MONTH IN REVIEW & OUTLOOK - Amazon S3

October - 2017

VOLUME 4, EDITION 10

MONTH IN REVIEW & OUTLOOK

Cannabis stocks rallied in September, with Canadian LPs showing leadership, and gained 8% in Q3:

The index, which was rebalanced as part of the regular quarterly process at the end of June and had 50 members, saw 18 double-digit gainers and 8 double-digit percentage decliners, including 2 that lost more than 20%, during the month. The index increased 4.8% to 61.74 during September and was up 8.0% in Q3 but is down 16.7% YTD. The 420 Opportunity model portfolio increased 0.3% in September and is down 11.6% YTD, outperforming the index by 5.1% after a very strong relative performance in 2016 (+293.4% vs. 88.8%). The new 420 Quality model portfolio, which is intended to have lower turnover in its holdings than 420 Opportunity, was launched on March 2nd and increased 4.7% in September. It is up 0.2% since its debut despite the 23.7% decline in the index since the then. The protections afforded to medical cannabis operators under Rohrabacher-Blumenauer were extended to December 8th as the federal government passed a spending bill. Utah

Republican Senator Orrin Hatch introduced legislation for medical cannabis research, the Marijuana Effective Drug Study Act of 2017. Dr. Oz publicly endorsed medical cannabis as a substitute for opioids.

California appears to remain on track for an early 2018 launch of its regulated medical cannabis program, which has been merged with the new adult use program.

In Canada, where Health Canada added 6 licenses, which now total 62, Ontario introduced a plan to have LCBO-like government-run dispensaries, run by OPSEU members, will be separate from the 650+ alcohol stores. Ontario vowed to close the remaining illegal dispensaries as it opens 40 stores by July and 150 by 2020. New Brunswick announced supply agreements for a state-run program it will oversee, signing MOUs with Canopy Growth and Organigram. British Columbia will have an answer by July but is seeking input before deciding. The global theme to cannabis escalated, with Cronos Group announcing a big production facility in Israel and Tilray in Portugal. Data through June 30th showed strong but slowing growth in the number of registered patients in Canada.

The big themes ahead are likely to be insight into the President's plans regarding the federal view on state-legal cannabis (especially in light of Jeff Sessions serving as Attorney General), hopeful extension of the Rohrabacher-Farr (now Rohrabacher-Blumenauer) Amendment (which is set to sunset on December 8th) to insulate statelegal medical cannabis businesses from DOJ intervention, better clarity from the federal government for banks and cannabis research (both part of the proposed CARERS Act and other proposed legislation), DEA pushback towards the CBD from industrial hemp industry, the inclusion of a broader range of extracts in Health Canada's ACMPR program and its continued growth in patient enrollment, likely legalization in Canada,

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the rollout of MMJ in Germany, Mexico and in Australia as well as continued advances in South America, progress with respect to the new legal cannabis implementations in CA, MA, ME, and NV and the new MMJ implementations in Arkansas, Florida, Hawaii, Illinois, Maryland, Minnesota, Montana, Nevada, North Dakota, Ohio, New York, Nevada, Massachusetts, Pennsylvania and Texas, the implementation of the new medical program in California and the possible legalizations via the legislatures in NM and RI.

The slide, which began in March of 2014, reversed out the entire gains from early 2014, with the market currently near the summer 2013 lows after the rally since February 2016. Most valuations remain high. Positively, we are seeing some new entrants into the publicly-traded sector of higher quality, and hopefully we see more in 2017, especially with the number of legal states doubling. Please remember that it remains the case that most of the penny stocks will not succeed. I expect that there will be just a few winners among the 550+ companies that are currently on our Broad List.

Extraction Action

One of the big trends for the cannabis industry is extracted products, which are used to provide alternatives to smoking or vaping cannabis flower, including edibles and concentrates. In some markets, the share of flower has declined to 50% with these derivatives making up the balance. Even in Canada, despite substantial limitations on formats of concentrates and the exclusion of edibles, extracts are a major growth driver for the LPs.

Extracting cannabinoids like THC and CBD as well as terpenes can be done in a variety of ways. Some of the more popular methods include hydrocarbons like butane, CO2, alcohol and even water. Rosin extraction is done without any solvents. Some considerations for which method to use include safety, taste, efficiency and cost.

The machinery used to perform extraction is sold by many companies, including global public companies like Waters (NYSE: WAT). The industry has seen some early cannabis-focused equipment makers emerge too, though they are all private, including Canada-based Advanced Extraction Systems, Apeks Supercritical, Eden Labs and MRX.

For public company investors looking to capitalize on this theme, there are just a few different ways to participate in the growth of the popularity of extracts (beyond investing in a brand). Most of the hardware companies from a few years ago are no longer investable, as MCIG has migrated its business model and VAPE and VPOR have gone by the wayside. In this review, I look at four companies that are leveraged to extraction, including CannaRoyalty, Kush Bottles, Quadron Cannatech and Radient Technologies.

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CannaRoyalty (CSE: CRZ) (OTC: CNNRF), which is on the Focus List, may be the best way to play extraction over time in my view. The company has extraction as one of its primary focus areas, which also include research, testing, branding and distribution. CannaRoyalty has assembled a portfolio of royalty agreements, equity interests and other investments and licensing agreements in the United States and Canada. Its CEO said in an interview:

Where we're really focused is the areas of research, brands and devices, which are all made possible in one way or another through extraction and licenses to be able to conduct extraction.

With respect to extracts, the company earns royalties on products sold by M?V, which include a vape pen and cartridges. It also has a licensing agreement with AbsoluteXtracts of California to expand its brand to Washington and Canada. Wholly-owned DreamCatcher Labs produces cartridges. The company is also a joint venture partner with Rich Extracts in Oregon. Finally, it is developing The Terpistry, which will focus on creating a platform targeting extract-based products. Several of its other entities have exposure to extraction as well.

In Q2 ending 6/30, the company reported sales of C$960K, up from just C$300K in Q1. While it's not a pure-play, I note that the word "extract" is mentioned 29 times in its MD&A filing from the quarter. As of late August, CannaRoyalty had 42mm shares outstanding and 52.3mm fullydiluted shares, though this is somewhat overstated as it includes 2.8mm warrants above C$3.00.

Kush Bottles (OTC: KSHB) has developed a substantial packaging business but recently gained significant exposure to extracts through the purchase of CMP Wellness, a distributor of standard and custom vaporizer products, including pens, cartridges and accessories, including MediPen.

The deal, which doubled its revenue, closed in Q3, so the fourth quarter, which ended 8/31, will be the first to include a full quarter of revenue from the acquired company. The company's SEC filing did provide a pro forma that suggested CMP Wellness revenue in the first half of the year accounted for just over 50% of the combined company's pro forma revenue. Kush Bottles has also developed a line of terpenes (Terps on Terps), further extending its exposure to the extracts trend.

Wayne Green, the scientist behind this effort, stated in an article as he described where Kush is headed in terms of being a one-stop shop:

If you want to build a brand, not only will we provide the cartridges, we can provide the terpene formulation, and we can provide the custom packaging and brand curation.

Kush bottles reported in mid-July that it has 58.5mm shares. There are also 4.7mm options, 2.94mm of which are at $2.36 and the balance at an a weighted average exercise price of $0.49. Considering the large amount of revenue (I project $37mm in FY18 ending 8/31/18), about half of which is tied to extraction, there is considerable leverage to the theme. KSHB will report its Q4 in mid to late November.

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Quadron Cannatech (CSE: QCC) (OTC: QUDCF) is a Canadian company focused on automated extraction and processing solutions. It is creating a closed system, with proprietary cartridges (that don't interchange with other devices but require the purchase of a specific device instead). This strategy could limit the company's potential.

Its Cybernetic unit provides the intellectual property for automation and process manufacturing and serves over 40 clients. Soma Labs Scientific creates CO2 supercritical extraction systems and generates revenue from a three-year research agreement with Odorchem (which sells odor neutralizer products). It hopes to have two mobile units in the field by the end of 2017. Greenmantle Products is going to be providing customized vaporization devices in Canada and the United States. It has forged a distribution relationship with Lucid Labs in Washington.

I have met with the CEO, Rosy Mondin, in person and have followed up with a phone call. The management team has some depth as well. While I am hopeful this could develop into a potentially appealing investment, it's early in my view. In Q4, the company reported sales of only C$150K and C$516K in FY18-Q1. If the company is able to meet its expectations later this year of placing the mobile extraction systems, it could begin to attract more investor interest.

As of late September, the company had 47.9mm shares outstanding 3.75mm options at a C$0.16 weighted average exercise price, 10mm warrants at C$0.20 and 6.15mm shares that could be converted from its B Preferred shares. The fully diluted share-count, then, is just 67.8mm shares, and there is significant insider ownership.

Radient Technologies (TSXV: RDI) (OTC: RDDTF) is applying its technology to the cannabis industry and has a strategic relationship with Aurora Cannabis, which is an investor and is hoping to use Radient's technology to extract CBD from industrial hemp, should that become legal in Canada.

Here is how it describes itself:

Radient extracts natural compounds from a range of biological materials using microwave assisted processing ("MAPTM"), a patented technology platform which provides superior customer outcomes in terms of ingredient purity, yield, and cost. From its 20,000 square foot manufacturing plant in Edmonton, Canada, Radient serves market leaders in industries that include pharmaceutical, food, beverage, natural health, personal care and biofuel markets.

This sounds great, but a look at the company's financials reveals a company that hasn't had a lot of success despite years of trying. The company was incorporated in 2001. Its Chief Technology Officer, Steven Splinter, and Vizon SciTec had acquired the MAP license from Environment Canada for the field of industrial-scale extraction of organic matter, and Radient acquired the rights in 2002. In the year ending 3/31/17, it generated only C$293K in sales, down over 50% from FY16.

It just began focusing on cannabinoid extraction in late 2016. Initial research suggests to the company that MAP can reduce extraction times,

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improve efficency, attain throughput of up to 1500 kg/day and retain cannabinoid and terpene profiles. The company has filed a license to become an LP, with a goal of producing cannabis oils. It also has a pending application for a Dealers License.

As of late August, the company had 179.5mm shares outstanding as well as 10.6mm options with a weighted average exercise price of $0.68, 1.1mm finders options at $0.45 and 55mm warrants at an average exercise price of $0.36. Additionally, there are 9.4mm shares pending issuance not yet included.

Conclusion:

Investors who want to leverage the theme of extraction are likely best served to further explore CannaRoyalty or Kush Bottles. Quadron Cannatech and Radient are more speculative at this time but are worth monitoring.

How Oils Are Driving LP Sales

In September, Health Canada updated market information that showed how oils are growing rapidly. During the quarter ending 6/30, LPs shipped 5.896mm grams of dried flower, representing growth of just 1% from the prior quarter and 46% from a year ago. Oil sales, expressed in weight, were 6.194mm grams, up 9% from the prior quarter and 313% from a year ago.

Not all LPs are positioned to capitalize on this trend, with many not yet permitted to sell oils. Among the bigger LPs, all are now selling, but the popularity of oils has benefitted some more than others. With that in mind, I wanted to compare each of the major LPs, including Aphria, Aurora Cannabis, CanniMed Therapeutics, CannTrust, Canopy Growth and MedReleaf.

Aphria reported its results for the fiscal year ending in May in July. For Q4, it reported that oils represented 31.7% of sales, or about C$1.81mm. In Q3, oils represented 25.6% of sales, or C$1.31mm, suggesting that the 38% sequential growth accounted for 83% of the increase in Aphria's Q4 sales compared to Q3. The company held inventory of 1091 liters of oil valued at C$682K on May 31.

Aurora Cannabis, which launched its oils in April, reported its results for the fiscal year ending in June in September. Unfortunately, it didn't break out the sales. The company suggested at the end of August that sales for the month would exceed C$3mm, with oils representing approximately 26% of sales.

CanniMed Therapeutics reported its FY17-Q3 ending in July in mid-September. Oils represented approximately 55% of sales, or C$2.63mm. In the prior quarter, sales of C$1.78mm represented 48% of sales. Oil sales accounted for 78.6% of the growth in Q3 sales over Q2's. The company sold 1114 liters during Q3, an increase of 208% from a year ago, while dried cannabis grams rose by 42%.

CannTrust reported its Q2 ending in June at the end of August. Oil sales, at C$2.39mm, represented almost 53% of overall sales and increased from C$1.05mm in the prior quarter, driving 89% of the overall quarterly increase. CannTrust first sold oils in August 2016.

Canopy Growth reported its FY18-Q1 ending in June in mid-August. The company's oil sales were 19% of revenue, or approximately C$3.02mm. The proportion of oil sales, which dropped about 7%,

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fell slightly from 22% in Q4 (C$3.23mm)but was up from 6% in FY17-Q1. The company has recently brought online a massive extractor made by Advanced Extraction Systems and reported 6.5mm grams of dried cannabis awaiting conversion and 2683 liters of oil in inventory.

MedReleaf reported its FY18-Q1 ending in June in mid-August. It began selling oils in November 2016. Sales of C$1.50mm represented just 14.4% of sales, up from C$967K in the prior quarter, or 9.3%, helping to offset a decline in sales from dried cannabis. The company disclosed that oil represented 23% of overall June sales and that it expects to get to 50% of overall sales over the next several quarters.

Oils are contributing to the growth of the leading LPs in Canada, and they are all well positioned to benefit over the next year and beyond as medical cannabis patients adopt these products over dried flower. How oils fit into legal cannabis sales is a topic for future discussion, as the types on nonflower products that are so popular in the black market and in the United States, including edibles and extracts with higher potency and different form factors (like shatters and waxes), are not yet permitted in Canada. Further, success in the current form of extracts doesn't suggest that the LP will be able to successfully create and market the products and brands that the consumer market will desire.

Rebalancing the 420 Investor Cannabis Stock Index

Each quarter, I rebalance the 420 Investor Cannabis Stock Index, which is designed to reflect the universe of publicly-traded cannabis stocks. The index includes all cannabis stocks that have average daily trading value in excess of $100,000 and a price of at least $0.01, the same as lat quarter and compared to $150,000 minimum in

Q1 and Q2. The bar remains much higher than in 2016. For Q4, the threshold for the minimum daily average trading value was $35K, $25K for Q2 and Q3 and just $15K for Q1 a year ago. To be included in the index, the company must have a real U.S. listing (not an unsponsored ADR), though volume requirements incorporate Australian or Canadian volume as well.

This quarter, the index will include 53 names, up from 50 in Q3 and representing about 9% of the entire universe of companies. The 420 Investor Focus List, which currently has 25 members, includes 8 names outside of this index that don't meet the daily trading value requirement (CBICF, CVSI, DIGP, GBLX, GRWG, MDCL, SLTK and SRNA).

All ten of the companies that were eliminated failed to meet the daily trading value minimum, including BLOZF, BUDZ, CNAB, CVSI, GBLX, MCOA, MQPXF, PMCB, VBIO and ZLDAF.

Additions that were members of the index in the past include Americann (ACAN), American Cannabis Company (AMMJ), Future Farm Technologies (FFRMF), Namaste Technologies (NXTTF), THC Biomed (THCBF) and ViaDerma (VDRM). AMMJ and NXTTF are on the Focus List. The 7 additions that join the index for the first time include:

Glance Technologies (GLNNF), Leafbuyer Technologies (LBUY), Liberty Health Sciences (LHSIF), Maricann Group (MRRCF), Sunset Island Group (SIGO), True Leaf Medicine Intl (TRLFF) and Friday Night, Inc. (VPGDF).

GLNNF is a Canadian mobile payment app company focused on many industries but talking a LOT about cannabis and its investment in CannaPay Financial (49% ownership and exclusive license). The stock has a primary listing on the CSE (GET). The company has been highly promotional, and this has helped the stock move

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to a 52-week high, more than tripling off of recent lows on very high volume. As of mid-July, there were 128mm fully-diluted shares. LBUY has an interesting business helping cannabis businesses with advertising solutions (coupons). The Colorado company is operating in several markets and generated sales of $715K in the first three quarters of the fiscal year ending in June, though Q3 was not impressive. The capital structure includes a nasty convertible preferred that gives management a constant 55% of common shares. Note that the company sold shares in late March at .12-.15 per share in a private placement.

LHSIF holds one of a limited number of licenses in Florida and has applied for a cultivation license in Ohio. The company has a license agreement with Aphria, which is also a substantial owner. CEO George Scorsis was a senior executive at Mettrum. The stock, which has a primary listing on the CSE (LHS). While I think this is an excellent company, the valuation is hard to justify (287mm fully diluted shares). MRRCF is a revenue-generating LP in Canada with big plans in Germany. The company, which grows in a greenhouse and has had early success with oils, has stumbled of late with a disclosure issue and has struggled with a capital raise. The stock, which has a primary listing on the CSE (MARI). MARI's valuation seems reasonable, with about 90mm fully diluted shares. Note that both of these companies are clients of New Cannabis Ventures.

SIGO is one of the worst stock scams I have seen in the past 4 1/2 years. I have written two pieces about the company on New Cannabis Ventures that go into many of the details. The company masked the involvement of a notorious penny stock operator, Joseph Wade (previously Joseph Wade Mezey), a disbarred lawyer who runs 1PM Industries (OPMZ). The company has only 4.67mm shares outstanding but has 46mm shares masked by a convertible preferred. The company cultivates cannabis but does so apparently as a service provider while pretending to be a license

holder. SIGO has an open S-1 registration that permits it to sell over 19mm more shares at $0.10 per share.

TRLFF is an ACMPR LP applicant with an animal health business focused on hemp-based products as well. The stock has a primary listing on the CSE (MMJ). I like the management team, though the pet business is not yet profitable and doesn't have material revenue ($1-1.5mm annual). The company is attempting to raise $10mm through a Reg A+ offering (registration not yet effective). There are about 85mm shares outstanding on a fully diluted basis. VPGDF is a relatively new reverse merger. The stock has a primary listing on the CSE (TGIF), and the company has interests in alcohol and cannabis, including 91% of Alternative Medicince Association in Nevada, a licensed cultivator and producer. It also has a hemp-based CBD business. There are 147mm fully diluted shares.

The other 40 returning members of the index include the following tickers: ABCCF, ACBFF, ACNNF, AMFE, APHQF, AXIM, CANN, CBDS, CBIS, CNBX, CNNRF, EMHTF, EMMBF, GLDFF, GWPH, HEMP, IIPR, IMLFF, ISOLF, ITHUF, IVITF, KSHB, KWFLF, MCIG, MEDFF, MJNA, MRPHF, MSRT, MYMMF, OGRMF, OWCP, PNTV, POTN, RMHB, SING, SPRWF, TBPMF, TRTC, TWMJF and XXII.

The current index includes twenty-eight companies (53%) based in or operating in Canada and one (2%) based in Australia. Reflecting slightly better liquidity than the prior quarter, in which there were 14 names that had daily average trading value in excess of $500K (including in Canada), this quarter there are 17, including ABCCF, ACBFF, APHQF, GLNNF, GWPH, IIPR, KWFLF, LBUY, MEDFF, MJNA, OGRMF, SING, SPRWF, THCBF, TRTC, TWMJF and XXII.

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Cannabis Industry Calendar

10/04-06: Cannabis World Congress & Business Expo in Boston, MA 10/06-07: Grow Up Conference in Niagara Falls, ON 10/12-14: Southwest Cannabis Conference & Expo in Phoenix, AZ 10/13-15: New West Summit in Oakland, CA 10/25-26: CannaTech in London, UK 10/28-29: CannaGrow Expo in Denver, CO

SAVE 50% USING CODE "NEWCANNABISVENTURES"

OTC Disclosure , SEC and Canadian Reporting Deadlines*

Fiscal Year ending in July: Annual report due on or before 10/30 (10/30 TSX) Fiscal Year ending November, February or May: Quarterly due 10/17 (10/16 TSX) Canadian Venture Fiscal Year ending in June: Annual due 10/30 Canadian Venture Fiscal Year ending in November, February or May: Quarterly due 10/30

*Note that many U.S. companies take advantage of automatic extensions

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