MONTH IN REVIEW & OUTLOOK - Amazon S3

July - 2015

MONTH IN REVIEW & OUTLOOK

June saw continued erosion in the price of cannabis-related stocks, with the Benzinga 420 Marijuana Index declining to new lows for the year:

The index, which was rebalanced as part of the regular quarterly process at the end of June and included 39 names during Q2, saw 4 double-digit percentage gainers and 26 double-digit percentage decliners during the month. The index declined 20.1% to 62.5 during June, dropping 36.5% during the second quarter, and is down 52.2% in 2015. Banking continues to be a major industry challenge, but a new initiative in Nevada may offer a solution. At the NCIA conference, I met many others working to solve this problem as well. New York announced 43 applicants for its 5 MMJ slots. Medical cannabis research funding was buoyed by a $34mm ($26mm USD) contribution by Australians Barry and Joy Lambert. In a setback for individual freedom, the Supreme Court of Colorado ruled in favor of Dish Network's firing of Brandon Coats for his being a patient despite his not consuming cannabis or being under its influence while at work. After an extremely long

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delay, Massachusetts saw its first dispensary open, though Nevada continues to see delays.

On the political front, the CARERS Act continues to pick up bipartisan support, with 11 cosigners now. The Senate Appropriations Committee approved the cannabis-friendly Mikulski Amendment. Finally, the Obama administration streamlined the rules for medical cannabis research, eliminating a review by the Public Health Service that had been previously required.

In Canada, the Supreme Court ruled against the government's prohibition of edibles, legalizing consumption and opening the doors to Health Canada broadening its current flower-only program to include extracts. Tilray created a bit of stir early in the month, exiting the industry trade association amidst accusations of ethical issues related to payments to clinics. It also laid off 1/3 of its workforce. Tweed and Bedrocan announced their intention to merge, a major consolidation.

Longer-term fundamentals for the industry remain positive, as legal and medical cannabis continue to expand on a state-by-state basis and as the industry moves from the black-market. The early-in-the-year explosion in demand for the stocks in 2014 led to unsustainable valuations (and a lot more supply of stock, much of which was from companies that appear to lack substance). This year, investors are likely to focus on companies with more visible near-term revenue opportunities.

The big themes ahead are likely to be the potential for the DEA to reschedule cannabis and better clarity from the federal government for banks (both part of the proposed CARERS Act), resolution of the MMAR/MMPR lawsuit, potential inclusion of extracts and edibles in Health Canada's MMPR program and its continued growth in patient enrollment, potential legalization in Canada, progress in 2015 with respect to MMJ expansion and on 2016 ballot

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initiatives and legislative initiatives for legal cannabis (CA, NV), the announcement of candidates for the Presidential election in 2016, rollouts in Oregon and Alaska, congressional handling of D.C.'s attempts to legalize, and implementations of several state MMJ programs, including Florida (CBD only), Illinois, Maryland, Minnesota, New York, Nevada, Massachusetts and Puerto Rico.

The slide, which marked its one-year anniversary in March, reversed out the entire gains from early 2014, with the market pulling back to late-2013 levels but currently below the summer 2013 lows. Despite the correction, most valuations remain high. 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 approximately 300 companies that are currently on our Broad List.

Changes to the Benzinga 420 Marijuana Index

Each quarter, I rebalance the index that is designed to represent the overall market for the cannabis sector. At the beginning of the quarter, each stock that qualifies for inclusion has an equal weighting in the index. The members, which must have substantial exposure to legal or medical marijuana, must also have sufficient liquidity. The

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test I run requires that the one-month average daily trading value that exceeds $25K. For Canadian stocks with U.S. tickers, I include Canadian volume in this calculation. The stock must actually have a quoted symbol in the U.S. as well. Additionally, the stock has to have a price at the time of the rebalancing of at least $.0020. Note that the rules may change over time, but this has been the criteria for the past two quarterly rebalancings.

In both Q1 and in Q2, the index held 39 names. With the changes that went effective at the close 6/30, there are now 33 constituents. The primary reason for the reduction is that trading volumes have declined, but I also removed two companies that don't appear to meet the exposure requirement, MYEC and XXII. The stocks removed for liquidity or low prices included ATTBF, CBDS, CGRW, CNAB, FWDG, GRCU, GRNH, GRSU, NRTI, NTRR, OGRMF, PKPH, PLPL, SMVR, TAUG and VAPE. This rebalancing eliminated 46% of the index, including some names not only on the Focus List but also in 420 Opportunity.

I did add a dozen new names, some of which returned after previously being removed due to liquidity reasons.:

Breath e-Cig (BVAP), a recent reverse merger, is developing a vape pen for use with CBD from industrial hemp to be provided by Tauriga (TAUG)

DirectView (DIRV) provides security equipment to marijuana cultivation facilities (allegedly). The company is run by a convicted felon

GrowBlox (GBLX), a Focus List name, returns. The company seeks to be a vertically integrated provider of pharmaceutical grade cannabis and is active in Nevada and Puerto Rico

Generex Biotechnology (GNBT) has licensed its technology to Smoofi (SMFI) to

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deliver cannabis-derived products through the buccal membrane Lexaria (LXRP) returns following a nice run on increased volume driven by the exit from oil & gas properties and the focus on its CBD tea. MaryJane Group (MJMJ) has performed very poorly this year but has seen trading volumes soar following a massive dilution. The company owns and/or operates several cannabis-friendly hotels. MassRoots (MSRT), a Focus List name, began trading in April and is now included in the index. The company offers consumers a mobile app focused on cannabis experiences. The company will soon be monetizing through advertising. Nemus Bioscience (NMUS) is another relatively recent reverse merger. The company, which is on the Focus List, is a cannabis-focused biotech with an early stage drug to treat glaucoma with a couple of other early stage products as well. Nutritional High (SPLIF) is a recent true IPO in Canada. The company currently has licenses in Colorado and Illinois and just announced a deal for Jimi Hendrix branded edibles Two Rivers Water & Farming (TURV), a Focus List name, returns after volume picked up as the company gets closer to revenue in its GrowCo unit, which is building and operating greenhouses in Pueblo, Colorado. North American Cannabis Holdings (USMJ) is a recent name change and ticker change (Algae International Group - ALGA previously). The company, which is involved in hemp, looks to open a chain of "Americanna Cafes" Verde Science (VRCI) is an early-stage pharmaceutical company. The company, which employs Paul Pelosi, Jr. (son of Nancy Pelosi) as an advisor, did a 1:280 reverse split earlier this year

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Returning members of the index include: AERO, BLOZF, CANN, CANV, CBIS, EAPH, ERBB, FITX, GTSO, GWPH, HEMP, IMLFF, MCIG, MDBX, MJNA, PMCB, PZOO, RSSFF, SPRWF, SRNA AND TRTC.

As a reminder, inclusion in the index is not in any way a recommendation of the stock. In fact, I would avoid the majority of the companies in the index. The 420 Opportunity Model Portfolio, which represents the names in the sector that offer the best investment potential within the universe of publicly-traded cannabis stocks in my view, is measured against the index and has outperformed it consistently since it was launched in April 2014..

The State of the States

When looking at the cannabis industry, one must take into account that the market is not national but rather state-level and even local. While four states now are rolling out or have implemented legal adult-use combined with regulated production and about half of all states allow some form of medical cannabis, the programs vary rather dramatically. In this review, I am going to focus on several newer state medical marijuana programs, including Minnesota, New York , Nevada, Illinois, Massachusetts and Maryland.

Today, Minnesota's new MMJ program kicks off. If you aren't familiar with the program, it is one of the more interesting ones in many regards. On the one hand, the program is highly restrictive. For instance, only concentrates are allowed to be sold. Additionally, there are only 9 conditions approved at least initially for which patients can access the program. On the other hand, the program hit all the deadlines, something that I don't believe any other state has done. Further, the two providers, MinnMed (a customer of AMMJ) and LeafLine

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Labs, have been able to raise about $35mm combined. The program faces the near-term challenges of low patient enrollment as well as resistance from the physician community, both issues that should improve over time. To learn more about the program, visit the Minnesota website.

New York has constructed a very similar program, but one that has attracted significantly more attention. Like Minnesota, the program is permits only extracts and only for a limited number of medical conditions. While Minnesota has two vertically integrated producers, each with four dispensaries, New York will initially choose 5 providers after receiving applications from 43. Many of the applicants have communicated information about their teams, their backers and their selected locations. One of the more interesting aspects has been the involvement of Canadian and Israeli cannabis producers. Clearly, despite its deficiencies, NY's program offers applicants to get in on the ground floor in one of the largest states. The state expects to issue the licenses in July, a remarkably fast timetable if met, with the program beginning in January. To learn more, you can visit the New York website.

The Nevada program, despite some implementation challenges, will likely be viewed as one of the best constructed efforts thus far. Patient access is good, and the rules permit all forms of cannabis. As I discussed last month, it

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has the most rigorous mandating testing of any state. The state fixed the number of dispensaries by statute but allowed an unlimited number of cultivation and production licenses, a situation that could lead to excessive competition among producers. The enrolled patient count at the end of May was just 9,345, but with dispensaries starting to open, we should expect to see more registrations. You can learn more about the program at the Nevada website.

Illinois has improved its program, ominously named the "Compassionate Use of Medical Cannabis Pilot Program," but it remains somewhat limited in terms of patient access. Positively, the state will consider adding eleven additional qualifying health conditions through a open petition period beginning July 1st. Earlier this year, the new governor signed off on the award of licenses to dispensaries and producers, allocating initially the vast majority of the 21 production licenses and 58 dispensary licenses. The program should begin soon, about two years after being signed into law on August 1, 2013. As of June 3rd, only 2500 patients had successfully registered. The state maintains a website for the program.

The Massachusetts program is likely one of the worst implementations to date. The state awarded 20 provisional licenses (of a total possible 35) in early 2014 but the process resulted in litigation surrounding accusations of political favoritism. The program is viewed as very unfriendly to businesses. Fortunately, it is making several improvements, effective June 29th, including a rolling application process with interaction between the Department of Public Health and potential "Registered Marijuana Dispensary". Still, these vertically integrated operators must be not- for-profits. The first dispensary finally opened in June, but voters approved the program in 2012, so these delays are unconscionable The state maintains a website for its program.

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Looking ahead, Maryland will be accepting applications later this year for its revamped program. The governor signed the new law, House Bill 490, in May. There will initially be 15 growers and 92 dispensaries. The program looks to be very well constructed, with good patient access and no restrictions on the form of the cannabis (flower and concentrates permitted). Interestingly, patients do not have to be residents of Maryland. This looks to be a good opportunity for testing labs. I haven't heard yet of any public company discuss the state yet. The best way to follow developments is to check in with the website for the Maryland Medical Cannabis Commission.

The six states discussed here are among the most interesting MMJ programs getting underway at this time. Successful implementation will likely smooth the path for other states considering adopting medical cannabis programs. To follow the progress, be sure to check in to the Forum, where we have state-level discussions.

Cannabis Brands: Buy vs. Build?

Now that cannabis is moving rapidly towards legalization, marketing has taken on a new role. In such a highly regulated industry, with advertising limitations, and given what is likely to be continued pricing pressure in a legal cannabis environment, cannabis providers face many challenges. A few months ago, I wrote about the importance of branding as the industry evolves, and I briefly discussed some of the early brand leaders that are better known, including O.PenVape, Bhang and Dixie. Each of the companies has expanded its product offering and geographical reach dramatically, and Bhang and Dixie are going into markets beyond their initial edibles.

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I also mentioned the trend towards iconic branding, discussing the deal between the Marley family and Privateer Holdings to create "Marley Natural". In this case, the brand exists before the first product. Sure, the Marley name will appeal to many potential customers, but a name is not enough: The product must fulfill the potential of the brand as well. Additionally, intellectual property is already enough of a challenge in the federally illegal cannabis industry. Investors should be careful to assume success based solely upon the name of a line of products.

A big issue with trying to create a celebrity brand is that there can be multiple parties with a connection to that brand. For another icon, Jimi Hendrix, trouble is already brewing. Nutritional High (SPLIF) signed a deal with "Purple Haze Properties", which is tied to the singer's brother, Leon, rather than Experience Hendrix, which owns the Jimi Hendrix name. Cannabis Science (CBIS) announced a deal with Purple Haze as well for "Jimi's Cannabis Collection".

I think that companies that build brands from the ground up will ultimately create the "Absoluts" or the "Jim Beams" of the future. One that has impressed me recently is Mary's Medicinals, which offers a variety of products with an emphasis on CBD, including transdermal patches and pens, topicals and capsules. The company's

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products are available in Colorado and Washington and will soon launch in California, and it has established a partnership with Colorado -based Elite Botanicals to create a line that can be shipped in all 50 states.

Terra Tech (TRTC) seems to get the concept and is rapidly developing its "IVXX" brand, which is now available across California in 10 stores, including Bl?m Oakland. The company will use the brand in Nevada as well, and this model will prove most interesting, as the Nevada operations will be vertically-integrated. While the packaging is elegant and consistent with the high-end nature of the product, and the reviews, of which there have been only a few (note to TRTC: post some reviews on the IVXX site!) have been decent, it's early to declare victory. Social media indicators are weak: 34 Twitter followers, 657 Instagram followers and 284 Facebook likes. The website seems to meet the intended effect, but traffic as estimated by Alexa and isn't meaningful. Another challenge for IVXX is that the company is having a trouble with obtaining a trademark (due to federal illegality). Additionally, there is another company using "IVXX" and was using it first. Still, TRTC has come a long way already over the past six months and will hopefully prosper in its efforts.

Our neighbors to the North seem to get this idea of building a brand, and I think that Tweed and Bedrocan have done a great job on this front.

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Their pending merger seems to take this into account, as it was mentioned in the press release as well as during the conference call. Tweed has done a decent job building a consumer brand, while Bedrocan's name is highly regarded within the medical community, with over a decade of producing consistent, high-quality cannabis in the Netherlands.

Here are some comparisons on a variety of indicators for the strength of the brand. Keep in mind that the ultimate measure is "sales"!

We know that branding will prove important, especially as wholesale cannabis prices are pressured by supply, but it's way too early to start declaring victors. I continue to track closely what is going on in the edibles and concentrates sub- industry, as that is where branding is most likely to be most relevant. Some companies are pursuing a celebrity branding strategy that could prove costly and not ultimately deliver the ROI expected on licensing fees. It will be essential for these companies to deliver a product that lives up to the consumers' expectations. The "buy it" strategy seems like a short-cut, and I prefer to see the brands built rather than bought.

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CANNABIS INDUSTRY CALENDAR

7/ 1 - Minnesota MMJ dispensaries open 7/11-12 - INDO Expo Trade Show - Denver 7/18 - Cannabis Investing Symposium at the Money Show in San Francisco 7/20 - Lift Cannabis Forum in Toronto 7/23-25 - My Compassion Cannabis Conference in Chicago 7/29-30 - Cannabis Creative Conference - Portland 7/30 - Cannabis Investor Webcast

Denver, 10/12-10/14 - Sign up for updates!

OTC Disclosure , SEC and Canadian Reporting Deadlines* Fiscal Year ending in April: Annual report due on or before 07/29 Fiscal Year ending August, November or February: Quarterly report due on or before 07/15 Canadian (Venture) Fiscal Year ending in March: Annual due 07/29 Canadian (Venture) Fiscal Year ending in August, November or February: Quarterly due

07/30 *Note that many U.S. companies take advantage of automatic extensions

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SPOTLIGHT ON THE FOCUS LIST

420 Investor maintains a "Broad List" that includes about 300 companies that purport to be in the cannabis sector. At the same time, it monitors a narrower group of 28 companies, the "Focus List", which consists of what we consider the most important companies among the publicly-traded stocks, including the most actively traded as well as several that are under-the-radar but that appear worthy of consideration. We provide numerical ratings to VIP subscribers on three different measures for each member of the Focus List, including relative valuation, technicals and relative quality. We added Digipath (DIGP) and Pazoo (PZOO) to the Focus List during June.

Our relative quality rankings, which range from 1 (best) to 5 (worst) are a subjective assessment of each company relative to the entire Focus List and are based on management capability, corporate governance and transparency, execution and capital structure. The companies that we currently rank below average (4 or 5) include alphabetically by ticker: Abattis Bioceuticals (ATTBF), Blue Line Protection Group (BLPG), CannabisSativa (CBDS), Cannabis Sciences (CBIS), Endexx (EDXC), American Green (ERBB), GrowBLOX (GBLX), Hemp, Inc. (HEMP), Medbox (MDBX), Medical Marijuana, Inc. (MJNA), PharmaCyte Biotech (PMCB), Pazoo (PZOO) and Surna (SRNA).

Here were some of the key news items for Focus List companies in June:

American Cannabis Company (AMMJ) announced a client's application submission in New York and the addition of a consulting client in Maryland. It also received an order for The Satchel valued at $175K

Abattis (ATTBF) announced its water supplier for its Vergence Visionary Bioceuticals Blue Line Protection Group (BLPG) announced an agreement to provide services to Amercanex

customers. The company is also embroiled in a dispute with co-founder Dan Sullivan, who was indicted on felony charges for fraud Bedrocan Cannabis (BNRDF) announced a $2mm loan from a Director to help fund the expansion of its new facility. The company agreed to be acquired by Tweed, subject to shareholder approval CannLabs (CANL) finally filed its 10-K that included a disclosure that its CEO had resigned CannaVest (CANV), which received a one-month extension from its lender to file its S-1, added a new executive to spearhead sales to national stores CannabisSativa (CBDS) CEO Gary Johnson resigned from the Board of Directors of Medican. The company borrowed $300K by issuing a convertible note to publicly-traded Weed Growth Fund (WEDG) Endexx (EDXC) announced that it will be launching CBD-infused K-Cups for coffee, apple cider and hot chocolate American Green (ERBB) announced the acquisition of an RFID technology company that specializes in asset tracking GrowBLOX (GBLX) announced a strategic partnership with an extracts manufacturer who is also providing it with capital to finish up the Nevada buildout, It's 10-K revealed a change in the ownership of its Nevada subsidiary such that it will now own more of the cultivation facility while giving its partners the potential dispensaries. GW Pharma (GWPH) began its 2nd Phase 3 trial for LGS. The company also saw some insider selling

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