THIS BUD’S FOR YOU - Midas Letter

[Pages:9]FALL 2017



Marijuana Stock Buyers Guide

The most authoritative analysis of Canada's publicly-traded marijuana companies from the nation's most connected cannabis investment writer.

CANNABIS COMPANY REPORT

THIS BUD'S FOR YOU

Marijuana has been a thriving underground business for decades. The impetus to bring this medicinal herb, whose cannabinoid structures are reflected in endocannabinoid receptors in the human body, is gaining momentum globally.

The pictures at right I took during visits to Canopy Growth Corp, Peace Naturals (a Cronos Group subsidiary), and Aphria - some of the earliest entrants into the legal medical market in Canada, and among the most established growers.

There are two driving forces at work here.

Increasingly, the medical community is beginning to understand that the CBDs and THCs that are at the core of marijuana's "entourage effect" (where the entire effect is actually contributed to by different components of the plant's biological elements) are powerful remedies to many of the maladies that afflict human beings during their lives.

Recreational marijuana is becoming a reality in an increasing number of U.S. states, and Canada will become the first G7 country to have a national recreational regime in recorded human history.

Each of these two segments of the human population might constitute as much as 20 percent or more of the entire population. I base that figure on anecdotal observation of the people I have met in my 53 years of existence.

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CANNABIS COMPANY REPORT

Whatever your attitude toward marijuana-- whether you revile it as another unneeded and unwanted intoxicant, or embrace it as the medicine that has made life worth living again--there is one certainty that cannot be ignored: This is a multi-billion dollar global market emerging from an age of prohibition, and the upside for investors who are lucky enough to recognize the massive scale of the opportunity, are going to realize transformational wealth accumulation.

Don't get me wrong.

There are going to be losers as well. In fact, in the run-up to Canadian recreational legalization now slated for July 1st, 2018, the number of higher risk companies will begin to outweigh the companies exhibiting the Midas Letter core mantra of "upside with a reasonable level of risk".

But that's precisely why, now more than ever, if you are an investor who wants exposure to this once-in-a-lifetime opportunity, you need a reliable source of objective market nalysis, and that's the purpose of this guide. It's not meant to be the all-inclusive, 360 degree view of the global cannabis space that we maintain as deeply embedded market participants across all aspects of the industry.

2 year old Andrew Rios' epileptic seizures plunged thanks to CBD drops made from Cannabis extracts.

But that was not the right response.

MedReleaf is the only substantially profitable company among Canada's ACMPR growers, according to company CEO Neil Closner.

The shares at the time of this writing have reversed direction and are now heading back toward the IPO price.

But MedReleaf went public at or near full valuation. Rather than pay full price a cash-flowing senior company in the space, speculative investors want to capture the exponential returns that occur when newly listed com panies become public at seriously discounted valuations due to the obvious high degree of risk inherent in such earlier stage companies.

Rather, I want to help you see what I can see ? that this is going to be a massive opportunity, but there are plenty of pitfalls to be avoided.

Already, we are seeing valuations among publicly traded companies stumble coming out of the gate after their IPO.

What do I look for in Cannabis companies that I consider investment-worthy? It all boils down to one thing: Extreme Differentiation.

By that I mean, we need to see a company who can't be and won't be lumped in with the vast number of growers who are just that: another grower. You'll see what I mean by these three choices for the Midas Letter Cannabis Portfolio.

Look no further than MedReleaf, who upon the commen cement of trading, promptly lost 20 percent of its IPO financing value. Many panicked investors sold, and locked in the loss.

On the following pages are three companies that we feel are among the most prospective in that sense.



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CANNABIS COMPANY REPORT TOP PICK #1

FINCANNA CAPITAL CORP (PRIVATE)

?? Royalty lending company targeting California; ?? Secured loans generating interest,

preferred shares, and revenue share;

?? Only best-of-breed companies considered; ?? First right of refusal on future growth capital.

FinCanna Capital is a so-called royalty investment company. It doesn't grow, process, or sell marijuana. Instead, it provides financing to best of breed companies that do the growing, processing, and selling.

Simply put, this company's shrewd plan reaps the benefits of the fast-growing market for marijuana without taking any of the operating risks.

FinCanna's business model is to lend money to licensed growers in U.S. states who have already established a clientele and demonstrated the ability to operate commercial-scale medical marijuana facilities.

When they lend the portfolio company funds, they are secured by the borrower's assets and real property as 1st senior secured creditor. The company then charges an acceptable rate of interest, negotiates a preferred share position in the equity of the company, and participates in the revenue stream of the borrower's sales.

The resulting portion of sales is called a "royalty".

So in the broadest sense, FinCanna is a royalty company, which is to say the bulk of its revenue is derived through such participation. The risk to the capital lent by FinCanna to the growers is largely mitigated by the value of the assets the borrower pledges as collateral, and the preferred warrants provide an incentive lift for the company's interest to be aligned with the interest of the borrower's equity holders: everybody wants to see these companies succeed.

First in a Series: A Case Study

As the first in a planned series of such transactions, let's take a look at the deal FinCanna has struck with one of California's top cannabis producers.

FinCanna is providing US$14 million to this leading, well-established marijuana company in California. For legal reasons, I can't name the company, but believe me when I tell you this outfit knows the marijuana business inside and out.

The financing package FinCanna is providing consists of two components: US$5.3 million in the form of debt and US$8.7 million in exchange for preferred stock.

The debt is repayable over five years with 10% interest. The loan is secured by all of the borrowing company's assets, as well as a pledge of the founders' shares. FinCanna has the right (but not the obligation) to convert its loan into stock representing just over 10% of the borrowing company's equity.

In today's low interest rate environment, a 10% return is pretty impressive. But the preferred stock part of the transaction is even more impressive ...

A Sweet Deal (Part 2)

FinCanna's preferred shares entitle it to receive royalty payments equal to the greater of: (a) 10% of net revenue or (b) 20% of EBIDA (earnings before interest, depreciation and amortization).

These royalties are payable monthly beginning as soon as the borrower achieves a positive cash flow. There's a guaranteed minimum royalty payment of US$2 million for 2018, and US$3.5 million in subsequent years.



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CANNABIS COMPANY REPORT TOP PICK #1

Think about the numbers for just a second and you'll realize what a great deal this is for FinCanna and its shareholders. Its US$8.7 million preferred stock position generates a guaranteed US$2 million the first year, and US$3.5 million every year thereafter.

Cannabis Wheaton Income Corp. [CVE: CBW] and iAnthus Capital Holdings [OTCQB: ITHUF] are two other specialized finance companies that provide capital to the marijuana industry.

In just three years FinCanna could receive guaranteed royalty payments greater than its initial investment! ($2.0 million + $3.5 million + $3.5 million = US$9.0 million on an initial investment of US$8.7 million)

And remember, these are guaranteed minimum royalties. The actual amounts could be (and are expected to be) much, much higher. And they continue year after year after year!

The Benefits of the RIC Structure

Royalty investment companies (RICs) and their first cousins, royalty investment trusts, aren't well known to many investors, but they've been around for years.

These are specialized finance companies that provide capital in exchange for future payments. They're most often found in the energy and mining industries, which, like marijuana companies, often encounter difficulty getting financing from banks and other lenders. (This explains why FinCanna was able to negotiate such favorable terms on the deal described above.)

Because they're not operating companies, RICs usually have a small staff and minimal expenses, allowing them to pass on most of their revenue to shareholders. As such, RICs frequently offer double-digit dividend yields.

But FinCanna might offer more than just a generous income stream ...

When iAnthus went public in September of 2016, you could have picked up shares for just over a dollar. Within three months, the stock soared to $2.79. Today, shares are changing hands for about $2.25.

You could have done even better with Cannabis Wheaton. If you had invested $1,000 last winter when shares were selling for about two cents, your investment would have grown to about $100,000 when the shares reached $2 on May 8, 2017.

While I won't predict how FinCanna Capital shares will react after they begin trading publicly, I will tell you that I expect the company to do extremely well. It has an especially strong management team with a track record of putting together very lucrative deals (like the one I wrote about above).

The Need For Speed

As I write this, FinCanna Capital is privately held, but shares should begin trading publicly in the coming months. When that happens, you would be well advised to act sooner rather than later, judging by the actions of similar stocks.



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CANNABIS COMPANY REPORT TOP PICK #2

NEVADA MEDICAL GROUP (CSE:DEP)

?? Las Vegas marijuana licensed producer; ?? Owner of the Body and Mind (BaM) brand, purveyor

of edibles, xtracts, concentrates and dried flower;

?? Las Vegas is now a legal state for adult purchase

of cannabis products for recreational purposes;

?? First right of refusal on future growth capital.

FALL 2017

Nevada Medical Group is the owner of the Body and Mind (BaM) brand of Cannabis products that is number one on Weedmaps (the go-to cannabis consumer's product finder). And this company is probably the best-positioned com pany in what will likely be the highest consuming location.

Body and Mind owes much of its success to its ability to create branded strains with known attributes. Company personnel spent years searching for and cataloging cannabis plants from around the world, carefully noting the physical and mental effects each had on users.

Namely: Las Vegas.

You see, BaM is already in 70 percent of the dispen saries operating in Nevada, and if you punch in Nevada on Weedmaps-- the number one cannabis location app in North America--you will see that BAM is already the number one brand in the entire state!

And as of July 1st this year, the 45 million visitors per year who come to Las Vegas with just one thing in mind--to party--will now also find that the most commonly available brand of cannabis in the sin capital of the world is Body and Mind.

The company used this research to crossbreed select plants, creating strains with specific, documented charac teristics. For example, the Sequoia Strawberry strain is designed to promote creativity, whereas their Blue Power strain is noted for its strong sedative effect.

In addition to its extensive research on plant characteristics, Body and Mind has become known for production techniques that ensure consistently high quality.

Body and Mind is so far ahead of the game in Las Vegas that they're virtually in a league of their own.

I call this my "best of both worlds" marijuana stock because it has the potential to benefit from both the recreational and medical use of marijuana.

Multiple Award Winning Body and Mind

In just a few short years, Body and Mind has seen annual sales soar from zero to just under $5 million, garnering a multitude of awards along the way.



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CANNABIS COMPANY REPORT TOP PICK #2

FALL 2017

Small Batch Quality

Unlike many growers, Body and Mind uses no synthetic pesticides. This prevents the introduction of chemicals that can interact with the plants' naturally occurring cannabinoids. (The company adheres to the same philo sophy in the production of cannabis oils by avoiding the use of chemical solvents.)

Body and Mind grows its plants in small batches,without chemical pesticides, in a climate-controlled facility under the drect supervision of Master Growers and a geneticist.

Party Town USA!

Body and Mind products are currently sold in dozens of medical marijuana dispensaries in and around Las Vegas, a city whose economy is based almost entirely on adult entertainment.

Each year, 45 million people come to Las Vegas with partying as their main objective.

The company's team of growers has worked under the supervision of a geneticist for more than a decade to ensure each plant is grown, harvested, and processed correctly.

Products are tested in an on-site lab for purity and potency before being shipped. This has given the company a well-deserved reputation for consistent, reliable quality. And that reputation has allowed Body and Mind to become the largest branded marijuana product producer in Nevada.

The company grows its cannabis strains in small batches in a state-of-the-art, climate-controlled facility indoor Las Vegas. Temperature and humidity are constantly monitored to ensure optimal growing conditions.

The legalization of recreational marijuana in Nevada (on July 1, 2017), instantly provides Body and Mind with millions of eager, new potential customers.

In addition to being Nevada's biggest purveyor of medical marijuana, I predict Body and Mind will become a major player in recreational marijuana. Don't wait for sales to take off (since that could cause the share price to soar). Consider adding shares as soon as they become available to the public.

Nevada Health is being merged via Reverse Takeover with a Canadian Securities Exchange-listed shell company called Deploy Technologies Inc. Deploy closed financings worth gross proceeds of CA$5.5 million. The company will likely change its name upon completion of the consolidation, and begin to undertake expansion activities to address the current production fulfillment limitations it has faced since well before the arrival of recrational rules in July 2017.

Nevada Health is, in my opinion, the best-positioned pubco play in Nevada.



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CANNABIS COMPANY REPORT TOP PICK #3

FALL 2017

JAMES E. WAGNER CULTIVATION (PRIVATE)

?? Canadian ACMPR Licensee growing "Aeroponically" ?? Best yields at 300 grams per square foot per year; ?? Expanding into 300,000 sq. ft. facility.

That's right. You can't buy shares in James E. Wagner Cultivation (JWC) yet. But you're going to want to, I'll bet. And herein lies the incredible value of being a subscriber to the Midas Letter investor alert database.

JWC has an extreme scientific differentiator--they grow using the space-age "aeroponic" system originally, used by NASA to grow beans aboard the MIR space station in 1996, aeroponics:

?? requires 95% less water than traditional outdoor

farming,

?? 40% less water than indoor hydroponic systems, and ?? results in growth rates as much as 300% higher than

traditional yields.

JWC is currently using this technology to grow cannabis plants at a 14,904 square foot, state-of-the-art facility in Kitchener, Ontario. The company plans to open a second facility within the coming year, which will allow it to vastly increase production.

Company

Aurora [TSXV:ACB] JWC [not yet publicly traded] Canopy [TSX:WEED] Aphria [TSX: APH] CanniMed [TSX:CMED] Cronos Group [TSX: MJN]

Company Production Capacity/Year (kg) 107,000 30,000 24,000 7,500 7,000 4,000

Source: Growing Through Proprietary Aeroponic, May 2017 JWC Investor Presentation

Why Aeroponics Is Superior

Suspending plants in mid-air might seem a bit odd at first, but it actually makes a lot of sense when you think about it

The roots are the prime mechanism for conveying nutrients to the rest of the cannabis plant (or any plant, for that matter). Despite their crucial role in plant health, roots buried in soil are not visible. Consequently, any disease affecting the roots often goes undetected until it's too late.

Growing a plant in liquid (hydroponics) isn't much better. While the roots are more visible (as long as the liquid nutrients don't become too cloudy), plants cultivated in a liquid growing medium are susceptible to root rot, a waterborne disease that can quickly spread to other plants and wipe out an entire crop.

Aeroponics allows growers to continually monitor the plant's root system, permitting any necessary adjustments to temperature, humidity, light, or nutrient mix to ensure optimal plant health (and eventual yield).

This increased production capacity will enable the company to move into the wholesale distribution of cannabis.

Because aeroponics results in a significantly lower unit production cost, JWC should enjoy a competitive advantage in both the wholesale and retail arenas.

In addition to the sale of cannabis, JWC is studying the potential of licensing its proprietary aeroponics system to other growers.



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CANNABIS COMPANY REPORT TOP PICK #3

As with all my investment picks, I won't predict what JWC stock will do when it begins public trading. I will, however, predict that because of its patent-pending aeroponics growing system, JWC is destined to become a big winner.

Well the short answer to that question is population. With land at a premium on one dimensional earth, scientists are seeking ways to feed the future population of humanity using vertical real estate that we don't use.

Who Needs Aeroponic Weed?

You don't need a degree in plant biology to understand that the greater nutrient control aeroponics bestows upon its cultivators results in a more consistent, predictable product. And that's important.

Especially if you are a pharmaceutical product manu facturer who needs to rely on a steady supply of raw materials from which to produe a consisten, pharmaceu tical grade product.

The fine tuning of the cannabis plant's ultimate terpene profile-- that range of organic microscopic compounds that determine a plant's flavour, THC and CBD matrix--means growers can target custom terpene profile outcomes in crops, and repeat the result with near zero deviation every single time. That is going to command a huge premium when cannabis finally becomes a mainstream component of the world's pharmacopia.

But its not just pharmaceuticals that will require such exacting specifications: edibles and beverages in the recreational segment of the market, which is still a year away in Canada, but making tremendous inroads in U.S. states, will have a requirement to source extracts and concentrates from producers who can capture the specific terpene outcomes these product developers will ultimately demand.

As you've probably noticed by now, the constant theme here is di erentiation. There are still a hundreds of applicatoins under scrutiny at Health Canada, and we've seen that the rate of new licenses has climbed to have per month as of June 2017 in Canada. Each new applicant presents a new supplier, and so the overall value of the sector must deteriorate accordingly.

And that's why deteriorate from the growing herd of growers who all think they grow the best weed in the world, will be key to pro ting from the sector.



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