list of available retail franchise opportunities. Given that Inner

Spirit is featured on the top of the list of available retail franchise opportunities, we

deem that interested retail franchisees are more likely to view the franchise

opportunity presented by Inner Spirit as opposed to other franchise opportunities.

Management has outlined that individuals interested in acquiring a Spiritleaf franchise

license are initially qualified based on stringent financial and operating parameters.

Additional information regarding the qualification process was undisclosed by

management. The license grant rate – the number of licenses granted by the company to the

number of applications made by potential franchisees, was also undisclosed by the

company.


Spiritleaf

Franchise

Costs

To operate a Spiritleaf franchised store, according to CFA, there is $200k - $300k in

start-up capital required and an additional $300k - $500k investment required (these

costs are on top of the initial franchise fee of $25,000). It is to our understanding that the

start-up capital requirement relates to equipment and operational costs, and that the

additional investment relates to ongoing costs required to ensure a going concern.

Spiritleaf Franchise Store Costs

Source: cfa.ca

We compare the costs required to enter into a franchise business agreement with Inner Spirit

to all other available retail franchise opportunities listed on the CFA (green highlights

cannabis franchise opportunities):

Retail Franchise Opportunities Listed on CFA

Source: cfa.ca, FRC


The Retail

Cannabis

Franchise

Space

In total, there were 26 retail franchise opportunities listed on CFA, four of which were

cannabis retail franchise opportunities (Spiritleaf, Canna Cabana, ONE Cannabis

Group and Starbuds International Inc.). We are unable to provide insight as to whether

the costs to operate a Spiritleaf franchised store are reasonable compared to other cannabis

retail franchise opportunities – relevant data for costs from the other three cannabis retail

franchise store opportunities were unavailable. When compared amongst all retail

franchise store opportunities, Spiritleaf had a lower-than-average franchise fee, but

higher-than-average start-up capital and investment required.

Spiritleaf Cost Comparison

Source: FRC

Although it is useful to gauge the average costs required to operate a retail franchised store

to that of a Spiritleaf franchised store, it is important for readers to realize that different

types of retail stores (for example: jewelry, cut-flowers, clothing, etc.) all have vastly

different capital requirements. We believe the high capital requirements required (compared

to other retail franchise opportunities) to operate a Spiritleaf franchised store is reasonable

and symbolizes the company’s desire for franchisees to create a storefront that is able to

invoke a unique in-store customer experience. With that said, the large capital requirement

needed may deter interested parties who do not have such access to capital.

We now look more into Canna Cabana, ONE Cannabis Group, and Starbuds International

Inc., to gauge how well-positioned the company is compared to other cannabis retail

franchise opportunities.

Canna Cabana

Canna Cabana is a subsidiary company of High Tide Inc. (CSE: HITI), with, according to

their website (cannacabana.com), 23 operating retail stores in Alberta, three in Ontario and

one in Saskatchewan. Canna Cabana operates, in aggregate, 27 retail stores across

Canada. The split between franchised stores and corporate stores was undisclosed.


Canna Cabana Geographic Footprint

Alberta Ontario Saskatchewan

Retail Stores 23 3 1 Source: cannacabana.com, FRC

Given that Canna Cabana mainly operates in Alberta, as does Spiritleaf, we believe that

Canna Cabana is a direct competitor to the company. Through using Google reviews, we

observed that Canna Cabana retail stores are also highly rated by customers. Shown below

are ratings of Canna Cabana retail stores we found through Google reviews:

Google Reviews for Canna Cabana Retail Stores

Source: Google Reviews

We found, in total, 25 Canna Cabana stores which had ratings ranging from 2.9/5 –

5/5. We deem the large variance in ratings to be concerning for Canna Cabana, as some

underperforming Canna Cabana stores could adversely affect the overall brand image of

Canna Cabana. Referencing Spiritleaf, we did not notice such a large variance in ratings

(refer to page four, which we outlined to be 3.9/5 – 5/5). We found the weighted-average

rating of Canna Cabana stores to be 4.1/5, which is lower than Spiritleaf’s of 4.4/5. The

large majority of positive reviews cited (1) reasonable pricing, (2) friendly staff and (3)

favorable store hours. Although Canna Cabana operates retail stores in similar

geographical regions to that of Spiritleaf, our interpretation, based off of customer

ratings, is that Spiritleaf stores are superior. Readers should note that with Google

reviews, we are unable to determine if the reviews are from actual customers or from

friends/families/employees (which could positively skew store ratings). Given that there

are over 1,400 reviews across all Canna Cabana stores, we believe the number of reviews

are sufficient enough to form an adequate judgment on Canna Cabana stores. For the

reader’s reference, the geographic footprint of Canna Cabana to that of Spiritleaf in the

province of Alberta (where the majority of retail stores of both Spiritleaf and Canna Cabana

are situated) is provided below.


Alberta Footprint – Canna Cabana vs Spiritleaf

Canna Cabana Retail Stores Spiritleaf Retail Stores

Note: Taken on November 26, 2019

Source: Google Maps

ONE Cannabis Group

ONE Cannabis Group (“ONE Cannabis”) is a vertically integrated private cannabis operator

and franchisor with a Colorado cultivation facility that is currently operational. Although

the company has a franchise business model, we were unable to find operating retail stores

in Canada under ONE Cannabis. Therefore, it is unclear whether this company has

retail operations in Canada at the moment. As such, we do not believe ONE Cannabis is

an applicable competitor to the company.

Starbuds International Inc.

Starbuds International Inc. (“Starbuds”) is a private cannabis operator focused on creating

international recreational cannabis retail networks. As indicated by their website

(starbuds.co), Starbuds currently has three operating retail stores in British Columbia. The

split between franchised stores and corporate stores was undisclosed.

Starbuds Geographic Footprint

British Columbia

Retail Stores 3 Source: starbuds.co, FRC

Given the limited number of retail stores operated by Starbuds, we do not see

Starbuds as a strong competitor to the company. With that said, it was noted on their

website that 13 retail stores in Alberta, two retail stores in British Columbia, and one retail

store in Saskatchewan are currently “under construction” or “coming soon”. Although this

indicates that Starbuds is looking to ramp up the number of retail stores under operation, we

believe that they currently have a slower speed to market. Given this understanding, we

believe that Spiritleaf has a strong first mover advantage over Starbuds and greater

brand visibility.


Overview of

the Cannabis

Retail Space

From our analysis on the cannabis franchise retail space, it is our belief that Spiritleaf

is extremely well-positioned. On this note, we take a step back and address the overall

cannabis retail space.

The Canadian cannabis retail space consist of private, public and government-run cannabis

stores. Inner Spirit notes the following public players:

The Canadian Cannabis Retail Space

Note: As of November 26, 2019. Numbers are in millions of C$ unless otherwise stated.

Source: S&P Capital IQ, Company, FRC

Through our research, we believe that the company has accurately outlined the public

Canadian cannabis retailers in the space. In addition to the public players above, there are

also governmental-run stores, private stores and other companies that have formed a

cannabis retail segment to complement their existing operations. For example:

• The B.C. Liquor Distribution Branch operates nine government-run cannabis stores

in British Columbia.

• The Donnelly Group (a private company) operates four cannabis stores in British

Columbia and one in Ontario.

• Alcanna (TSX: CLIQ), a private sector liquor retail operator, received a $138

million investment from Aurora Cannabis (TSX: ACB) in 2018, to operate retail

cannabis stores across Canada. On Alcanna’s retail cannabis brand website

(novacannabisstore.com), they listed 13 operating cannabis retail stores in Alberta.

As such, the overall cannabis retail space is highly competitive. We discuss notable public

pure-play cannabis retailers in more detail below.

Public Players in the Canadian Cannabis Retail Space

Source: FRC


Choom

Holdings

Fire &

Flower

Meta Growth

YSS Corp.

Choom Holdings (CSE: CHOO / “Choom”): Choom is looking to build a footprint of 125

corporate owned retail stores in Canada. As indicated on their website (choom.ca),

Choom operates ten retail stores.

Choom Geographic Footprint

Ontario Alberta

Retail Stores 1 9 Source: choom.ca, FRC

Fire & Flower (TSX: FAF): Fire & Flower (“F&F”) is looking to build a footprint of 85

retail stores in Canada by January 2021. As indicated on their website

(fireandflower.com), F&F operates 33 retail stores.

Fire & Flower Geographic Footprint

Ontario Alberta Manitoba Saskatchewan Yukon

Retail Stores 2 22 1 7 1 Source: fireandflower.com, FRC

On August 2019, F&F received a strategic investment from Alimentation Couche-Tard

(TSX: ATD) that provides between $380 - $830 million of growth capital. In the

subscription agreement, it was indicated that Alimentation Couche-Tard has the right to

obtain a controlling interest in F&F. This leads us to speculate that pure-play cannabis

retailers may be potential mergers and acquisition (“M&A”) targets.

Meta Growth (TSXV: META): On November 1, 2019, National Access Cannabis

announced that they had changed their operating business name to “Meta Growth” and

additionally sold its medical cannabis clinics for $4 million in cash (use of proceeds to fund

its operation of retail stores). Meta Growth owns two retail cannabis brands called

“Newleaf” and “Meta”. As indicated on the websites of Newleaf and Meta, Meta

Growth operates 33 retail stores in total.

Meta Growth Geographic Footprint

Alberta Manitoba Saskatchewan

Retail Stores 23 9 1 Source: metagrowth.com, FRC

YSS Corp. (TSXV: YSS): YSS Corp. owns two retail cannabis brands called “YSS” and

“Sweet Tree Cannabis Co.” As indicated on the websites of YSS (ysscorp.ca) and Sweet

Tree cannabis Co. (sweettreecannabis.com), YSS operates 13 retail stores.

YSS Corp. Geographic Footprint

Alberta Saskatchewan

Retail Stores 12 1 Source: ysscorp.ca, sweettreecannabis.com, FRC


Westleaf

High Tide

Westleaf (TSXV: WL): Westleaf owns a retail cannabis brand called “Prairie Records”. As

indicated on their website (prairierecords.ca), Westleaf operates four retail stores. On

November 8, 2019, Westleaf announced that they were merging with We Grow BC Ltd., a

cannabis producer with a cannabis product line called Qwest.

Westleaf Geographic Footprint

Saskatchewan Alberta

Retail Stores 3 1 Source: westleaf.com, FRC

High Tide (CSE: HITI): High Tide owns two retail cannabis brands called “Canna

Cabana” and “KushBar”. Readers can refer to page nine for our discussion on Canna

Cabana. KushBar is High Tide’s new retail cannabis brand, and according to their website

(mykushbar.com), operates three retail stores in Alberta. High Tide operates, in

aggregate, 30 retail stores across Alberta, Ontario and Saskatchewan.

High Tide Geographic Footprint

Alberta Ontario Saskatchewan

Retail Stores 26 3 1 The store count above incorporates Canna Cabana stores (refer to page nine for the number of Canna Cabana stores).

Source: cannacabana.com, mykushbar.com, FRC

The following illustrates the aggregate number of retail stores operated by the cannabis

retailers we have discussed.

The Retail Cannabis Landscape

Source: FRC

As the cannabis retail landscape is still in its infancy, we are currently unable to comment

on which retail cannabis brand is superior over the other – each cannabis retailer has a

unique store layout and brand image. Through our research, we believe that Spiritleaf,

Choom, F&F, and Canna Cabana had store layouts and promoted shopping experiences that

closely resembled the brand perception that they are trying to instill in customers.


Ideal

Provinces to

Operate In

Readers should take note that Spiritleaf currently operates the largest number of

retail stores amongst other pure-play cannabis retailers. We believe this to be very

important to take into consideration, as a greater number of retail stores provides for greater

brand reach amongst customers. In total, we found that the cannabis retailers mentioned

operate, in total, 164 retail stores across five provinces and one territory. Readers may

notice that a large number of retail cannabis stores were situated in Alberta. This is

addressed in the following section.

According to Cannabis Compliance Inc., the following Canadian provinces/territories

follow a Crown Corporation model where the province/territory owns both the distribution

and retail stores (i.e. these provinces do not allow private cannabis retailers to operate):

Provinces/Territories that Prohibit Private Cannabis Retailers

• Quebec • New Brunswick

• Nova Scotia • Prince Edward Island

• Northwest Territories

This is followed by provinces/territories that allow private cannabis retailers to operate, in

addition to having their own provincial/territorial retail cannabis stores:

Split Retail System (Private and Government-owned Retail Cannabis Stores)

• British Columbia • Newfoundland and Labrador

• Yukon • Nunavut

Lastly, the following provinces/territories allow private cannabis retailers to operate and do

not operate their own provincial/territorial retail cannabis stores:

Private Retail System

• Ontario • Alberta

• Saskatchewan • Manitoba

Excluding British Columbia, Inner Spirit is focused in provinces/territories where

there is no competition from provincial/territorial cannabis stores. We believe this is a

good strategy – although the company operates against other cannabis, they are avoiding

provinces/territories that allow provincial/territorial cannabis stores. It is our belief that it is

difficult for companies to compete successfully against a government entity. Although the

company did not disclose why they do not currently have stores in Manitoba, we suspect

this is due to the low market size for cannabis in Manitoba (discussed later in the report).

According to various sources, a single company is only legally permitted to operate 75

stores in Ontario and eight stores in British Columbia. It is our expectation that the

company will operate up to these store limits over the long-term. Through our research, we

have not found any definitive information that would point to an increase in the store limits


Establishing

an Online

Presence

Canadian

Cannabis

Market

mentioned above. In addition, in a press release dated November 13, 2019, the company

stated that they will resume franchise sales efforts in Saskatchewan. This announcement

came after the Saskatchewan Liquor and Gaming Authority (“SLGA”) announced on

October 29, 2019, that they will open up retail cannabis licensing in early 2020

(applications for cannabis retail licenses were previously closed off). Readers can refer to

our valuation section for our expectation on the number of retail stores that the company

plans to operate over the long-term.

In addition to the operation of retail stores, the company, on November 13, 2019, launched

an online retail sales platform in Saskatchewan. Residents of the province are now able to

purchase online at sk.spiritleaf.ca and Spiritleaf will arrange direct delivery of the product.

This e-commerce platform is to be used in other provinces as permitted. Although the

company is establishing an online presence, it is our understanding that this revenue

segment is not anticipated to form a material portion of overall revenues.

Next, we discuss the cannabis market and cannabis store density by province/territory.

In Canada, the percentage of cannabis users nationwide sat at 17.1% in Q3-2019, an

increase from 16.1% in Q2-2019. We believe the increase in the percentage of cannabis

users is attributed to easier access to cannabis nationwide. With the recent legalization of

edible cannabis products and alternative cannabis products, we expect Q4-2019 to show an

even greater percentage of cannabis users. In areas where the company operates, Alberta

(cannabis use: 18.8%), British Columbia (cannabis use: 20.4%) and Saskatchewan

(cannabis use: 17.2%) had cannabis use percentages higher than the national average. As

the majority of the company’s retail stores are in Alberta, this is a positive indication.

Shown below illustrates cannabis use in Q3-2019 by province/territory.

Source: Statistics Canada

Provided below are retail sales of cannabis by province/territory from October 2018 to June

2019.


Cannabis

Store Density

Cannabis Store Sales

Source: CBC News

As shown, Alberta generated the greatest number of retail sales from October 2018 to June

2019 – Alberta accounted for 21.93% of retail sales in Canada over this period. As indicated

by CBC, the large number of private cannabis vendors in Alberta contributed to the sizeable

amount of cannabis store sales. Alberta currently has the highest number of retail cannabis

stores nationwide (over 300) and supersedes the province with the second-largest number of

retail cannabis stores (British Columbia at 157) (Source: Marijuana Business Daily).

Although Alberta had the greatest amount of retail sales, Alberta also had the fifth highest

cannabis store density of 2.44 per 100,000 population.

Note: Chart is as of June 6, 2019

Source: The Globe and Mail

This is visually represented below.


Cannabis Retail Store Density in Canada

Note: Chart is as of June 6, 2019

Source: The Globe and Mail

Readers should note that the cannabis store density across provinces/territories is still

significantly lower than in the states of Oregon and Colorado, states that have a

cannabis store density of 14.02 and 9.49 per 100,000 residents, respectively (Source:

Marijuana Business Daily). Given that our research indicates Colorado to be one of the

most mature cannabis markets in the world, we believe that provinces will only be able to

sustain a long-term cannabis retail store density per 100,000 residents of up to 10. Noting

that the population of Alberta has been growing at a CAGR of approximately 2.30% from

2011 to 2019, and extrapolating this growth rate into the future, we believe that Alberta is

still able to sustainably add more cannabis retail stores. Our forecasted sustainable cannabis

retail store count for Alberta is outlined below.

FRC Forecast of Sustainable Number of Cannabis Stores in Alberta

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

Population

(in millions) 4.37 4.47 4.57 4.68 4.79 4.90

Sustainable

Store Count 437 447 457 468 479 490

Source: StatsCan, United Nations, FRC

Similar to Alberta, we believe that other provinces still have significant leeway to add more

cannabis retail stores.

Readers should note that we believe the state of Oregon to be currently oversaturated with

cannabis stores – our research has indicated that prices of cannabis in Oregon has dropped

more than 50% since legalization in 2014. As such, we suspect that a store density per

100,000 population nearing 14 as unsustainable.


Ontario as a

Province for

Retailers to

Target

Cannabis Store Density of Select States

Source: Marijuana Business Daily

Readers should be aware that operating in provinces with a low store density is desirable, as

this implies lower competition. Given this understanding, we believe that operating in

provinces such as Ontario is a major focus for cannabis retailers going forward –

Ontario had a cannabis store density per 100,000 population of 0.14. With that said,

readers should be aware that each province faces a different process for acquiring the

relevant licenses to operate a retail store. Notably, in Ontario, licenses are currently awarded

through a lottery system. At this time, we are not privy to when a new lottery system for

retail licenses will be held in Ontario. Although Ontario is currently an extremely attractive

province to operate cannabis retail stores in, it is immensely harder (compared to other

provinces/territories) to gain the licenses required to operate a cannabis retail store in

Ontario for the reason mentioned above. The following are recent developments in regard to

the cannabis market in Ontario:

• On October 30, 2019, an open letter was sent to Ontario Premier Doug Ford to

significantly increase the number of cannabis retail stores in Ontario.

• On November 6, 2019, the Ontario government announced plans to amend

legislation to allow retail stores to sell cannabis products online for in-store pick. In

addition, it was announced that licensed products (“LP”) will be able to establish

retail storefronts at their production sites.

• On November 21, 2019, BNN Bloomberg reported that the Ontario government is

considering a plan that would abandon the lottery system and move towards an open

allocation system for issuing cannabis retail licenses. No decisions have currently

been finalized.

Given the extremely low cannabis store density in Ontario and the expectation that Ontario

is poised to comprise a significant portion of Canada’s legal cannabis market (discussed

further below), the recent developments noted above are extremely positive for cannabis

retailers who want a portion of Ontario’s lucrative cannabis market.


Future

Cannabis

Demand in

Canada

New Wave of

Cannabis

Products to

Help Drive

Sales

Next, we discuss future cannabis demand in Canada.

According to a report by U.S. research company ArcView Market Research and BDS

Analytics, it was estimated that consumer cannabis spending in Canada is forecasted

to witness a CAGR of nearly 45% from 2018 to 2024 – rising from $569 million to $5.2

billion. This is an extremely strong growth rate and outlines the huge potential for cannabis

in Canada. A graph depicting this is shown below.

Taken from Global News, Source: ArcView Market Research/BDS Analytics

In addition, it is estimated that Ontario, Alberta, British Columbia and Saskatchewan

(provinces where the company operates retail cannabis stores) will make up

approximately 74% of Canada’s legal cannabis market by 2024. Ontario by itself is

expected to comprise 38% of Canada’s legal cannabis market by 2024. As such,

establishing retail operations in Ontario is imperative to becoming a leading cannabis

retailer in Canada. Projections of the Canadian cannabis market by province is provided

below.

Taken from Global News, Source: ArcView Market Research/BDS Analytics

Given the recent legalization of cannabis edibles and alternative cannabis products on

October 17, 2019, Inner Spirit is now able to offer a greater range of cannabis products at its

stores for sale to customers. The following outlines the classes of cannabis that can now be

sold in Canada:


Authorized Classes of Cannabis

Before October 17, 2019 After October 17, 2019

Dried cannabis Dried cannabis

Cannabis oil Cannabis oil

Fresh cannabis Fresh cannabis

Cannabis plants Cannabis plants

Cannabis plant seeds Cannabis plant seeds

Edible cannabis

Cannabis extracts

Cannabis topicals Source: osler.com, FRC

As such, in addition to the forecasted cannabis market by ArcView Market Research

and BDS Analytics (which we believe to not have considered the new authorized

classes of cannabis), Inner Spirit has exposure to the Canadian market for edibles and

alternative cannabis products, which has a forecasted annual demand of $2.7 billion

(Source: Deloitte). With that said, visibility regarding the list of approved cannabis

products and the availability of cannabis edibles and alternative cannabis products (i.e. the

amount of supply) is uncertain. Although we urge readers to view the current annual

demand for cannabis edibles and alternative cannabis products with skepticism, this new

wave of legalization is expected to materially increase the sales potential of Spiritleaf stores.

Taken from a corporate presentation by AgraFlora Organics International Inc. (CSE:

AGRA), the following visually illustrates the estimated annual market demand for cannabis

edibles and alternative cannabis products.

Market Demand for Cannabis Edibles and Alternative Cannabis Products

Source: AgraFlora Organics International Inc.

Next, we touch on strategic partnerships, collaborations and investments with cannabis

industry leaders.


Strategic

Partnerships

The company has developed several strategic partnerships with cannabis industry leaders

such as HEXO, Tilray, Auxly Cannabis Group and High Times Magazine. These

partnerships are briefly outlined below:

• HEXO (TSX: HEXO): HEXO currently holds approximately 8% of the

outstanding common shares of Inner Spirit. The strategic partnership includes the

retail distribution of Up Cannabis products (a brand owned by HEXO) and the

creation of Up Cannabis-branded customer lounges at select Spiritleaf stores.

• Tilray (NASDAQ: TLRY): Tilray currently holds approximately 9% of the

outstanding common shares of Inner Spirit. The strategic partnership includes the

retail distribution of High Park products (Tilray’s subsidiary that owns a number of

cannabis brands).

• Auxly (TSXV: XLY): Auxly currently holds approximately 13% of the outstanding

common shares of Inner Spirit. The strategic partnership includes collaboration on

retail initiatives, such as in-store marketing, branding, etc.

• High Times Magazine: This strategic partnership includes a license for Inner Spirit

to distribute and sell High Times magazines in Spiritleaf stores.

We deem the partnerships above as value-added to the company’s operation of retail stores

as it increases the cannabis product diversity at Spiritleaf retail stores. Shown below are

some of the company’s retail partner brands.

Inner Spirit Partner Brands

Source: Company


Management

Overview

In addition to the number of partner brands that can be found at a Spiritleaf retail stores, the

company has been developing in-house brands such as Ruby, Prairie Flower and Stone

Selects to retail through the company’s network of stores. These products will be produced

by specifically chosen partners and white-labeled for Spiritleaf. These initial roster of in-

house brands are shown below.

Company In-House Brands

Source: Company

Information regarding product logistics was undisclosed by the company.

A discussion on the company’s management and board of directors is provided below.

The company’s board of directors has six members, four of whom are independent.

Directors and Executive Officers currently own 43.29 million, or 20.99%, of the common

shares outstanding.

Share Ownership Table

Name Position Shares Owned % of Shares

Owned

Darren Bondar President, CEO and

Director 15,336,000 7.44%

Christopher Gulka CFO and Director 450,000 0.21%

David Margolus Independent

Director 484,000 0.23%

Jeff Tung Independent

Director 25,941,177* 12.58%

Larry Wosk Independent

Director 0 0.00%

Craig Steinberg Independent

Director 1,077,500 0.52%

Total 43,288,677 20.99%

*These shares are owned by Auxly Cannabis Group Inc, a company where Mr. Tung is currently the COO of.

Source: Company

The Chief Executive Officer (“CEO”), Darren Bondar, owns 7.44% of the common shares

outstanding of the company. Mr. Bondar was nominated and received runner-up

recognition for Entrepreneur of the Year at the 2019 Canadian Cannabis Awards

(“CCA”) Gala on November 8, 2019. In addition, Mr. Bondar has extensive experience


in managing franchise stores and has been in the retail and franchising business since

1999.

The biographies of management and the board of directors, provided by the company,

follows:

Darren Bondar, MBA – CEO, President and Director

Mr. Bondar is the President and CEO of Inner Spirit Holdings Ltd. and the company is led

by his strategic planning, determination and creativity – not just for thinking outside the

box, but for creating a whole new box! With an uncanny knack for surrounding himself

with the best and the brightest, Darren has a proven executive management track record and

over 20 years’ experience driving sales growth in both the retail and franchise industries. He

has been recognized with multiple industry awards including numerous Canadian franchise

awards of excellence, The Alberta School of Business retail awards and a Top 40 under 40.

He received his Bachelor of Arts from Western Ontario University and his MBA from the

University of Alberta.

Christopher Gulka – CFO and Director

Christopher sits on our Board of Directors and works for our company as Chief Financial

Officer. Christopher is a CPA and CFA with over 26 years of business experience. He has

sat as President of Working Capital Corporation since 1999 and is a former financial analyst

at the Alberta Securities Commission. In addition, Christopher founded and was the CFO

and a Director of Grunewahl Organics Ltd, ACMPR applicant grower, which became

Sugarbud Craft Growers. He was the CFO and a Director of EXMceuticals, an international

cannabis grower in Africa with licensed cannabis research facilities in Portugal. He was also

CFO and Director of Passport Energy Ltd., and the CFO of Rochester Energy Corp.

Christopher brings meticulous attention to detail, a high level of oversight and a thorough

understanding of IFRS to ensure accurate financial reporting.

David B. Margolus – Independent Director

Counsel to, and former Managing Partner of Witten LLP, David served on the boards of the

Edmonton Regional Airports Authority and TSX-listed Liquor Stores N.A. Ltd.,

PowerComm Inc. and the XS Cargo Income Fund. He holds a Bachelor of Arts and Law

Degree from the University of Alberta and is a member of the Institute of Corporate

Directors.

Jeff Tung, CFA – Independent Director

Jeff is CFO & COO of Auxly Cannabis Group, Canada’s leading cannabis investment

company. Prior to joining Auxly, Jeff was the co-founder of CPS Management Partners,

where he led the acquisition of multiple businesses in the insurance administration industry.

Jeff has managed more than USD $3 billion of deals in the Telecom, Banking, Insurance

and Technology industries. Jeff holds an MBA from the Richard Ivey School of Business,

graduating at the top of his class as well as a Bachelor of Computer Engineering from UBC.


Financials

Larry Wosk – Independent Director

Larry has been lecturing at the Sauder School of Business at UBC for over 15 years. His

areas of concentration are strategic management, international business, real estate, and

marketing. Larry commenced his teaching career after working for over 27 years in senior

management and as President and Chief Executive Officer in several industries including,

retailing, real estate development, hospitality and consulting. During that time, he ran

several companies, the largest of which had over 1,000 employees.

Craig Steinberg – Independent Director

Craig has over 10 years of experience as a private mortgage banker and corporate counsel to

a private lender and was most recently a partner in Miller Thomson LLP’s banking and real

estate group. He is a member of the Law Society of Alberta, Canadian Bar Association and

Real Estate Council of Alberta. Craig holds a Bachelor of Arts from Queens University,

Bachelor of Laws from Western University and a CSA/PDO from the Canadian Securities

Institute.

In 2018, the company generated revenue of $5.79 million – a 98.86% increase from revenue

generated from incorporation (March 16, 2017) to December 31, 2017 (of $2.91 million).

For the nine months (“9M”) ended September 30, 2019, the company reported $20.86

million in system-wide retail sales (“SWS”) – a 233.80% year-over-year (“YoY”) increase.

Readers should note that SWS refer to the sum of revenue generated by franchised and

corporate-owned stores. From $20.86 million in system-wide retail sales, the company

reported $7.02 million in revenue – a 85.73% YoY increase. The increase in revenue YoY

was primarily driven by strong growth in revenue from franchised stores.

2018 (9M) 2019 (9M)

SWS $6,249,693 $20,861,722

Revenue $3,779,926 $7,020,616 Source: Company, FRC

For Q3-2019, the company reported $10.78 million in system-wide retail sales, a YoY

increase of 374.86% and a quarter-over-quarter (“QoQ”) increase of 61.32%. From $10.78

million in system-wide retail sales, the company reported $3.99 million in revenue – a

158.60% YoY increase and a 124.77% QoQ increase. For Q3-2019, 23.17% of revenue

were generated from Watch It! This compares to 54.79% for Q2-2019.

Q3-2018 Q2-2019 Q3-2019

SWS $2,270,798 $6,684,484 $10,783,152

Revenue $1,544,779 $1,775,881 $3,991,640 Source: Company, FRC

Based on historical SWS and our estimates, we believe that each Spiritleaf store generates

revenue of $1.20 million per annum. Using an industry average (specialty retail average)


operating profit margin of 11.20%, we estimate operating profit of $0.13 million.

Considering that a franchisee contributes 6% of its gross sales to the company and an

upfront CAPEX of $0.30 million, we believe that the return on investment (“ROI”) for a

franchisee is 20.80%. We believe this to be an attractive ROI.

The company reported gross margin of 50.02% for the first 9M of 2019, an increase from a

gross margin of 45.30% for the first 9M of 2018. The improvement in gross margin was due

to strong growth in royalties revenue – a revenue source which does not incur cost of goods

sold (“COGS”). Historical margins are shown below.

Source: Company, FRC

The company reported selling, general and administrative (“SG&A”) expenses of $7.62

million for the first 9M of 2019 – a 71.61% YoY increase. In addition, the company

reported SG&A expenses of $2.39 million for Q3-2019, compared to $1.71 million for Q3-

2018 – a 39.53% YoY increase. The increase in SG&A expenses were largely driven by the

company’s continued growth and expansion into the retail cannabis industry. This includes

hiring retail, managerial, and administrative staff to support growth of the company. With

that said, this was slightly offset by lower SG&A expenses from the company’s Watch It!

division. Although SG&A expenses increased materially compared to prior quarters, the

company’s EBITDA, EBIT, and net margins improved due to stronger revenue (with the

exception of net margin for Q3-2019 compared to Q3-2018, which deteriorated due to

unrealized loss on marketable securities).



Free cash flows (“FCF”) were -$12.40 million for the first 9M of 2019, compared to -$2.64

million for the first 9M of 2018. The deterioration in FCFs YoY was primarily driven by

cash outlays for the acquisition of store permits and investments in property, plant and

equipment (“PPE”). Cash flows from financing were $12.92 million for the first 9M of

2019, compared to $6.31 million for the first 9M of 2018. This was primarily due to the

issuance of $10 million in convertible debentures. These debentures were issued in June

2019, have a three-year maturity (June 2022) and a 12% coupon rate per annum paid in

arrears. Additionally, these debentures have an exercise price of $0.25 per share.


At the end of Q3-2019, the company reported a cash position of $3.89 million, working

capital of $4.66 million, and a current ratio of 2.09x. The company’s debt is primarily

attributed to convertible debentures.


Valuation


Stock Options and Warrants: We estimate that the company has 18.84 million stock

options (weighted average exercise price of $0.16) and 50.40 million warrants (weighted

average exercise price of $0.27). Currently, 8.14 million stock options and 1.15 million

warrants are in the money. The company will be able to raise up to $0.93 million if all the in

the money options and warrants are exercised.

Our valuation on Inner Spirit is discussed below.

Store Count Forecasts – Spiritleaf

Our store count forecast for Spiritleaf through to 2024 is presented below:

Store Count Forecasts for Spiritleaf

Source: FRC

In our discussions with management, they have provided a short-term store count forecast

of 44 by the end of 2019. We believe their forecast is reasonable and we have incorporated

it into our store count forecast for 2019. Other assumptions include:

• The company will operate at the store count limit for Ontario (of 75) and

British Columbia (of 8) over the long-term. In addition, Spiritleaf stores in British

Columbia and Ontario will all consist of franchised stores.

• Given the small population of Saskatchewan (Saskatchewan has a population of


1.17 million) and a resultingly small cannabis market size (which ArcView Market

Research and BDS Analytics estimated to be $180.4 million by 2024), we have

nominally increased the number of Spiritleaf stores in Saskatchewan per year.

• An article by the Calgary Herald published on October 16, 2019, noted that Dave

Berry (Vice-President of Regulation for the Alberta Gaming, Liquor & Cannabis)

predicted 500 stores in Alberta by 2021 (implied store density of 11.19 – higher than

our belief of a sustainable store density of 10). Given that there are currently

approximately 300 retail stores in Alberta, this would imply an additional 200 stores

in one years’ time – a 66.67% annual growth rate. As such, we have grown the

number of franchised and corporate stores of Spiritleaf in Alberta by

approximately 67% up until 2021. From there on, we have decreased the

growth rate per year dramatically.

To conclude, by 2024, we expect the company to be operating 147 Spiritleaf franchised

stores and 29 Spiritleaf corporate stores. This would result in a total of 176 cannabis

retail stores operating under the company’s umbrella by 2024.

Store Count Forecasts – Watch It!

We have modelled Watch It! to retain current store levels for 2019 (which consists of six

corporate stores and six franchised stores). Due to our expectation of Watch It! being spun-

off, we have decreased the store count to zero from 2020 onwards.

Revenue Forecast

Our revenue forecast for Inner Spirit through to 2024 is presented below.

First, we outline our revenue forecasts for Spiritleaf:

Revenue Forecast for Spiritleaf

Source: FRC

The following are our revenue assumptions for Spiritleaf:

• Store-wide sales (“SWS”) of $1.20 million per store. The company reported

system-wide retail stores of $9.04 million for Q3-2019 through the operation of 33

retail stores (implied annualized SWS of $1.10 million per retail store). We have


revised this slightly higher to account for the fact that not all retail stores were

operational starting Q3-2019.

• Royalties and advertising to consist 6% of the SWS generated from franchisees.

This assumption is in-line with the company’s franchise business model.

• $45,000 in millwork per additional franchised store. Millwork consist of

woodwork services provided to Spiritleaf franchised stores prior to opening.

• $65,000 in supply and other revenue per annum per franchised store.

Management has indicated that “supply and other revenue” refers to accessories and

supplies to franchise store (i.e. miscellaneous supplies). This source of revenue is

expected to be recurring.

• $25,000 in franchise fee revenue per additional franchised store. This is in-line

with the company’s franchise business model.

• A revenue per store growth rate of 3% per year.

Our current 2024 revenue forecast for Spiritleaf reasonably assumes that Inner Spirit

will capture <5% market share of the Canadian cannabis market.

Second, we outline our revenue forecast for Watch It!.

Revenue Forecast for Watch It!

Source: FRC

Our consolidated income statement forecasts for Inner Spirit through to 2024 are presented

below.


Source: FRC

In addition to the assumptions made to revenue, we have assumed a long-term EBITDA

margin of approximately 21%. This is higher than the specialty retail industry average of

13.40% due to the fact that royalties revenue from franchised stores do not incur COGS.

We have assumed CAPEX required for a corporate store to be $0.30 million. Readers can

refer to page seven for the start-up capital required for a Spiritleaf store.

DCF Valuation

Our DCF valuation on Inner Spirit’s shares is $0.45. Our models are summarized below.


Source: FRC

For our discount rate, we utilized a weighted average cost of capital (“WACC”) of 12.67%.

Industry-relevant cost of equity was used as well as a cost of debt that reflects the average

rate of long-term corporate debt. An equity risk premium has also been added to the WACC

to reflect additional risk given the uncertainty regarding attaining retail licenses in Ontario,

as well as unforeseeable restrictions to the sale of cannabis edibles and alternative cannabis

products that the government of Canada may impose. As we have assumed the spin-off of

Watch It! by the end of 2019, we estimate Watch It! should be valued at $6.71 million

based on an Enterprise Value to Revenue (“EV/R”) multiple of 1.80x. We have used the

multiple of the specialty retail industry, discussed below.

Comparables Valuation

The following table shows our comparables valuation based on our expected revenue and

EBITDA estimates in 2024. The values have been discounted back to the present at our

above WACC of 12.67%. As shown below, our valuation on Inner Spirit is $0.30 based on

an average EV/R of 1.80x, and $0.44 per share based on an Enterprise Value to EBITDA

(“EV/EBITDA”) ratio of 13.30x. In our comparables valuation, we opted to use multiples

of the specialty retail industry. Although the company is a franchise business, we believe a

significant portion of their revenue are to be derived from corporate-owned stores.


Risks

Source: FRC

After reviewing Inner Spirit’s business, the quality of the management team, their

execution plan, and our valuation models, we are initiating coverage on Inner Spirit

with a BUY rating and a fair value estimate of $0.40 per share (average of our three

models).

We believe the company is exposed to the following risks (list is non-exhaustive):

➢ There is no guarantee that the company will be able to successfully manage its

franchised stores.

➢ The company operates in a highly regulated industry subject to governmental

intervention. The existence and health of the illicit cannabis market may limit the

ability of the legal cannabis market to gain market size.

➢ There is no guarantee that the company will be able to secure more licenses to

operate additional retail stores. This is especially true in Ontario, a province that

awards licenses on a lottery system.

➢ The cannabis retail space in Canada is new and highly competitive.

➢ Poor-performing franchised-stores may adversely impact the company’s brand

image.

➢ With a new industry, there remains concerns around product supply and risks around

product call.

➢ Access to capital and share dilution.

We are initiating coverage with a risk rating of 3 (Average Risk).


Appendix


Fundamental Research Corp. Equity Rating Scale:

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

Hold – Annual expected rate of return is between 5% and 12%

Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:

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

industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital

structure is conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less

sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of

debt.

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

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

averages, and coverage ratios are sufficient.

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

turnaround situation. These companies should be considered speculative.

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

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

Disclaimers and Disclosure

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

and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” do not

own any shares of the subject company, do not make a market or offer shares for sale of the subject company, and do not have any investment banking business with

the subject company. Fees were paid by ISH to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct.

Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability

for negative reports are protected contractually. To further ensure independence, ISH has agreed to a minimum coverage term including four updates. Coverage can not be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made

available to delayed access users through various other channels for a limited time.

The distribution of FRC’s ratings are as follows: BUY (69%), HOLD (8%), SELL / SUSPEND (23%).

To subscribe for real-time access to research, visit https://www.researchfrc.com/website/subscribe/ for subscription options.

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and

uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are

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

risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities

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

have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter.

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inner spirit holdings ltd. (cse: ish) initiating coverage: a leader in canada...

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