viridis energy inc. (tsxv: vrd) – initiating coverage – up

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

Daniel Iwata, BBA

Associate

May 25, 2015

2015 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Viridis Energy Inc. (TSXV: VRD) – Initiating Coverage – Up and Coming Wood Pellet Producer Sector/Industry: Renewable Energy (Biomass) www.viridisenergy.ca Market Data (as of May 25, 2015)

Current Price C$0.60 Fair Value C$1.37 Rating* BUY Risk* 3 (Average) 52 Week Range C$0.46 - C$2.60 Shares O/S 13,845,190 Market Cap C$8.31 mm Current Yield N/A P/E (forward) N/A P/B 2.6x YoY Return -53.9% YoY TSXV -28.8%

*see back of report for rating and risk definitions

Investment Highlights Viridis Energy Inc. (“Viridis”, “VRD”) is a manufacturer and distributor of

wood pellets. The company owns two production facilities - one in British Columbia (BC), and the other in Nova Scotia (NS). With a total production capacity of 180,000 tonnes, the company is one of the top five wood pellet producers, by capacity, in Canada.

Primary customers are power generation companies in Europe, and residential customers in the Northeastern U.S. for heating.

Viridis also operates a wood pellet brokerage business which is expected to trade 45,000 - 50,000 tonnes of wood pellets this year.

The company reported $28.21 million in revenues in 2014. The plant in NS is yet to break-even, therefore, the company has yet to achieve profitability. We expect EBITDA to turn positive this year.

The wood pellet industry is highly poised for consolidation with multiple M&A activities in the recent past. We believe Viridis has built a strong platform to grow organically and through acquisitions, and position itself as a good acquisition target for larger players.

We are initiating coverage with a BUY rating, and a fair value estimate of $1.37 per share.

The company expects to announce their Q1-2015 results this week. Risks The wood pellet industry is highly competitive, and is operated by several

players. Demand for wood pellets for heating is subject to seasonal fluctuations.

Unusually warm weather conditions may result in lower demand for heating. Raw material supply and price risk. Technological changes / advancements may result in an increase in demand

for other sources of energy. If wood pellets experience a significant increase in price, customers may

switch to other sources of energy. The company may have to pursue equity financings for future acquisitions,

which may dilute existing shareholders. Foreign exchange risks exist as a significant portion of sales are in US$.

Key Financial Data (FYE - Dec 31)(C $) 2010 2011 2012 2013 2014 2015E 2016ECash - 598,696 413,570 1,594,246 2,058,334 631,131 233,917 Working Capital (3,925,131) (2,250,304) (6,824,657) 659,690 852,328 (5,824,104) (1,387,583) Total Assets 15,838,963 15,344,456 10,305,039 13,389,431 15,082,999 13,863,829 17,424,032 LT Debt to Capital 3.9% 27.0% 0.0% 62.9% 63.2% 15.1% 54.2%Revenues 6,934,979 12,354,206 9,548,177 13,918,816 28,209,683 34,200,000 38,522,000 Net Income (1,162,100) (4,202,687) (9,540,048) (3,303,686) (4,699,676) (1,551,542) (693,277) EPS -0.05 -0.12 -0.19 -0.34 -0.35 -0.11 -0.05

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http://www.viridisenergy.ca

2015 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Overview History

Viridis Energy Inc., headquartered in Vancouver, Canada, is a manufacturer and distributor of wood pellets. The company supplies wood pellets primarily to power utilities in Europe and for residential heating in Northeastern U.S. The total production capacity of its two manufacturing facilities in BC and NS is approximately 180,000 tonnes, making it one of the top five wood pellet producers, by capacity, in Canada. The company also runs a wood pellet brokerage business (buying wood pellets manufactured by third-parties and selling them to distributors/customers), which management states has a capacity to trade 120,000 tonnes a year. With about 37 wood pellet manufacturing facilities in the country, Canada is one of the largest exporters of wood pellets. Europe is the largest consumer of wood pellets in the world. The strategic location of Viridis’ two plants on either coast of the country puts the company in a great position to serve the large European market, and the relatively new and burgeoning Asian market. The company, previously known as GridSense Systems Inc., was in the business of design, development and marketing of advanced monitoring and control systems related to electric utilities. They had reported revenues of $4.79 million, and a net loss of $0.46 million in 2008. In June 2009, the company’s management at that time, acquired the company’s business by assuming 100% of its $1.92 million debt. Upon completion of the transaction, the company completed a 10:1 stock consolidation, decided to enter the renewable energy business, and changed its name to the current name. ‘Viridis’ in Latin means green. In March 2010, the company acquired Cypress Pacific Marketing Inc. (“Cypress”) for 5.6 million common shares @ $0.50 per share for $2.8 million. The company also assumed Cypress’ $1.97 million debt, bringing the total acquisition price to $4.8 million. Cypress Pacific, founded in 1997, was a BC based private company primarily focused on the distribution of premium wood pellets to U.S. customers. Cypress’ founder, Christopher Robertson, was appointed the new Chief Executive Officer of the company. Michele Rebiere, the current Chief Financial Officer and one of Cypress’ shareholders, also joined the company in 2010. Cypress had reported $6 million in revenues, and negative $2.13 million in EBIT (earnings before income tax), in the year ended February 28, 2010. A summary of Cypress’ financial performance is shown in the table below.

YE 28-Feb-09 28-Feb-10Cypress Pacific 2009 2010Revenues $6,168,523 $6,298,769COGS $3,584,777 $3,775,222Gross Profit $2,583,746 $2,523,547Gross Margin 42% 40%

Net Income $230,704 -$2,131,281 Subsequently, in April 2010 and February 2012, the company acquired two private pellet manufacturers, namely the Okanagan Pellet Company (“OPC”) based in Kelowna, BC, and Scotia Atlantic Biomass Company Limited (“Scotia”) based in Musquodoboit, NS. OPC



Biomass / Wood Pellets

targets the residential heating markets in the U.S., Europe, and Korea, while Scotia targets the power generation market (industrial) in Europe. The total capacity of the two plants is currently 180,000 tonnes. In November 2013, the company incorporated a new brokerage subsidiary, Viridis Merchants Inc., which currently facilitates transactions totaling approximately 120,000 tonnes a year. This division, which generated $6.19 million in revenues and gross profit of $0.49 million (gross margin – 8%), is expected to account for 20% to 30% of the company’s revenues going forward. The company sold approximately 140,000 tonnes (including brokerage) in 2014, at an average price of $201/t. Management expects to sell 175,000 tonnes in 2015, including 80,000 tonnes from Scotia, 45,000 to 50,000 tonnes each from OPC and trading. The industry is poised for consolidation with multiple M&A activities in the recent past. Although there was a 19 month delay to put the Scotia plant back into production after its acquisition, we believe the company has built a great platform to grow organically and through acquisitions, and position itself as a good acquisition target for larger players. Wood pellets are made from compressed sawdust and related waste from sawmills, wood products, etc. As wood pellets are made from biological material, they are a source of bioenergy / biomass energy. The production of wood pellets has increased significantly over the past decade. Prior to the emergence of this industry, most of wood related waste was disposed of by burning. The following key features of wood pellets have made it one of the fastest growing sources of renewable energy: Wood pellets are dense and are produced with low moisture content, allowing them to

be burned with a high combustion efficiency. Although wood pellets release carbon dioxide while burning, they are much cleaner than

coal or natural gas. A 10% reduction in coal usage can reduce greenhouse gas (“GHG”) emissions by 20%. The U.S. EPA (Environmental Protection Agency) has stated that wood pellets are one of the cleanest-burning energy sources on earth.

Compared to renewable energy produced from solar / wind, which are intermitted sources, wood pellets can serve as a source of base load power.

Wood pellets can be burned with the same existing infrastructure as coal fired power plants, thereby enabling power plants to co-fire wood pellets with coal, or convert from coal to wood pellets with a relatively low capital investment.

The primary uses of wood pellets are: a) heating, and b) power generation. a) Home / office heating, greenhouse heating, etc. - The following diagram explains how

wood pellets are used for heating:



Home Heating

Source: Viridis Energy

Wood pellets are widely used in areas such as Europe and the Northeastern U.S., where it is cheaper than most other sources of energy. In Canada, and most parts of the U.S., natural gas is the primary choice for heating as it is cheaper than most other sources. The following tables and chart shows the price comparisons of various fuel types in the U.S., Ireland, and the Northeastern U.S. Ireland is used here as an example as the cost structure in Ireland mirrors the cost structure of the rest of Western Europe. As shown, wood pellets have a major cost advantage in Ireland and the Northeastern U.S.



Energy Cost in the U.S.

Fuel Type Fuel Price per Million BTUCoal 8.00$ Wood 9.09$ Natural Gas 10.02$ Corn 14.29$ Pellets 15.15$ Fuel Oil 28.99$ Propane 32.11$ Kerosene 32.77$ Electricity 35.13$

Source: EIA

Energy Cost in Ireland Fuel Type Delivered energy Cost Cent/kWhCoal 5.30 Pellets bulk 5.90 Softwood Bulk 6.47 Natural Gas 6.81 Pellets bag 7.14 Gas Oil 7.47 Kerosene 7.55 Hardwood 9.42 Softwood 10.00 Electricity 24.07

Source: SEAI

Energy Cost in Northeastern US

Source: Rentech

The demand for wood pellets in heating has increased from less than 2 million tonnes in 2004, to over 8 million tonnes by 2013. b) Power generation (industrial demand) – The following diagram explains how wood

pellets are used in a typical coal-fired power plant. Coal and/or wood pellets are burned in a boiler to heat water to produce steam. The produced steam is used to spin turbines to generate electricity.



Power Generation


The demand for wood pellets in power plants has experienced exponential growth since the European Union (“EU”) adopted the Renewable Energy Directive in 2009. The directive set the objective to reduce GHG emissions by 20% from 1990 levels, increase the share of energy consumption from renewable resources to 20%, and improve energy efficiency by 20% by 2020. In October 2014, the EU announced a target to lower greenhouse gas emissions by 40% by 2030, and by 80% by 2050. The directive in 2009 prompted several nations to focus more on renewable energy. Belgium (share of renewable energy in 2005 – 2.2%), the Netherlands (2.4% in 2005), and the U.K. (1.3% in 2005), who have had a low share of renewable energy in their total energy mix, have been the most proactive since the directive. Governments in the EU started offering significant subsidies to switch from coal fired power plants to wood pellets. Several large operators of coal-fired power plants started co-firing wood pellets with coal, or made a 100% conversion to wood pellets. By 2012, according to Eurostat, the the total share of renewable energy in the EU increased to 14.1%, up from 8.7% in 2005. It is reported that the EU has so far been successful in reducing their GHG emissions by 18%



Pellet Grades

compared to 1990 levels. The UK is now the number one importer of wood pellets in the world. The UK government offers subsidies to wood pellet power stations until 2027. Although there is a 400 MW cap on the subsidies for new biomass power stations, the cap does not apply for coal to biomass conversions, implying that more operators will be encouraged to convert going forward. Despite the emergence of wood pellets as a major source of renewable energy, green activists continue to raise concerns that an increase in dependence on wood pellets may promote further forest destruction as pellet manufacturers will not be able to meet demand just from wood waste. The demand for wood pellets for power generation is essentially nonexistent in the rest of the world outside the EU primarily (with the exception of Japan) because of the lack of any policy incentives in those regions. Canada has only one plant (the 205 MW Atikokan Generation Station in Ontario) that uses wood pellets. The plant was converted from coal to wood pellets last year. It uses 90,000 tonnes of wood pellets a year. As discussed later in the report, the industrial demand for wood pellets will experience another significant growth phase (like the past decade) if and when nations around the world adopt stricter policies to reduce GHG emissions. The following table shows the various types of pellets (based on their quality) and their applications. Viridis’ current focus is on the premium grade ‘EN Plus A1’ for home heating, and the ‘Industrial I1’ for power generation.


A wood pellet buyer’s decision is primarily based on quality and pricing. Quality is measured by the BTUs (the amount of energy in British Thermal Unit) or gigajoules. As for the residential market, buyers also seek low moisture and ash content. Wholesale prices range typically from $175/t for Industrial I2, to $250/t for EN Plus AI. The following sections present an overview of the company’s key assets.



Okanagan Pellet Company, BC

In June 2010, the company acquired the Okanagan Pellet Company (formerly Westwood Fibre Products Inc.) for $2.65 million in cash. The company also assumed $3.60 million in bank debt and loans, implying a total acquisition price of $6.25 million. Westwood Fibre, formed in 2001, was a private company owned by the Tetreau Group, a family business based out of Calgary. FibreGen Plc (formerly Libra Natural Resources plc; AIM: LNR) acquired a 55% interest in Westwood Fibre from the Tetreau Group in 2004, and then increased their stake to 75% in 2006. Our discussions with Viridis indicated that FibreGen’s interest reverted back to the Tetreau Group in 2009, as they defaulted on a loan due to Tetreau. Tetreau subsequently sold the plant to Viridis in 2010. Westwood produced wood pellets, primarily targeting the northeast U.S. market, and animal bedding (shavings) for the U.S. equestrian market. Cypress Pacific was one of Westwood’s distributors. Cypress’s role as a distributor, we believe, probably helped management get a good understanding of Westwood’s business model, and their products’ market positioning before they made the acquisition decision. The following table shows a summary of Westwood’s performance prior to the acquisition in 2010.

2008 2009

Total Revenues $7,738,713 $8,408,874

EBITDA $1,006,612 $1,468,924

EBITDA Margin 13.0% 17.5%

Westwood had revenues of $8.41 million, and EBITDA of $1.47 million in 2009. The acquisition reflected a price to sales (“P/S”) ratio of 0.74x, and a price to EBITDA ratio of 4.3x. We estimate current comparable average valuation multiples are approximately 1.6x revenues, and 13.5x EBITDA. Their facility, located in West Kelowna, BC, has a capacity to produce 60,000 tons per year, reflecting an acquisition price of $104/t. We estimate the current industry average is approximately $150/t. OPC currently has 25 employees. This facility produces high-quality / premium pellets for heating purposes. The products meet the premium standard of the Pellet Fuel Institute (“PFI” / PFI is a North American trade association promoting biomass fuel), and is in the process of obtaining the EN Plus A1 certification in Europe, and the CANplus certification in Canada. If they receive these certifications, we believe their credibility in the market will significantly improve from a customer’s point of view. The following chart shows the various standards set by the PFI. Notice the requirement of higher density, and lower ash / moisture content for premium pellets relative to standard grade and utility grade pellets. Premium grade pellets typically sell at a 15% - 20% premium over standard, and 45% over utility grade pellets.



Source: PFI

OPC highlights the following as the key qualities of their pellets: - low moisture content and no additives / contaminants, implying high combustion

efficiency - less than 0.7% ash content - low chlorides implying lower potential for corrosion - BC is the world’s largest exporter of softwood lumber, and OPC uses 100% softwood

for its pellets. Although the quality of pellets depend heavily on how they are made rather than the species of wood used, softwood pellets tend to have a higher output and lower ash.

- OPC also claims that their quality control and packaging process ensures their products are safe and of high quality.

- Programme for the Endorsement of Forest Certification (PEFC); this certification provides assurances that OPC’s pellets originate from sustainably managed forests - a key factor considered by large wood pellet buyers.

OPC’s pellets are sold under the brand name: Okanagan Pellets - Platinum. They also sell pellets produced by two unrelated U.S. based manufacturers under the brand names, Okanagan Pellets – Douglas Fir, and Okanagan Pellets - Gold. The company has exclusive rights to distribute the two brands in the U.S. northeast markets. Details of the manufacturers are not disclosed. All of the three brands are considered premium grade pellets. The following chart shows the three products, their features, and retail pricing.



Source: http://www.royalfireside.com/pages/pellets.htm

As shown above, the price per ton ranges between $309 to $359. To put things in perspective, a typical home may require three – four tons of pellets a year (costing approximately $1,000 - $1,200) to meet most of its heating needs. This compares to $600 - $700 per year for a house in Vancouver, BC which uses natural gas for heating. The cost of natural gas is much higher in the northeastern U.S. and Europe, and hence, the higher demand for wood pellets in those areas.

OPC’s pellets are primarily sold to the following segments. The chart also indicates the share of each segment.


http://www.royalfireside.com/pages/pellets.htm


Source: Viridis

All three brands are primarily sold through five to six major pellet distributors, and dozens of small distributors, who in turn sell directly to end-users. In the U.S., the pellets are distributed through hardware stores, such as Ace Hardware, Tru Value Hardware Stores, pellet stove dealers and other related outlets. Pellets produced at OPC’s facility are stored in silos, and either packaged on site, or shipped in bulk to offsite third-party packaging facilities via rail cars. The company currently has a fleet of 80 leased rail cars that are used to ship pellets to customers in the Northeastern U.S. Pellets for Europe and South Korea are trucked to the Port of Vancouver, where they receive FOB Vancouver prices. Viridis normally gets paid within 10 days from the distributors. With regard to the pellets produced by the two U.S. based manufacturers, OPC purchases pellets from the manufacturers (payments are made in 30 days) and distributes the pellets through their distribution channels. Viridis typically has a gross margin of 8% - 10% on these products. Marketing is typically done by the distributors, so the company has minimal marketing expenses. As a significant portion of the sales are in US$, the company is exposed to exchange rate risks. The exchange rate impact is mitigated for third-party product sales as those products are purchased in US$. The recent weakness in the C$ has had a positive impact on OPC’s financials. Raw material supply - Attaining steady and cost-effective raw material supply is a critical component of the business model. The availability of raw materials is highly correlated to



Scotia Atlantic Biomass Company, Nova Scotia

the economic cycle as the supply of wood waste is dependent on the strength of the lumber industry, which in turn is dependent on housing/construction activities. Wood pellet manufacturers typically obtain supply from working forests, sawmills, and wood product manufacturers. OPC currently has four primarily suppliers – all of them are wood product manufacturers in BC. Names of the suppliers are not disclosed. However, our discussions with management indicated that the largest supplier’s site (accounting for 50% of the total supply) is located in close proximity to OPC’s facility. OPC has a two-year supply contract with this supplier. OPC also has a 10-year contract with its second largest supplier, who accounts for 30% to 40% of the supply. However, these contracts do not set any volume obligations for the suppliers, which exposes Viridis to risk of supply shortages in the future. OPC is currently using oven dry metric ton (“ODMT”) as its raw material, which has 10% - 15% moisture content. Our discussions with management indicated that they are currently evaluating various options to upgrade their facility, so that they can start accepting green metric tonnes (GMT) material, which has a higher moisture content (≈40%). Management states that their gross margins for pellets produced from GMT may be higher as the additional cost to dry GMT materials may be more than offset by the lower price of GMT compared to ODMT materials. This upgrade will significantly mitigate any risk of supply shortage, as management believes there is an abundant supply of GMT material in BC. Management estimates the upgrade cost, which can increase existing capacity by another 30,000 tons, is $4 - $5 million. This estimate is in line with the industry average acquisition multiple of $150/t. OPC generated $10.13 million in revenues in 2014, with a gross margin of 21%. Although management did not provide any information on the tonnage produced by OPC, they announced that they expect OPC to produce 45,000 to 50,000 tonnes this year. In February 2012, the company acquired the assets of a former wood pellet manufacturer, called Enligna Canada Inc., based in Musquodoboit, NS. Viridis subsequently changed the facility’s name to Scotia Atlantic Biomass Company Limited. The facility covers four properties with a total of 157 acre, and a 22 acre woodlot. With a capacity of 120,000 tonnes, this facility is currently the largest wood pellet manufacturing plant in Atlantic Canada. A 200,000 tonne plant is currently in the development stage in Miramichi, NB. Scotia currently has 28 employees. The following image shows their manufacturing facility:




This pellet facility was set up originally in 1998 to utilize wood waste from the nearby MacTara lumber mill. MacTara filed for bankruptcy in 2007. Subsequently, Enligna (owned by a group of private equity investors in Germany) acquired the MacTara facility in 2008, and decided to run the pellet facility leaving the lumber mill dormant. According to Viridis’ management, Enligna had generated $17 million in revenues, and $2.9 million in EBITDA in 2010. Enligna acquired raw materials from a variety of sources, including logging contractors, private landowners, and other sawmills in the area. In August 2011, Enligna suspended operations due to financial difficulties, and their inability to gain market share. The facility eventually went into receivership, with $2.7 million in government loans outstanding. Virids acquired the facility for $2.5 million in cash in February 2012. They spent another $4 million to put the plant back into production, reflecting a total acquisition multiple of $54/t, which is much lower than the current industry average, and the price at which OPC was acquired for. This facility produces industrial quality pellets, and its customers are power generation companies in Europe. Names and locations of the utilities have not been disclosed. According to Viridis, Enligna’s financial problems were primarily because they were exposed to currency and transportation (freight cost) risks associated with their sales to customers in Europe. In order to mitigate these risks, Viridis made a business decision to sell of their products in C$, and FOB Halifax pricing. This move transfers all the freight cost and currency risk to the customers.



Distribution agreement with Ekman & Co AB: In July 2013, the company entered into an agreement with Ekman & Co (“Ekman”). Sweden based Ekman is one of the world’s oldest trading houses and wholesalers of forest products. Through this agreement, Ekman became the exclusive worldwide agent of Scotia’s pellets. The original agreement covered two years, and pellet production of up to 240,000 tonnes. In December 2014, the companies renewed their agreement for another three years. Ekman receives a commission of 2.5% on all the sales. Another key advantage of this agreement for Scotia is that Ekman purchases and pays for the pellets to Viridis on a weekly basis, limiting the amount of cash tied up in working capital. If Viridis transacts directly with their end-customers, the cash cycle will be much longer. The company will also be exposed to counter-party default risk. Also, as 100% of the sales are in C$, the company is not exposed to any exchange rate risks. The recent weakness in the C$ has made Canadian pellets more attractive. Our long-term C$/US$ exchange rate forecasts is 1.1x. Therefore, we do not expect the current advantage to last for an extended period. Strategic agreement with Halifax Grain Elevator Limited: In July 2014, the company entered into a strategic agreement with Halifax Grain Elevator Limited ("Halifax Grain"). Halifax Grain invested $1 million in Scotia in return for a 20% equity ownership in the subsidiary. Halifax Grain is a significant bulk grain handling and storage provider at the Port of Halifax. The company has 365 silos at the port connecting to roads, rails and sea. In addition to storing the pellets at the port, Halifax Grain also assists Viridis in trucking pellets from the plant, which is a 40 minute drive from the port. Access to port storage facilities is important for exporters such as Viridis as it allows them to control the logistics in a more cost-effective and efficient manner. All of the large wood pellet manufacturers in the U.S./Canada (discussed later in the report) have some sort of arrangements with port(s) to facilitate logistics.

Raw material supply: Unlike the OPC plant in BC, Scotia has experienced challenges related to their raw material supply. The shutdown of several sawmills (due to the U.S. housing recession), and pulp mills in the province, have resulted in a decline in lumber production and availability of wood waste. In NS, approximately 70% of the forest is owned by private landowners, and 30% by the crown. This contrasts to the rest of Canada. Over 90% of the forest in the country is owned by the crown. Although forest covers 75% of the land in NS, the high ownership of private landowners makes the ability to acquire raw material in the long-term at stable prices a challenge.

Viridis currently uses 25 suppliers, ranging from large pulp producers, landowners, wood brokers, to small lumber yards, sawmills, etc. The company does not have any long-term supply contracts with their suppliers, which is a risk. Management is seeking to cut down their number of suppliers, and establish long-term contracts with a few large suppliers, which will bring more reliability and consistency in the raw material supply.

In 2014, the Nova Scotia Department of Natural Resources granted Scotia a 10 year license to harvest on crown lands in the province at a rate of 50,000 GMT of wood per year. This 50,000 GMT will be able to produce 25,000 – 30,000 tonnes of pellets. As the crown land is approximately 250 km from the Scotia plant, the company has yet to take advantage of



Viridis Merchants Inc. Growth Plan

the grant. If and when they decide to make use of the grant, management indicates that they will harvest the trees, sell the wood to sawmills, and take the waste.

The revival of the sawmill industry since 2013 is encouraging for Viridis. Management estimates that they have supply arrangements to produce 80,000 tonnes of pellets this year, implying the plant will have to run at an utilization rate of 66.7%. Management notes that all of the current supply comes from close proximity to the plant. If they decide to source raw materials from farther destinations, the higher trucking costs will lower margins.

Restarting production: Viridis made a decision not to put the plant back into production right away due to unfavorable market conditions including the shutdown of several sawmills/pulp mills in the region which created uncertainties in raw material supply, and the shutdown of RWE AG’s UK based Tilbury Biomass Power Station in 2013. Finally, after 19 months since the acquisition, Viridis put the plant back into production in September 2013 after overcoming certain operational challenges.

In April 2014, the Nova Scotia government granted Scotia $0.52 million to purchase equipment and upgrade the plant. In total, Viridis spent $4 million to put the plant back into production. In February 2014, the company made its first shipment of 25,000 tons to a power generator in Belgium. So far, Scotia has shipped over 100,000 tonnes. In Q1-2015, production was 18,600 tonnes, up from 15,000 in Q4-2014. Their target for 2015 is 80,000 tonnes. Operations are yet to be profitable. The company expects to operate at a break even on an EBITDA basis in 2015.

Viridis Merchants (“VMI”) was formed in November 2013. This subsidiary facilitates transactions between buyers and sellers of wood pellets and other alternative energy sources. As mentioned earlier, management has experience in brokering transactions through Cypress Pacific Marketing. VMI was formed to take advantage of the following: Viridis’ existing distribution network Agreement with Ekman Ability to provide services to small producers such as logistics management and

transportation using its fleet of leased rail cars. This subsidiary also mitigates any risk of production shortfall at OPC or Scotia,

allowing Viridis to meet its customers’ demand.

Currently, VMI is aggregating 6-8 pellet producers (heating) in the US/Canada. A typical transaction has a gross margin of 8% - 10%. The company normally receives payments from its customers in 15 days, and it is required to make payments to its buyers in 30 days, enabling them to maintain a low cash cycle. Management expects to sell 45,000 to 50,000 tonnes this year. The following points highlight the company’s key growth drivers:



Competition

Increase capacity at both OPC and Scotia with low cost improvements: As mentioned earlier, a $4 - $5 million upgrade at the OPC will allow the company to accept GMT material, and increase capacity by 30,000 tonnes, which reflects potential annual revenue increment of $5.4- $6.0 million. Management believes Scotia’s capacity can be increased to 150,000 tonnes with a $5 - $8 million investment, contingent on securing raw material supply.

Continue to increase VMI’s volume by aggregating new suppliers. Grow through acquisitions Viridis’s goal is to expand to 1 million tonnes a year of pellets in total - 50% from their own manufacturing plants, and 50% by VMI. According to the Food and Agricultural Organization of the United Nations (“FAO”), global wood pellet production grew by 12%, to 22 million tonnes in 2013. The mix of industrial and heating is almost 50:50. North America accounted for 34%, while Europe accounted for most of the remaining production. The top five producing countries were the U.S. (5.7 million tonnes), Germany (2.2 million tonnes), Canada (1.8 million tonnes), Sweden (1.3 million tonnes), and Latvia (1.1 million tonnes). The top five pellet exporters were the U.S., Canada, Latvia, Portugal, and Russia. The following tables shows the total number of plants (existing / proposed / under construction) in the U.S. and Canada. The U.S.’s existing capacity is approximately 11.37 million tonnes from 145 plants, averaging 77,725 tonnes per plant. Canada’s existing capacity is approximately 3.32 million tonnes from 54 plants, averaging 89,650 tonnes per plant.

Canada Capacity (tpa) No. of Plants AverageProposed 1,452,215 13 111,709 Under Construction 855,000 4 213,750 Existing 3,317,060 37 89,650 Total 5,624,275 54 104,153

US Capacity (tpa) No. of Plants AverageProposed 7,237,363 30 241,245 Under Construction 3,381,698 9 375,744 Existing 11,270,158 145 77,725 Total 21,889,219 184 118,963

Source: Biomass Magazine

B.C., with 17 plants, is expected to account for 45% of the total capacity in Canada once all the proposed and under construction plants are up and running. The following table shows the capacity by province.



Province Capacity (tpa) No. of Plants Average (tpa)AB 192,215 5 38,443 BC 2,538,000 17 149,294 ON 1,297,000 13 99,769 QC 881,060 8 110,133 NB 420,000 7 60,000 SK 6,000 1 6,000 NS 170,000 2 85,000 NL 120,000 1 120,000

Total 5,624,275 54 104,153 Source: Biomass Magazine

Capacity Distribution

Source: Biomass Magazine

The following section lists three key players in North America. Established in 2004, Enviva (NYSE: EVA; market capitalization – US$509 million), headquartered in Bethesda, Maryland is one of the largest wood pellet manufacturers in the world. The company went public last month through a $200 million initial public offering (“IPO”). Their focus is on the European power producers. With six wood pellet facilities across Mississippi, North Carolina, Virginia and Florida, Enviva has an annual production capacity of approximately 1.7 million tonnes. They sold 1.51 million tonnes in 2014 generating US$433 million in revenues, gross profit (excluding amortization) of US$69 million (gross profit – 16%), and EBITDA of US$55 million (EBITDA margin – 13%). Their adjusted gross margin (excluding amortization) per tonne was US$46. In addition, Enviva owns and operates a deep-water port terminal in Chesapeake, VA. BC based private company, Pinnacle Renewable Energy Group, founded in 1989, operates six plants across BC with a total capacity of 1.05 million tonnes per annum. Their primary focus is on the European power market. The company also supplies their pellets to



Wood Pellet Industry

the heating segment in North America, Europe and Asia. Rentech, Inc. (NASDAQ: RTK; market capitalization - US$252 million) is a global wood pellet and fertilizer producer. They have 34 (wood pellets/chips/fertilizers, etc.) facilities across 4 countries. In Canada, they have two wood pellet plants in Ontario with a total capacity of 560,000 tonnes. They have a 10 year off-take agreement with British power company, Drax (LSE: DRX), for 400,000 tonnes a year, and a 20-year agreement with Ontario Power (Atikokan Power Station) for 45,000 tonnes per year. They also have long-term agreements with CN Rail and a service provider at the Port of Quebec for logistics management. In May 2014, Rentech acquired New England Wood Pellet (NEWP), the largest producer of pellets for the U.S. heating market for US$45.1 million. The acquisition reflected a 6.1x multiple to NEWP’s 2013 EBITDA. NEWP, established in 1992, operates four wood pellet facilities in the Northeastern U.S., with a combined annual production capacity of 280,000 tons (acquisition multiple - US$161/t). They are currently producing 200,000 tonnes. NEWP, who is Viridis’ biggest competitor, has a 15% market share in the Northeastern U.S., with products distributed through major retailers including Home Depot, Lowe’s, Tractor Supply, and Walmart. In February 2015, Rentech acquired a wood pellet plant in Pennsylvania (50,000 ton capacity) for $7 million, or US$140/t. Rentech reported US$473 million in revenues (gross margin - 17%), and a net operating loss of US$10 million in 2014. Their wood pellet business generated US$36 million in revenues, with a gross margin of 18.6%. Rentech is planning to spin-off its wood business into a public company this year. Based on a review of the key competitors, we believe the following are extremely critical for a wood pellet manufacturer’s success: ability to grow through acquisitions diversified customer base across region and product type (industrial and residential) access to port and control on logistics diversification across manufacturing facilities to mitigate regional, political, raw

material supply risks attain long-term feedstock supply long-term purchase agreements with customers We believe Viridis fares well in most of the above points. The key for Viridis is to attain long-term feedstock supply at stable prices, and long-term purchase agreements with customers. The industry is poised for acquisitions, and we believe if Viridis can continue to grow organically, and through acquisitions, and achieve all the above, they will be a strong takeover candidate. Canadian production of wood pellets has been rapidly growing over the last five years. The following chart displays Canada’s wood pellet production, and exports.



Source: Statistics Canada

Production grew from 0.50 million tonnes in 2002, to 1.8 million tonnes in 2013, indicating a CAGR of 12%. Based on a 3.32 million tonne capacity, the industry average utilization rate was 54%. As mentioned earlier, an additional 2.31 million tonnes per year of new capacity is under construction or proposed. The plants in the U.S. have a utilization rate of 51%, and approximately 10.62 million tonnes of new supply is proposed or under construction. Canada exports 85% - 95% of its wood pellet production. The U.S. exports about 50% to 60% of its production. The UK, Netherlands, and Japan are the top importers of Canadian pellets. The leading importers of Canadian wood pellets in 2012 are shown below.



Wood pellet exports from the U.S. almost doubled from 1.5 million tonnes in 2012, to 2.9 million tonnes in 2013. The leading importers are the UK, Belgium, and Denmark.

According to the FAO, in 2013, the top five pellet consuming countries were the U.K., U.S., Denmark, Italy and Germany, while the top five importers were the U.K., Denmark, Italy, Belgium and Sweden. Although Europe is the largest consumer, the demand in Asia is also surging, and is rapidly becoming a significant market. RISI, a leading forestry products research company, estimates that wood pellet demand will increase from 23 million tons in 2014 to 50 million tons in 2024, which is an 8% CAGR.

Source: Wood Pellet Association of Canada

The demand for pellets in Europe for the heating sector has been rapidly increasing primarily due to the rising electricity prices (as shown below), and the fact that wood pellets are one of the cheapest sources of energy in Europe.



The chart below shows the strong increase in demand in Europe over the last decade for wood pellets for heating. The demand increased from under 2 million tonnes in 2004, to over 8 million tonnes in 2013, reflecting a CAGR of over 17% p.a.

Source: RISI

The industrial demand for pellets has been growing since 2009 primarily due to the EU’s Renewable Energy Directive, discussed earlier. According to the Energy Information Administration (“EIA”), the UK’s wood pellet imports have grown from near zero in 2009, to more than 3.2 million tonnes in 2013. As shown below, countries with the strongest industrial demand are Belgium, the UK, Netherlands, and Denmark.



The following chart shows the Europe’s imports in 2012.

Source: Wood Pellet Association

Even though the U.S. is the second largest global consumer, the overall demand in North America is far less than Europe. The Northeastern U.S. has seen a surge in wood pellet use. The following shows increases in wood pellet use by various states.



In Asia, South Korea implemented a Renewable Portfolio Standard in 2012 with a goal to increase renewable energy from 2% to 10% of their total energy over the next 10 to 15 years. In 2012, Japan introduced feed in tariffs for renewable energy as they aim to reduce its usage of coal. Since the introduction of their FIT program, the number of biomass power generation facilities has been growing. Nippon Paper Industries and Mitsubishi recently announced to develop a 149MW power plant fired by 70% coal and 30% biomass in Japan. 30% wood biomass and the remaining coal. In summary, we believe the European demand for pellets will continue to remain strong from both the heating and power markets. The Asian market, although still at a nascent stage, is expected to experience strong growth. Although the demand for heating may fluctuate based on price volatility of other sources of energy, industrial demand is likely to experience more steady growth as it is tied to government policies, and power generators tend to enter into long-term feeedstock supply contracts and power purchase agreements. Sources suggest that if Canadian utilities begin co-firing its plants with 10% wood pellets, domestic demand would be 6 million tonnes of pellets, which is almost three times the current Canadian production. With regards to the U.S., currently 39% of the power production comes from coal, and 27% from natural gas. Biomass only accounts for 1.7% of the total energy production. A change in policies by the U.S. / Canada will significantly increase the demand for wood pellets in North America. The low utilization rate in the U.S. / Canada, and the expected increase in production capacity in both countries, we believe, should be able to meet the growing demand. We believe raw material supply will be the primary bottleneck in the long-term, which may drive wood pellet prices higher. With regard to feedstock supply, Canada has experienced a decline in harvested land (see chart below) primarily due to the housing recession in the U.S., and drop in paper consumption. However, the lumber industry is expecting a strong 2015 due to the low C$



and increasing construction activities in the U.S.

Wood pellet pricing: The following charts show that wood pellet prices has been relatively stable compared to other sources of fuel.



Prices Wood Pellets CIF ARA

CIF =cost, insurance and freight / ARA = Amsterdam - Rotterdam - Antwerp

Source: Apx-endex

Source: Argus / Wood Pellet Association of Canada



Management Team

Source Pellergy LLC

As mentioned earlier, the existing and expected increase in global capacity should be able to meet demand, and keep wood pellet prices from going too high and dampen its demand. Wood pellet prices will be heavily dependent on raw materials supply and their prices. Management owns 0.80 million shares, or 6% of the outstanding shares. The team has a combination of distribution, manufacturing and financial expertise. Brief biographies of the management, as provided by the company, follow. Robert M. Aaron - Chairman and Director

CEO Gilwern Investments, advisor to Cornwall Investments LLC Vice Chairman HedgServ, a leading hedgefund and private equity administrator Formerly CEO of DPM Mellon (now a subsidiary of Bank of New York Mellon

Corporation)

Chris Robertson - Chief Executive Officer and Director

Founder of Viridis Energy in 2009 Managed rapid growth pellet brokerage business for previous 9 years Extensive background in forestry sector including lumber trading, remanufacturing

and sales management

Michele Rebiere - Chief Financial Officer and Director

Joined Viridis Energy in 2009, responsible for Corporate Development, Finance, M&A, Investor Relations, HR

Over 20 years experience in corporate finance, strategy and markets



Board of Directors Financials

Tim Knoop - Senior Vice President of Operations

Joined Viridis Energy in 2014, responsible for overseeing Viridis' West and East Coast manufacturing operations

Over 20 years experience in forestry, including second largest pellet manufacturer in Canada

The company’s board consists of five members. Three members are independent:

Christopher Robertson Robert Aaron Michele Rebiere Noah C. Schankler - Experience in corporate development and M&A. Principal

with Felix Partners, a New York based financial advisory Firm. Previously, M&A at JP Morgan Securities. BS (Economics) - Princeton University.

Joseph Zappulla - 25 years experience in investment banking, M&A and executive management. CEO of Grannus Financial Advisors Inc. in New York. Previously, held management positions with Donaldson, Lufkin and Jenrette, S.G. Warburg & Co. and American Express. MBA, BS - Suffolk University Sawyer Business School.

The following table shows the company’s revenues and margins.

Revenues 2010 2011 2012 2013 2014

OPC $6,934,979 $12,354,206 $9,548,177 $10,285,832 $10,129,362

Scotia $2,580,453 $11,894,879

Viridis Merchants $1,052,531 $6,185,442

Total $6,934,979 $12,354,206 $9,548,177 $13,918,816 $28,209,683

Gross MarginOPC -5.7% 13.2% 17.2% 20.6% 20.6%

Scotia -7.7% -3.2%

Viridis Merchants 9.0% 8.0%Overall -5.7% 13.2% 17.2% 19.5% 12.8%

The company’s revenues grew from $6.93 million in 2010, to $28.21 million in 2014, reflecting a CAGR of 42%. Viridis sold approximately 140,000 tonnes (including brokerage) in 2014, at an average price of $201/t. The company has not disclosed sales per plant. OPC revenues grew from $6.93 million in 2010, to $10.13 million in 2014, reflecting a CAGR of 9.9%. Gross margins were 21% in 2014, which is in line with management’s long-term expectations. After a significant jump in revenues in 2011, revenues dropped in 2012 because:



the company changed its sales terms related to freight. Prior to 2012, the off-take agreements included the cost of freight, which was included in revenues. In 2012, the company revised its arrangements to require customers to pay delivery costs directly to the transport service providers, which resulted in a drop in reported revenues, and rise in gross margins.

2011 revenues were unusually higher due to the sale of excess inventory carried over from the acquisition of OPC in 2010.

According to the company, revenues dropped slightly in 2014 as they had to spend a considerable amount of time addressing the compliance of increasing safety regulatory requirements set by the government due to two major sawmill explosions that occurred in 2012. Scotia revenues were $11.89 million in 2014. Revenues were $2.58 million in 2013, which reflected 4 months of the division’s operations. The division had a negative gross margin of 3.2% in 2014. Management expects Scotia to break-even this year. They expect gross margins to be approximately 15% going forward. VMI revenues were $6.19 million, with a gross margin of 8%. The following table shows revenues by region. Europe accounted for 53%, the U.S. accounted for 31%, and the rest came from Canada and South Korea.

Revenues 2014 % of Total

Canada $3,648,602 12.9%

US $8,783,521 31.1%

Europe $14,824,428 52.6%

Asia $953,132 3.4%

Total $28,209,683 100.0% In 2014, 48% of the revenues came from Ekman. Management states that no one end-customer accounted for more than 10% of revenues. Management expects to sell 175,000 tonnes in 2015, including 80,000 tonnes by Scotia, and 45,000 - 50,000 tonnes each by OPC and VMI. Management estimates $36 million in revenues in 2015, which reflects a 28% YOY increase. The company expects an average price of $210/t in 2015. We are taking a slightly cautious approach and forecast sales of 165,000 tonnes in 2015, and 180,000 tonnes in 2016. Our revenue forecast for 2015 is $34.20 million, and for 2016 is $38.52 million. The following tables show the margins.



Margins 2010 2011 2012 2013 2014 Rentech EnvivaGross -5.73% 13.23% 17.18% 19.52% 12.80% 17.60% 16.00%

EBITDA -51.98% -23.64% -24.45% -13.93% -10.99% 11.80% 11.10%

EBIT -60.19% -28.54% -30.27% -19.27% -15.38% 3.40% 6.70%

EBT -64.89% -33.79% -38.14% -22.75% -17.91%

Net -16.76% -34.02% -99.91% -23.74% -16.66% -5.80% 2.60%

Expenses / Sales 2010 2011 2012 2013 2014

Selling & Marketing 3.6% 2.9% 1.8% 1.7% 1.6%

Freight Out (storage cost) 5.7% 7.2% 1.8% 3.2% 8.7%

Maint. / Startup Costs 0.0% 0.0% 8.1% 3.8% 0.0%

Stock based compensation 0.0% 0.0% 0.0% 0.1% 0.6%

G & A 36.9% 26.8% 30.0% 24.5% 12.8%

Total 46.3% 36.9% 41.6% 33.4% 23.8% As mentioned earlier, the increase in gross margins post 2011 was due to the change in sales terms related to freight. The drop in gross margin in 2014 was because Scotia has yet to break-even, and had a negative gross margin in the year. EBITDA was -$3.10 million in 2014 versus -$1.94 million in 2013. The company reported a net loss of $4.70 million (EPS: -$0.35) in 2014 versus $3.30 million (EPS: -$0.34) in 2013. Our EBITDA forecast is $0.65 million, and a net loss of $1.55 million (EPS: -$0.11) in 2015. Our forecasts for 2016 are $1.50 million in EBITDA, and a net loss of $0.69 million (EPS: -$0.04). The following chart shows our projections:



The company has non-capital loss carryforwards of approximately $22.22 million which may be carried forward to apply against future year Canadian income tax. The following table shows a summary of the company's cash flows since 2010. Summary of Cash Flows 2010 2011 2012 2013 2014 2015E 2016E

Cash Flows from Operations (3,286,369) (1,759,742) (598,091) (2,915,026) (3,608,997) 1,015,090 1,241,251

Cash Flows from Investing (5,211,085) (928,475) (2,058,478) (1,031,636) (931,817) (1,500,000) (5,000,000)

Cash Flows from Financing 8,284,107 3,286,913 2,471,443 5,127,338 5,004,902 (942,293) 3,361,536

Net Change (213,347) 598,696 (185,126) 1,180,676 464,088 (1,427,203) (397,213)

Free Cash Flows (Equity) (8,497,454) (2,688,217) (2,656,569) (3,946,662) (4,540,814) (484,910) (3,758,749) The company reported negative $3.61 million in cash flow from operations, and CAPEX of $0.93 million in 2014. Free Cash Flow (“FCF”) was negative $4.54 million. Our models project FCF of negative $0.48 million in 2015. At the end of 2014, the company had $2.06 million in cash. Working capital and the current ratio were $0.85 million, and 1.2x, respectively. Liquidity Analysis 2011 2012 2013 2014 Rentech Enviva

Cash $598,696 $413,570 $1,594,246 $2,058,334Working Capital -$2,250,304 -$6,824,657 $659,690 $852,328Current Ratio 0.56 0.23 1.18 1.17 1.10 4.4Debt / Capital 53.0% 80.1% 64.5% 71.7% 71.2% 36.8%LT Debt / Capital 27.0% 0.0% 62.9% 63.2% 68.5% 36.0%EBIT Interest Coverage Ratio (5.4) (3.8) (5.5) (6.1) 0.8 2.7

Profitability Analysis 2011 2012 2013 2014Return on Assets -27% -74% -28% -33% 1.3% 4.0%Return on Equity -59% -240% -134% -141% -19.3% 3.9%Return on Invested Capital -23% -71% -33% -41% 1.6% 4.2%Activity Analysis 2011 2012 2013 2014Days Accounts Receivable 32.47 37.15 26.61 17.31 19.7 16.7Days Inventory 51.10 27.49 24.78 21.05 48.2 18.8Days Accouts Payable 52.35 99.78 101.89 53.12 25.4 8.3Cash Conversion Cycle 31.22 (35.14) (50.50) (14.76) 42.50 27.20 As shown in the table above, the company has an extremely low cash cycle versus its peers. They have long-term debt to capital of 63% at the end of 2014. Rentech also has a similarly high debt to capital (69% as of March 2015). The total debt on Viridis’ balance sheet was $7.98 million, which included: - a $2.67 million secured loan by the Royal Bank of Canada at prime + 3% p.a. - a $1.56 million working capital loan from Cornwall Investments, LLC. at prime + 5% p.a. - a $3.05 million loan from Cornwall at 9% p.a. - $0.53 million in equipment finance leases - $0.17 million in leased property improvement loans



Valuation

In March 2015, Scotia received a $2 million working capital loan at a rate of 10% p.a. from Cornwall. Cornwall Investments, based out of New York, is also Viridis’ largest shareholder. They currently own 10.50 million shares, or 76% of the outstanding shares. Viridis’ chairman, Robert Aaron, who is also the CEO of Gilwern Associates, is an adviser to Cornwall.

Shares %

Management 800,000 6%

Cornwall Investments LLC 10,500,000 76%

Retail 2,545,190 18%

Total 13,845,190

Stock options and warrants: At the end of 2014, the company had 0.53 million options (weighted average exercise price of $1.52), and 0.20 million warrants (weighted average exercise price of $3.50) outstanding. None of the options/warrants are currently in the money. The following key assumptions were used in our Discounted Cash Flow (“DCF”) valuation model: $4.5 million CAPEX over the next 24 months at OPC for a 30,000 tonne increase in

capacity We are currently not assuming any expansion of the Scotia plant as the company has yet

to attain long-term / stable raw material supplies. Total annual sales of 165,000 tonnes in 2015 increasing to 240,000 tonnes by 2020. Long-term gross margins of 20.5% for OPC, 15% for Scotia, and 8% for VMI. The company maintains debt to capital of 50% - 55% over the long-term. A weighted average cost of capital (“WACC”) of 11.0%; see table below for our

calculations - note that we added a 3% premium to adjust for size and liquidity of VRD’s shares

Cost of EquityIndusty Beta 1.6410-year Government bond yield 2.2%Market Risk Premium 6.0%Discount Rate 12.0%

Industy - Debt to Capital Ratio 52.5%Expected Cost of Debt (p.a.) 6.0%Expected Return on Equity 12.0%Tax rate 26%WACC 8.0%Adusted WACC* 11.0%* Adjusted for size and liquidity

Weighted Averge Cost of Capital

Source: FRC and Various Other Sources



Risks

Based on the above assumptions, we arrived at a fair value of $1.08 per share on VRD.

DCF Valuation(C$) 2016E 2016E 2017E 2018E 2019E 2020E TerminalFunds Flow from Operations 462,032 1,446,672 2,008,422 2,420,567 2,782,386 3,127,301 Change in Working Capital 553,058 (205,421) 198,794 22,114 116,732 71,303 Cash from Operations 1,015,090 1,241,251 2,207,216 2,442,681 2,899,118 3,198,605 CAPEX (1,500,000) (5,000,000) (500,000) (500,000) (500,000) (500,000)Free Cash Flow (484,910) (3,758,749) 1,707,216 1,942,681 2,399,118 2,698,605 Present Value (448,296) (3,129,561) 1,280,164 1,311,946 1,459,161 1,478,182 18,946,929

Discount Rate (WACC) 11.0%Terminal Growth 3.0%

Present Value $20,898,525Cash - Debt -$5,921,976Fair Value $14,976,549

Shares O/S (treasury stock method) 13,845,190

DCF Value / Share $1.08 Our comparables valuation on VRD is $1.67 per share.

Rentech Enviva(US$,

mil lions)(US$,

mill ions)Market Capitalization $259.3 $523.2Enterprise Value $806.1 $630.0

2015E 2016E 2015E 2016E AverageEV/Total Revenue 1.6 1.5 0.4 0.4 $2.44 $2.81EV/EBITDA 13.8 13.1 21.8 9.5 $0.40 $1.02P/E n/a 42.0 n/a n/a n/a n/a

Viridis

VRD (C$, mil lions)

$8.3$14.2

$1.67

Fair Value ($/share)

We used an average EV (enterprise value) to Revenue ratio of 1.55x, and EV to EBITDA ratio of 13.5x for estimating the fair value of VRD’s shares. We applied a 75% discount to the ratios (EV / Revenue of 1.2x, and EV / EBITDA of 10.1x), for conservatism, to adjust for size and liquidity of VRD’s shares. The average of our DCF and comparables valuation is $1.37 per share. We are initiating coverage on VRD with a BUY rating, and a fair value estimate of $1.37 per share. The company expects to announce their Q1-2015 results this week. The following risks, though not exhaustive, may cause our estimates to differ from actual results: The wood pellet industry is highly competitive, and is operated by several players. Technological changes / advancements may result in an increase in demand for other

sources of energy. If wood pellets experience a significant increase in price, customers may switch to other

sources of energy. The company may have to pursue equity financings for future acquisitions, which may



dilute existing shareholders. Foreign exchange risks exist as most of OPC’s sales are in US$. The company currently

does not use any currency hedging strategies. Raw material supply and price risk. The company has entered into a long-term purchase agreement with OPC’s feedstock

suppliers. VRD will have to find buyers for feedstock if they are unable to fulfill these purchase agreements.

Transportation costs. Interest rate risk associated with debt. Demand for wood pellets for heating is subject to seasonal fluctuations. Unusually warm

weather conditions may result in lower demand for heating. The liquidity of VRD’s shares is not high as only 18% of the shares are floating. 82% of

the outstanding shares are held by Cornwall Investments and management. We assign a risk rating of 3 (Average).



APPENDIX STATEMENTS OF OPERATIONS(in C$)- YE Dec 31st 2010 2011 2012 2013 2014 2015E 2016E Sales 6,934,979 12,354,206 9,548,177 13,918,816 28,209,683 34,200,000 38,522,000 Cost of Sales 7,332,038 10,719,800 7,907,399 11,202,170 24,599,424 30,237,750 33,292,175

Gross Profit -397,059 1,634,406 1,640,778 2,716,646 3,610,259 3,962,250 5,229,825

Expenses Selling & Marketing 251,492 355,490 167,385 242,826 452,023 572,330 644,657

Freight Out (storage cost) 394,193 885,453 167,492 451,375 2,464,609 2,736,000 3,081,760 Maint. / Startup Costs 775,999 534,586

Stock based compensation 10,000 172,958 656,767 739,766 G & A 2,562,361 3,313,969 2,863,995 3,416,514 3,621,413 3,974,491 5,245,983

EBITDA -3,605,105 -2,920,506 -2,334,093 -1,938,655 -3,100,744 653,920 1,503,408

Amortization 568,995 605,679 555,727 743,011 1,237,107 1,356,806 1,400,183 EBIT -4,174,100 -3,526,185 -2,889,820 -2,681,666 -4,337,851 -702,886 103,225

Interest & Bank Charges 326,044 647,712 751,858 484,174 713,618 798,031 703,802 EBT -4,500,144 -4,173,897 -3,641,678 -3,165,840 -5,051,469 -1,500,917 -600,577

Exchange rate and Unusual items 2,593,034 -72,359 -5,898,370 -137,846 -123,536 EBT -1,907,110 -4,246,256 -9,540,048 -3,303,686 -5,175,005 -1,500,917 -600,577

Non-controlling Interest -475,329 50,625 92,700 Income Taxes -745,010 -43,569 - - Net Earnings for the period -1,162,100 -4,202,687 -9,540,048 -3,303,686 -4,699,676 -1,551,542 -693,277 EPS -0.05 -0.12 -0.19 -0.34 -0.35 -0.11 -0.04



BALANCE SHEET(in C$)- YE Dec 31st 2010 2011 2012 2013 2014 2015E 2016E

Assets

Cash - 598,696 413,570 1,594,246 2,058,334 631,131 233,917Accounts receivable 1,007,389 1,190,370 753,208 1,275,959 1,400,077 1,622,146 1,702,077Inventory 2,404,622 597,003 594,012 926,933 1,910,772 1,744,061 2,012,011Related parties 58,448 190,686 54,000Prepaid expenses 142,531 247,972 225,761 546,917 379,263 388,745 398,463Current Assets 3,612,990 2,824,727 2,040,551 4,344,055 5,748,446 4,386,082 4,346,468

Property and equipment 12,225,973 12,519,729 8,264,488 9,045,376 9,334,553 9,477,747 13,077,564Total Assets 15,838,963 15,344,456 10,305,039 13,389,431 15,082,999 13,863,829 17,424,032

Liabilities & Shareholders' Equity

Accounts payables & accrued liabilities 1,675,752 1,399,033 2,924,127 3,329,868 3,830,403 4,400,723 4,531,291

Deferred income 71,470 157,058 196,595 123,422 171,000 192,610Related parties 707,771 164,670 44,373Loans payable 5,154,598 3,604,528 5,619,353 113,529 942,293 5,638,464 1,010,150Current Liabilities 7,538,121 5,075,031 8,865,208 3,684,365 4,896,118 10,210,187 5,734,051

Loans payable 556,355 3,747,726 6,198,921 7,038,017 1,399,553 6,889,403

Shareholder's EquityShare Capital 16,233,172 18,559,325 22,537,578 27,322,578 31,550,008 31,550,008 34,050,008Contributed surplus 1,727,713 2,381,449 2,861,376 3,446,376 4,141,665 4,798,432 5,538,198Non-controlling interest -572,660 -572,660 -572,660Deficit -10,216,398 -14,419,075 -23,959,123 -27,262,809 -31,970,149 -33,521,691 -34,214,968

Total Liabilities & Shareholders' Equity 15,838,963 15,344,456 10,305,039 13,389,431 15,082,999 13,863,829 17,424,032



STATEMENTS OF CAS H FLOWS

(in C$)- YE Jan 31st 2010 2011 2012 2013 2014 2015E 2016E

Operating Activities Net earnings for the period -1,162,100 -4,202,687 -9,540,048 -3,303,686 -5,175,005 -1,551,542 -693,277

Items not involving cash Depreciation 427,856 605,691 555,727 743,011 1,237,337 1,356,806 1,400,183 Bad debt expense 154,617 18,971 76,861 -4,392 Stock based compensstion 228,333 49,163 10,000 172,958 656,767 739,766 Deferred income,accretion exp, int accrual, and others -3,023,429 617,071 6,131,414 514,845 347,854

-3,529,340 -2,776,145 -2,833,936 -1,958,969 -3,421,248 462,032 1,446,672

Changes in working capital 242,971 1,016,403 2,235,845 -956,057 -187,749 553,058 -205,421

Cash from (used in) operations -3,286,369 -1,759,742 -598,091 -2,915,026 -3,608,997 1,015,090 1,241,251

Financing activities Debt 2,482,078 874,494 1,971,443 127,338 546,902 -942,293 861,536 Lease Equity 5,802,029 2,412,419 500,000 5,000,000 4,458,000 2,500,000

Cash provided by financing activities 8,284,107 3,286,913 2,471,443 5,127,338 5,004,902 -942,293 3,361,536

Investing activities Purchase of capital assets -5,211,085 -928,475 -2,058,478 -1,031,636 -931,817 -1,500,000 -5,000,000 Cash used in investing activities -5,211,085 -928,475 -2,058,478 -1,031,636 -931,817 -1,500,000 -5,000,000

Increase (decrease) in cash -213,347 598,696 -185,126 1,180,676 464,088 -1,427,203 -397,213

Cash beginning of period 213,347 - 598,696 413,570 1,594,246 2,058,334 631,131 Cash end of period - 598,696 413,570 1,594,246 2,058,334 631,131 233,917



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” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by VRD 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, VRD has agreed to a minimum coverage term including four updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (8%), SELL (5%), SUSPEND (19%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. 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viridis energy inc. (tsxv: vrd) – initiating coverage – up

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