February 2016

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Let’s talk about food for a moment. Specifically cheese.

A study just came out that much of the Parmesan cheese we eat is about 10% wood...

That’s right, wood.

Many grated Parmesan companies have apparently been filling their cheese with far more cellulose than they claim on the package. Cellulose is made from wood pulp and is commonly used in grated cheese to keep it from clumping together in the package.

The investigation also found that many companies were likewise using much cheaper cheddar cheese in their blends.

According to Arthur Schuman, the largest seller of hard, Italian cheeses in the country, around 20% of the Italian cheeses in the U.S. is mislabeled in these ways. That accounts for $375 million in sales.

“The tipping point was grated cheese, where less than 40 percent of the product was actually a cheese product,” Schuman told Bloomberg. “Consumers are innocent, and they’re not getting what they bargained for. And that’s just wrong.”

While this may sound like a silly little story, it really has big consequences. One company president — Michelle Myrter of Castle — is expected to plead guilty to criminal charges, and faces up to a year in prison and a $100,000 fine.

But this issue goes way beyond cheese. Take a peek at the rest of the weird stuff you’re eating:

Carmine

Mostly any food that has been dyed red contains carmine, which is typically created from “scale insects” that are boiled in a solution of ammonia or a sodium carbonate.

You can identify this as “natural red 4” on food labels.

Isinglass

This is a substance made from dried fish bladders. And it is likely in your beer. Isinglass is used to accelerate the clarification of beer so the yeast doesn’t settle at

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the bottom.

Castoreum

This lovely ingredient has been found to “enhance the flavor” in vanilla, strawberry, and raspberry versions of iced cream, iced tea, and candy.

It is created from the castor sacs located in — well — a beaver’s behind. Due to the location of the sacs, castoreum also includes a mixture of the beaver’s anal gland secretions and urine.

Now, I’m not saying that these ingredients will hurt anyone. But I am saying that a lot of the stuff we eat is pretty gross when you think about it. Wouldn’t you like to at least know what’s in your food before you decide to eat it?

I know I sure would. And I’m hardly alone...

One of the biggest trends in America right now is the local and natural food movement. I can’t walk a block these days without seeing a restaurant sign offering “locally sourced” food, or a fast food joint using “only natural ingredients.”

But often times, these claims are vague at best — and straight up lies at most. That’s why it’s important not only to know what is in your food but also where it comes from.

Now, why in the world am I discussing this in an investment newsletter?

Because identifying the origins of food is going to be a big business...

Our new stock recommendation this month focuses on a small company that does just that. It’s called Where Food Comes From (OTC: WFCF) and you can read all about it in the Plundering section.

We also have a couple of great reader questions to get to as well as some important company updates from our marijuana and dividend positions.

So let’s dive in.

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Charting the Course

Legal marijuana is officially ready for prime time...

In Colorado alone, legal marijuana shops sold $996,184,788 worth of recreational and medical marijuana.

That’s right, a cool billion dollars that would have otherwise gone tax-free into the hands of cutthroat drug dealers and two-bit pot-slingers, now flooding into state funds.

All told, U.S. sales of legal marijuana soared to $5.4 billion last year.

“It’s remarkable that less than seven years ago, all of that money was being spent in the underground market,” according to Mason Tvert, communications director for the Marijuana Policy Project.

“Clearly there’s a large demand for marijuana, and we’re now seeing that demand being met by legitimate businesses that are answering to authorities instead of criminals who answer to nobody.”

So where did that money go instead?

Of the $135 million of Colorado’s marijuana taxes and fees in 2015, over $35 million will be pumped into school construction projects. That’s a pretty attractive proposition for states facing budget shortfalls. If these votes are left to the states, politicians will have a very easy path to recreational marijuana ballot measures...

That’s because the tides have swiftly turned in public opinion...

If you weren’t already convinced about the power of marijuana investing, you can now rest easy: it is on the front page of The Economist!

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When somebody rolling a joint hits the cover of one of the world’s biggest economic magazines, it is high time to start paying attention. And The Economist laid out the facts with a couple of simple, yet telling, charts.

Not only are people using more and more marijuana in states where it finally becomes legal:

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But they are also calling for its full-scale legalization across the board:

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Here are some highlights from the issue:

• America, and the world, are going to see a lot more such establishments. Since California’s voters legalised the sale of marijuana for medical use in 1996, 22 more states, plus the District of Columbia, have followed suit; in a year’s time the number is likely to be nearer 30. Sales to cannabis “patients” whose conditions range from the serious to the notional are also legal elsewhere in the Americas (Colombia is among the latest to license the drug) and in much of Europe. On February 10th Australia announced similar plans.

• A growing number of jurisdictions are legalising the sale of cannabis for pure pleasure—or impure, if you prefer. In 2014 the American states of Colorado and Washington began sales of recreational weed; Oregon followed suit last October and Alaska will soon join them. They are all places where the drug is already popular (see chart 1). Jamaica has legalised ganja for broadly defined religious purposes. Spain allows users to grow and buy weed through small collectives. Uruguay expects to begin non-medicinal sales through pharmacies by August.

• Canada’s government plans to legalise cannabis next year, making it the first G7 country to do so. But it may not be the largest pot economy for long; California is one of several states where ballot initiatives to legalise cannabis could well pass in America’s November elections. A majority of Americans are in favour of such changes.

The tide is turning, and we’re in a great position to capitalize on it. It is an especially important time to be invested in a burgeoning new market, considering that the rest of the stock market looks rough. This is one bright spot to focus on while we wait for the broader market to play out over the year.

Let’s check in on our current marijuana positions:

Canopy Growth Corp (TSX: CGC)

Canopy is riding high. As of the time of this writing, we’re up 78%.

I’m still waiting on the financials to come out later this week (I’ll provide a full update once they do), but in the meantime there has been some great news coming out from our favorite marijuana stock.

It made a huge PR splash recently by signing rapper and marijuana enthusiast Snoop Dogg to

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an endorsement deal. From its press release:

Snoop Dogg is one of the world’s most respected cannabis icons and pioneers in the industry. He is recognized as a connoisseur of quality, medical cannabis products and has expanded his entrepreneurial endeavors to provide expertise and strategy to business ventures that, like Tweed, represent the birth of a new industry.

“There are real social and medical benefits from the cannabis industry- and the world is seeing this positivity in a whole new way,” said Snoop. “Canada has been at the forefront of the business model, and I look forward to being a part of the road ahead.”

Under the partnership, Snoop, through a controlled company, and Tweed have partnered on curated content and brand strategy exclusively in Canada. The license agreement is for an initial three-year term with a two-year extension. As partial consideration for the arrangement, the controlled company will receive a combination of Canopy shares, royalties, and monetary compensation, released over the course of the agreement.

Snoop Dogg has truly paved the way across the global cannabis industry. In September, Snoop and business partner Ted Chung launched online media platform MERRY JANE as the definitive cultural destination for cannabis news and original content. He was the first to release a widely-lauded cannabis brand, Leafs By Snoop. And via Casa Verde Capital, Snoop is also recognized as a leading venture capitalist in the space — investing in early-stage startups.

“Our team is proud to bring Snoop into the fold,” said Mark Zekulin, Tweed’s President. “Today we’re announcing our partnership and welcoming him to one of Canada’s most exciting industries. Over the coming months we’ll unveil the specifics, and until then all I can say is ‘stay tuned.’”

Here’s the latest interview with CEO Bruce Linton at Midas Letter explaining the deal and speaking about the future of the company:

James West: Bruce, thanks for joining us again.

Bruce Linton: Thanks, James.

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James West: Bruce, why don’t you give us a snapshot on what is the deal with the deal with Snoop Dogg?

Bruce Linton: Well, for about 18, almost 24 months, we’ve been working with his people so that we can come to a conclusion on what would happen over the next three to five years, if we made an exclusive relationship. So what was announced on Thursday was that we’ve started, but we didn’t fully set out everything that we want to do, and over three years we’ll invent things to do. But really, it starts with a brand announcement that says, Tweed is really focused on being ready for rec access, and Bedrocan is the pure play medical.

James West: Okay. So focusing on that for a sec, Canopy, you’ve obviously really battened down the hatches on distinguishing the two brands, Bedrocan and Tweed, into medical and recreational. What is your anticipation of the timeline for that happening in Canada?

Bruce Linton: I think the big factor driving it right now is, the more that these, I don’t want to just call them dispensaries, I’ll say the actual term, quick access medical marijuana sales points pop up in every community, the more I would say accelerated the intent of the Federal Liberals will be to get in place their methods of putting it out recreationally. And the reason I say that is, there is no lawful source of supply, and with the number that’s proliferating, obviously there’s a pretty good business for somebody growing lots of marijuana illegally and selling it at these venues. And I think that’s a big agenda driver on the Liberals’ program to get it done sooner than later.

James West: Sure. I’ve noticed that they have actually been cracking down in BC and denying licenses to a lot of dispensaries, or short term access locations as you call them. Is that part and parcel of what’s going to accelerate the legalization for recreational purposes, do you think?

Bruce Linton: Maybe. There’s been a bunch of that, and things like, there have been really clear statements in the last week from the Minister of Justice and other areas that say the rules have not changed. This is not a legal activity, and it’s not coming from a lawful supply, and it has no credibility in terms of content or what it doesn’t have. And so I think the number of people jumping into that sort of business is really going to cause that sort of business to disappear, because as soon as recreational access is defined, distribution points are agreed, and taxes are set, you realize that business is going to be closed pretty quickly, because there is not even, you can’t use the word ‘gray’ whatsoever, even though it seems to be quite clear what’s not permitted.

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James West: Yeah. So what do you think of Premier Wynne’s strategy in Ontario to sell marijuana through the LCBO outlets?

Bruce Linton: I think it was bigger news that maybe there was a transport truck broke down on the 401, than her announcing that. It’s really, we want to put it out wherever, but no one even batted an eye, because if the goal is to make sure the taxes are collected, that the product’s sold and that it’s legal, and that kids under the age of 19 don’t get it, that sounds like something the LCBO’s good at.

James West: Sure. They’ve been doing it –

Bruce Linton: What people don’t know is that these are large organizations with really excellent training systems as well. So if you want to introduce a new line of product and you want to make sure that that product’s understood by the consumer, there’s a very good training protocol that they can implement. So I think for the consumers’ understanding of the product and the government’s goals of the product, it seems pretty straightforward.

James West: Okay. So in January we noticed you announced your true compassionate pricing plans stipulating the sale price of $5 per gram for patients with limited insurance. How does that compare with Bedrocan’s normal pricing?

Bruce Linton: When we bought Bedrocan, everything was 7.50, and it had been imported from Holland. And so the first crops produced here were sold essentially as we were acquiring them. What we want to do with Bedrocan is run the building full time and serve as many medical patients as possible. And so $5 pricing, it works in that this is medicine and we’re kind of sharing the pain with the patients while hopefully helping manage their pain.

Our goal behind that is, we’re spending a lot of cycles on, call it the lobbying to insurance companies, politicians, so that people with plans with limited income have this treated as any other product which they would use for the purpose of managing pain or other symptoms. So it’s kind of like a bunch of things that go in concert, and it says this is medicine. This is not anything else, and ultimately from an investment perspective what you like to know is, the more we run the building, the less the cost per gram, the more the market share we can have. So it’s good for the patient and good for the investor.

James West: Sure. So has it been effective in attracting a broad range of, call it, lower income patients?

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Bruce Linton: I think we even underestimated the price sensitivity of getting quality, consistent product. So our biggest challenge when we did this was, we have pretty good infrastructure for the phones ringing and being answered, and we got annihilated for a few days. So yeah, it has been well received, and I think over the short term, medium term, when we’re speaking to physicians and there’s rollout oils and the whole this is medicine, the clinical trials, it all kind of hangs together, and you will never see the Bedrocan product offered in a recreational format. Meaning that if the LCBO or SAQ or BC Liquor was the point, you’re not going to see Bedrocan in those stores. And so it is intended to be played in exactly those clearly set out kind of divisions.

James West: Okay. So from your experience, to what extent do you believe price is a factor in marijuana consumers’ product selection versus other aspects like brand and celebrity endorsements, etcetera?

Bruce Linton: Well, I think as long as you can first consistently deliver good product, you can have differentiated prices. When you start to add celebrity support, you start to add a lot of the work – the reason that we’ve announced a partnership with B&A Genetics is because of the breeding programs that we’re implementing. Over time, if you start to create really unique strains, those differentiate on price. I think we find the margin of price really differentiated when you convert the plant material to an oil, and then the oil to finished goods, and those finished goods could be a soda, they could be an edible, but that they’re done in a way that the packaging, the professionalism, everything is consistent or high quality as you could possibly expect – that’s where you get both margin and, I’ll call it, price differentiation.

James West: And so how is that rollout of the oil products coming? I haven’t seen anything in the news about it.

Bruce Linton: So we’ve been inspected. We are waiting for the (unintelligible) [0:07:00] to confirm we can sell, but what we’ve been able to do in the intervening period is, we’ve been running two shifts for probably four and a half months producing and storing the oils. And so really what we wanted to do was make sure that we had, when we get our license, both a system for producing quantity and a quantity of inventory so that you don’t end up having the system happen like it did before, which is people kept running out of the dried cannabis. I think that’s not going to happen this time.

James West: So you’ve learned from that exercise.

Bruce Linton: Putting it on the shelf and having the shelf empty two days later is not

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the way to launch something.

James West: It’s a good problem but a bad problem, I guess.

Bruce Linton: Exactly.

James West: Okay. So what’s the status of your operations in Niagara? How much is being produced there now, relative to in Tweed, Ontario?

Bruce Linton: Yes, we had an announcement, I think it was September, that 100 percent of the facility had met the security and other control conditions. Health Canada said we could use it all if we wanted, but we were, at that time, still having to manage to move the plants back and forth between Smiths Falls for harvesting. And we were spending quite a lot of time and money to build out the plant facility, which had a vault and everything which is now being completed.

We invited Health Canada at the end of January. They came down and saw us, I guess about a week or two ago, and we’re hopeful they’ll give us the right to use that building for trimming so that the whole property can be processed there, and then we’ll expand operations. This winter grow, we’ve gone from using about 36,000 square feet last winter to, I guess we’re about 95,000 square feet that we’re using out of the total 350,000.

So we are expanding a little bit, not all of it at once.

James West: Okay. So your Q3 financial statements are probably due out in the next 10 days here, by my estimate. Can you give us a hint of what to expect in terms of earnings and profitability?

Bruce Linton: Well, we don’t want to take the tension off the trade by giving guidance, so we won’t be doing that. But we have been, I think, fairly clear that we’ve been enjoying really solid and consistent growth in terms of client acquisition and the frequency of purchase. So at the last quarter, recall people asked a little bit about how do you try to manage your business, what do you think about for infrastructure? And we tend to think about 30 percent at least quarter over quarter, meaning Q2 to Q3 to Q4, onboarding of patients, because that’s the big thing: you’ve got to make sure you’re educating the doctors and onboarding the patients and getting that first order out efficiently. If you slow down and fall down, then the whole chain breaks. It seems like that’s gone well.

James West: Okay. So is that a sort of commensurate number, 20 to 30 percent new

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patients, with the actual growth in revenue, would you say?

Bruce Linton: Yeah, and if you try to do more than – as the numbers go up, if you try to be more than 35, 40 percent growth from Q1 to Q2 to Q3, what starts to happen in absolute nubertybriefing.com/mbers is, you have different choke points. So one month it might be the call centre, but the next month it could be the shipping infrastructure, the pre-pack. So you can always kind of keep moving through these; it hasn’t been a single point where it chokes at the same time each month or each quarter.

James West: Okay. So since you’ve merged Bedrocan and Tweed under the Canopy brand, have you set your sights on any other Canadian producers as potential acquisition targets?

Bruce Linton: Yeah, you know, the whole point of putting the Canopy out at top is to have more infrastructure underneath, and there’s quite a few people out there that, I think, are at that stage where they were trying to decide to run on our own gun and should we move over, a lot more of them private than public. So we see lots of field calls pretty much every week, and I do a lot of site visits, but the next thing to come up, you want to do it with the leverage of a public equity, you know, it essentially makes it much less costly to acquire the next ones. So we’re on it, and it’s nice to have so many people call and say ‘we’ve always liked your team’. That’s right, that’s what you were saying before. There’s a lot of people looking over the fence now.

James West: Sure, that’s great. Do you have any plans to branch out in the US market, or is Canada where you plan to maintain your focus?

Bruce Linton: We’d like to do some stuff where it’s federally permissible, so I think there are other really good federal markets that are now opening up for medicinal and I think they’re going to be a lot more orderly in the US. They’re going to take similar plans that Canada has implemented. So I expect we’ll have some things out over the next few weeks on that, but it really is, the opportunity to dominate in Canada and use that strength to grow internationally; I think when you do that in any business, you start to have the ability to do really well. If what you’re trying to do is exit your own country because you’re failing, and find someplace to succeed, that almost never works.

So we’re pretty happy with kind of what we’ve got going here, and it feels like we could actually establish some other points of sale in those countries when they go through what we’ve gone through in about the next 18 to 36 months. We’re there in part of it, and we don’t sponsor a big company coming out of those countries

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because they’ve gone on challenge. And I think that we’re kind of ready for that.

James West: Okay, awesome, Bruce. Well, congratulations on your clear progress. Thank you so much for your time again.

Bruce Linton: Sounds great, James. Thanks.

If you want to hear the news straight from the horse’s mouth, you can join the conference call with Bruce Linton, CEO and Tim Saunders, CFO at 8:30 a.m. Eastern Time on February 25th.

Here’s the info:

Calling Information Toll Free Dial-In Number: 1-888-231-8191 International Dial-In Number (647) 427-7450 Conference ID: 55227314

We’re still buying Canopy under $4.00

Heliospectra (OTC: HLSPY)

Our “picks and shovels” play on the marijuana market hasn’t done too much since we recommended it. But that may finally be changing...

For new readers, Heliospectra is a company that specializes in “intelligent lighting systems” for plant research, greenhouse cultivation, and controlled environment agriculture. The company is a global leader in LED grow lights for advanced research applications and has patented technology.

In recent news, it has added a new VP of sales and marketing to help boost its operations in North America — where most of the marijuana business would be coming from. It has hired Caroline Nordahl Wells — co-founder and former executive of LumiGrow, a horticultural lighting company — as Vice President of Sales and Marketing for its North American operations.

She will be responsible for continuing Heliospectra’s sales growth in the medicinal cannabis market, where the company made significant inroads with large commercial installations in 2015. She will also help expand Heliospectra’s market share within the traditional commercial greenhouse grower and emerging urban agriculture and vertical farming market segments.

Heliospectra doubled its U.S. sales headcount in 2015 and will add more sales professionals

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in 2016 to continue growing.

At LumiGrow she was responsible for recruiting and leading a successful sales organization. She is widely credited with advancing the LED grow light category and accelerating market adoption of LED lighting for commercial horticultural applications.

“Heliospectra was the obvious choice for me because it uniquely fulfills the promise of LED grow lights. There’s no company out there with more knowledge of the effect of light on crop outcomes, and Heliospectra baked this know-how right into their product line. Every Heliospectra fixture installed is driving consistent crop performance and grower profitability, and that’s exactly what the North American market has been waiting for,” said Caroline. “I’m thrilled to align with the world-class Heliospectra team and ready to hit the ground running.”

Christopher Steele, COO, added that “having Caroline join us speaks volumes about Heliospectra’s growth potential and technology advantages over our competition. Her experience and abilities strengthen our position to become the outright industry leader in intelligent LED grow lighting.”

Aside from its value to the marijuana market, Heliospectra is already one of the driving forces behind future-oriented projects aiming to develop effective growing systems with minimal consumption of light and water resources for more traditional crops.

That includes growing plants in outer space...

Heliospectra is part of the EDEN Initiative, a research program whose objective is to develop, integrate, and demonstrate various crop cultivation technologies and operating processes for safe food production on board the International Space Station and for future manned space expeditions.

While that is certainly an interesting project, I’m not banking on that kind of stuff to count for much more than good PR and news.

To see this stock really move, we’ll need to see the company land some big contracts across the board.

It just landed a grant to analyze and improve the possibilities for engaging in energy-efficient, water-conserving growing in the Middle East.

Here are some of the details:

• This venture represents a strategically important development project for

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Heliospectra. It’s also of utmost significance for the region as a whole, where water is in short supply and is expected to be an even scarcer commodity in the future. The need to identify energy-efficient and, perhaps even more importantly, water-conserving means of growing plants in the Middle East is enormous in places such as the Middle East.

• For example, a minimal amount of Qatar’s food consumption comes from crops grown in the country, with almost all foods being imported. This system is not sustainable in the long term. While a limited growth regime is possible in a greenhouse environment, temperatures during the summer months can reach over 45 degrees Celsius, making crop growth all but impossible. In certain areas in Africa and California, water will be at even more of a premium than it is today.

• Projects like the Middle East project at hand, which aim to advance the efficiency of plant growth, are going to be increasingly necessary.

Now, we certainly hope to see more large projects like that come to fruition. But in the end, we are really banking on its lighting expertise to shine through in the marijuana sector.

In a very detailed recent research report, Red Eye was very encouraged by what it had seen with the stock — especially in the legal marijuana market. Here are some of the findings from its report (keep in mind that SEK stands for the Swedish Krona and 1 Krona represents 0.117580 in U.S. dollars):

Inflection point ahead as sales focus starts paying-off

Heliospectra is in the middle of a transition from a research company with little focus on sales to a leading global player in the rapidly growing market for intelligent LED grow light solutions. With a strong position in the research market and several important contracts and partnerships in the medical plant segment and research segment we believe Heliospectra is on the verge of its big market breakthrough.

In 2015 several important contracts have been won. The most notable order came in the medical plant segment and was the largest order for LED grow lights from a grower of medical marijuana to date at SEK 5.7 million.

We see Heliospectra as well positioned to sustain its strong position in the research segment and establish itself as a leading player in the fast growing medical plant/legal marijuana segment as well as in the commercial greenhouse segment.

Rapid market growth driven by global trends

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The global market for LED grow lights is expected to grow at a CAGR above thirty percent from 2014 – 2020. The use of LED grow lights address global issues of environmental impact from agriculture and fresh food supply for the urban population.

LED grow lights are more energy efficient than traditional HIS/HPS lamps traditionally used in greenhouses and growers increasingly replace traditional lighting solutions in commercial greenhouse operations in Europe, North America and Asia. Heliospectra’s intelligent lighting systems also provide growers benefits of increased automation and higher plant quality thus making the incentives to switch from HID/HPS even higher.

Medical plant segment booming thanks to legalization

Heliospectra has increased its focus on sales and marketing to target growers of legal marijuana in North America. The market is still very much in its infancy in the US and rapid growth is expected as legalization continues.

As the market matures competencies in the industry increase with the inflow of skilled people with ability to make sound financial analysis. LED grow lights provide short payback times on investment for growers of marijuana who can drastically reduce their high electricity costs and increase productivity and quality.

As we’ve said before, this position is a long-term bet on these markets expanding. This will not be an overnight success story. Red Eye agrees… but does see a few catalysts that could push the stock up in the next year:

• Large (over SEK 2 million) order from a larger AgTech player

• Major (over SEK 4 million) follow up and/or major new order from greenhouse cultivator and/or marijuana grower

• Proof-of-concept of partnership with player in agricultural automation through sales success

• Successful commercialization with breakthrough order on the much anticipated biofeedback system incorporating sensors, software, and LED grow lights

• California releases the ban on recreational marijuana leading to an increased interest in suppliers of ancillary products to the industry

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Red Eye gave a bullish case of Heliospectra hitting around $3.34 a share, which would be a whopping 167% from where it is sitting today. It expected at the very least for the company to hit around a $1.61 a share this year, which is a decent 30% from where it stands now.

I would urge any investors to read the entire report here.

We’re buying Heliospectra under $1.75.

MassRoots (OTC: MSRT)

MassRoots is a sharing app, like Twitter or Instagram — except it specifically targets marijuana smokers and suppliers.

Basically, it lets pot smokers interact semi-anonymously, messaging one another and sharing pictures without revealing their true identity. And it creates a forum for marijuana vendors to advertise directly to their market.

And they continue to build a huge subscriber base...

It just hit 775,000 users this month, and is projecting to hit the million mark by — of course — 4/20. For those who aren’t hip to marijuana lingo, 4/20 is essentially Christmas for marijuana smokers.

“The weeks leading up to 4/20 are the cannabis industry’s holiday season – a period where millions of cannabis enthusiasts make purchases, buy tickets, and make plans for marijuana’s official holiday. Historically, during the weeks leading up to 4/20, we have experienced significantly higher growth and visibility,” stated MassRoots CEO Isaac Dietrich.

In short, the company is growing out the user base, which will keep expanding as more and more states legalize marijuana. This is another long-term grower… and you can see from the chart below that it has been growing at a steady clip...

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More users means more advertising revenue, which should carry the stock to higher levels. In fact, this week it announced two new social media advertising deals that will bring in $77,000 a year.

It will also be rolling out new localized advertising features later this quarter.

“Our corporate objectives can be summarized in one word: growth. By growing the number of users on our apps and growing the number of eyeballs visiting our website, we’re expanding our advertising inventory and reach, which in turn, is expected to continue to grow our revenues,” stated MassRoots CEO Isaac Dietrich. “I’m pleased to report that our revenue growth remains strong and last week, we set a new sales record with the booking of these contracts.”

I expect this stock will double over the next year as these trends continue.

We’re buying MassRoots under $1.50.

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Plugging the Leaks

If you caught Message in a Bottle last week, you would have seen the great question posed by a fellow reader. If you missed it, here it is:

Dear Jimmy,

I would like to put some money to work for my granddaughters. One is 5 the other 6 months. What would you recommend? I was going to put it in their names and use their SS#’s.

Thank you for the advice, Mark

Hi Mark, thanks for reading, and thanks so much for the question — it’s an excellent one. You are giving your grandchildren perhaps the most valuable gift imaginable.

Now, I have two young children that are constantly being spoiled with toys, games, and clothes at every turn.

While I’m very appreciative of the gifts my kids get for birthdays, holidays, and for seemingly no reason (Mom and Dad, I’m looking at you), in actuality, they would be far better served with the gift of a long-term investment.

Sure, a stock certificate is not as immediately rewarding from the giver’s perspective — there’s no doubt that it’s thrilling to see the joy on a child’s face when you give them a toy — but the kids would be far better served in the long run if you hadn’t given them a toy that will inevitably find its way to the Good Will donation bin sooner than later.

In short, kids grow out of these possessions fast. But a gift that pays off years from now will bring all the more joy to your children or grandchildren when they want to buy their first car, put a down payment on their first house, or — if they’re really smart — give them a head start on a nest egg for their retirement.

While I cannot speak to anyone’s personal situation, I believe that you cannot go wrong by starting a dividend reinvestment program (DRIP) as soon as humanly possible. You could give

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a gift that will turn them into a millionaire by the time they are ready to retire.

So let’s use that as a quick, sexy example: say you want that little fella to retire a millionaire. While it may sound crazy, it is actually rather simple, as long as you start early.

Check this out...

If you invest $4,000 around the birth of a child or grandchild and let it ride — meaning you never even contribute another penny to that investment — that $4,000 will compound to around $1 million by the time they turn 65. That is assuming a 9% return — which with some of our positions is completely within the realm of possibility.

Now, if you make semi-regular contributions — say as part of their birthday present each year — that number will be far higher. The earlier you start compounding interest, the better. I would recommend looking at the list of dividend aristocrats in the portfolio and choose a company you trust and understand.

Personally, I like to combine the fun of gift giving with the value of investing. The few times I’ve given investments as gifts, I package the gift of stock with something fun and relatable. It’s the best of both worlds. You could...

• Enroll them in the Disney DRIP and give them a Mickey Mouse doll along with the stock certificate.

• Enroll them in Hershey’s DRIP and pair it with a bag of Hershey Kisses.

• Enroll them in Mattel’s DRIP and gift them with a set of Hot Wheels.

It’s a simple but effective tactic: buy them something inexpensive that they can use immediately, and set them up for the future with the DRIP. Everyone wins...

There are plenty of combinations. Get creative.

If you do put a DRIP in a child’s name, here’s how to go about it:

You first need to transfer at least one share to him or her and register it with the company’s transfer agent (while you are still buying stock through the company, transfer agents manage shareholder record-keeping and manage DRIPs). Word to the wise: you may want to register it in the parent’s name “in trust for” the child. This will give the parent legal authority over any transactions in case you are worried about the kid turning into a teenager and cashing out for an ill-advised shopping spree.

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Now, I’m not specifically recommending any of the above companies for Mark in particular, but I think by joining the dull investment gift they don’t understand with a low-cost toy or treat they do, it may help them process the value of the piece of paper (and at least you don’t look like you’re stiffing them at the birthday party).

You could even go the extra mile and frame their first stock certificate to help illustrate its importance (and to make sure they don’t color all over it with crayons or tear it to pieces).

I also elaborated on Mark’s question since before you start investing for a child, you should make sure you set up some simple accounts for your kids and grandkids to shield some of your money from the tax man.

There’s no reason to hand over any extra money to Uncle Sam, and by setting up these accounts, you’ll be able to stash some money away tax-free for your little ones...

529 College Plans

This college saving plan has major tax benefits...

529 plans are a way that you can save for your child or grandchild’s education tax-free through several different investment vehicles. You can set them up in a few different ways, but typically the money you put in starts in more aggressive funds while your children are young, and becomes more and more conservative as they get closer to college age.

The gains you get in these accounts are tax-deferred, so once they are used to pay for certain education costs, you will not pay any taxes on the funds you have in the account. You can typically use the funds for tuition, books, school supplies, and even room and board that are required by the college.

Now, if it turns out your child doesn’t want to go to a traditional two- or four-year school, you can actually change the beneficiary.

Roth IRA

If your child is a bit older, and is earning some kind of income — think lawn mowing or babysitting — you can start a Roth IRA in their name. They’ll be able to stash away everything that they make for the year up to $5,500.

Since most kids want to hang on to some of that cash, you can make contributions on their behalf.

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Say your child holds onto the Roth IRA for 40 years. If you load $4,000 into the account and have an average return of say 7% a year over that time. The interest will compound — tax-free — and your child will be sitting on a $60,000 nest egg by the time they are ready to retire

They can take the funds out tax-free when they turn 59 1/2.

You can also gift stock to family and friends through websites like Spark Gift. It allows you to gift over 6,000 stocks and index funds and start giving for as low as $20. It is a quick and easy way to set somebody up investing.

SparkGift was founded by veteran technologists in Silicon Valley, with experience from Google and Visa. They noticed a common problem among their friends and family, “I need to find a gift; I want to give them something they’d appreciate; I’m tired of wasting money on meaningless toys and gift cards.” They wanted to empower people to give gifts that can truly impact their loved ones’ lives

When you give a gift on SparkGift, you provide the name and email of gift recipient (and parent name and email if under 18). You choose a stock or fund that you would like to give and pay. Using fractional shares technology, SparkGift enables you to get a fraction of a share (if you buy $20 of a stock that is trading at $100, you’re getting 0.2 of a share). SparkGift creates a gift certificate and notifies the recipient that they have received this gift.

The gift recipient then uses the SparkGift website to create an investment advisory relationship with Spark Advisors, and completes the steps to open a brokerage account with our brokerage partner Folio Institutional. Folio Institutional provides the brokerage engine that powers numerous financial investment advisors, including Spark Advisors. Once the brokerage account has been opened and the gift accepted, Spark Advisors will place a trade in the gift recipient’s brokerage account. The gift recipient logs into SparkGift to see their investment portfolio.

Mark’s question really resonated with a lot of readers. I wanted to share the other comments that readers wrote in with...

I started DRIPS about 15 years ago for my oldest grandchild. At that time I started with Johnson & Johnson and periodically I would send in money. When I saw that I had 167 shares of J&J I transferred 67 shares to my youngest grandchild. In the interim I opened accounts for my 2 granddaughters - 1 had Pepsi Cola and the other American Waterworks.

My 2 oldest grandchildren have since married and I gave 1 - 101 shares of J&J and the other 100 shares of Pepsi. I started last year talking about DRIPS to my grandchildren

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and my oldest granddaughter opened an account with Computershare.

When i saw your newsletter I immediately forwarded it to my grandchildren. 2 of them called me late in the afternoon saying they wanted to do DRIPS. My talking started them thinking but your newsletter was the icing on the cake. Thank you.

BTW - I read a lot. For my birthday my daughter-in-law bought me several books. One of them is “Investing in Drips” by Alan Kerrman. it was published in 2015. Very good book that i strongly recommend. Thank you again.

Bev K.

Thanks for reading and sharing Bev. You are certainly going above and beyond to take care of your family. Kudos! I’ll have to check out that book too, thanks for the recommendation.

Another reader had a similar tale...

Hi Jimmy – thanks for the great piece on investing for kids. I went through the SAME EXACT THING when I first had my grandchildren. I was sick of the mindless crap everyone was showering them with...

I ended up getting them a Coca-Cola DRIP (though I didn’t accompany it with a soda, since that’s the last thing kids need at that age – and their parents would have killed me!)

Thanks for all of your work, Crow’s Nest is the only newsletter I have that’s actually fun to read!

Donald C.

Thanks Donald, I really appreciate the kind words. When I was a kid, my brother smartly ended up buying Coca-Cola stock around 1990. The stock today is up 916% since he bought it! A good choice for sure...

Here’s another DRIP advocate...

Jimmy – thanks for spreading the good word about dividend reinvestment programs. I’m been beating that drum for my whole investing life.

I used to work for Exxon, so about 30 years ago I started a DRIP for my son. I haven’t asked him how much is in there now, but if my shares are any indication, it was a hell

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of a move!

Terry L.

Thanks Terry. Considering that Exxon has returned 1,082% over the past 30 years (without counting dividends), I’d say your son couldn’t have done much better. Nice work!

The topic also attracted some media attention. I was asked to give an interview with Money Show about the topic, which you can read here and listen to here.

Plundering

Where Food Comes From (OTC: WFCF)

Take a look at news coming out of the food industry, and you’ll see a grim and desolate situation.

We aren’t too far removed from the mad cow disease scare. Nor are we far beyond the disturbing tales of horsemeat masquerading as beef.

We’ve seen food poisoning scares of increasing scope and diminishing ability to determine the source.

There is pink slime, mislabeled seafood, falsified sources, hormone proliferation, and a growing dependence on antibiotics that threatens widespread resistant to outbreaks of diseases all but eradicated in the early and mid 20th century.

The consumer backlash is only picking up steam. It isn’t so much that people want their food to be better than ever before. People want food to return to what it should be and what it was only a couple generations ago.

Look to the massive growth and recent hit to Chipotle sales and share prices to see this trend in action. Consumers and investors flocked to the company, only to abandon it when the supply line was revealed as opaque and tainted.

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Many more retailers that have done so well in the past are scared. Whole Foods has built a corporate empire that could crumble with a similar situation.

McDonald’s is been creamed by loss of sales to fast-casual restaurants that promise meat and produce that isn’t treated with chemicals while the animals and crops are grown and that isn’t processed.

Even large retailers like Wal-Mart, Target, and supermarkets are aggressively moving towards certified labeling, with private labels filling shelves to capture some of the “natural,” GMO-free, and organic food segment growth.

Research shows that the U.S. accounts for 36% of the $550 billion worth of food made with non-GMO ingredients, and that organic foods will grow from 60% of that market to 75% while the market grows at a 15% compound annual rate through 2020.

87% of global consumers think non-GMO foods are “somewhat” or “a lot” healthier. 63% think they are “less safe to eat.”

Then there is the study from Ketchum, a public relations and marketing agency that specializes in corporate and product positioning, which shows that this trend is going to continue unabated as future consumers are trained to be discerning.

Among the findings:

• 49% of all parents surveyed say their children take an active role in choosing the types of food the family eats.

• 39% of all parents surveyed say their children look at labels.

• 38% of all parents surveyed say their children shun foods with certain ingredients.

• In short, current and future sales are critically dependent on companies verifying that their products adhere to standards measured by third-party auditors.

This creates a massive opportunity for companies that provide these services. They were considered a niche, luxury sector. Now, they are becoming the base standard.

One company stands out in particular, and we have an opportunity to hop on board right as market forces, scales of economy, and global retailers are hiring them to assure consumers that they are getting what they demand.

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Where Food Comes From, Inc. (OTC: WFCF) — WFCF from here on out — is an independent, third-party food verification company.

The business, on the whole, is pretty simple. Companies want to tap the growing demand and add value to their products by labeling them as organic, hormone free, GMO free, etc.

WFCF visits farms and ranches and looks at their plants, animals, and records. It compares all of the information it collects to specific industry or regulatory standards and verifies the claims if they are legitimate.

Everyone from the producer through the wholesaler and retailer down to the consumer gets a stamp of approval they can count on.

The company is divided into four divisions that audit to 32 certification standards:

IMI Global is Where Food Comes From’s animal agriculture arm. As the founding company, IMI Global has nearly 20 years of verification experience and specializes in programs designed for livestock producers.

The oldest Organic Certification company in the United States, International Certification Services (ICS) also provides expert services for the Gluten-Free Certification and Non-GMO Project Verification.

Validus Verification Services provides expertise in a variety of areas of certification, including animal welfare, worker care, environmental stewardship, and feed and food safety.

Sterling Solutions is the newest division of Where Food Comes From and a leader in dairy, calf ranch, and beef verification programs. The division focuses on animal handling and traceability programs.

Over the last 10 years of public trading, WFCF has become the largest company of its kind, controlling about 50% of the currently addressed market.

Competitors tend to be much smaller subsidiaries or private companies that focus on niche services. WFCF’s relative size makes it an easy one-stop shop for all types of customers, be they farming operations, processors, or restaurants.

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Partnerships with large retailers, including Costco, Whole Foods, and McDonald’s, position WFCF as the most visible third-party auditor.

Coupled with significant barriers to entry for competitors, such as certification to act as an auditor, industry expertise and personnel, and acquisition of loyal customers, WFCF has an intrinsic advantage.

For example, it took WFCF a whole four years to hire personnel with sufficient expertise and overcome regulatory barriers for certification. Needless to say, this is a capital-intensive process, and the amount of time required for any viable competitor to arise will only allow WFCF to further dominate the market.

Wide Open Growth

As for the potential size of the market the company can tap, consider how WFCF’s 50% market share represents 40,000 or so farmers that are buying verification services right now.

The total size of the domestic addressable market is estimated at 800,000 farmers.

That is just the domestic farmers, too. The U.S. imports and exports unimaginable quantities of food, and certification is critical for key markets like Korea, Russia, and the European Union.

Then there are mandatory regulations that need to be met.

The USDA’s Animal Disease Traceability Program will force 800,000 cattle producers to implement source audits in the next few years.

Plus, 32 U.S. states have some kind of GMO label ballot initiative pending, and WFCF is one of only three non-GMO approved auditors in the nation.

Between rapid consumer demand growth, passed and pending legislation, and the promise of higher margins in a high-growth retail segment, the remaining 95% of farmers are going to be under ever-increasing pressure to adopt third-party verification services.

WFCF is also dedicating a sizable portion of its growing cash flow and revenues to mergers and acquisitions to propel growth forward. So far, it has been quite successful:

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So far, M&As have added 3,700 new customers, $4 million in additional annualized revenue, six new auditing standards, four new food groups, a net increase in market share, and higher margins.

In effect, it can cherry-pick the most successful of its potential future competitors in a phase where growth for them would be tough. WFCF can effectively buy market share on the cheap.

In addition to the scaling and efficiency advantages, it can also support efforts that make its services wholly unique.

WFCF has plans in place to provide data directly to consumers about the entire provenance of their purchases.

Here is what it looks like:

Any retail or restaurant customer that is weighing their options simply needs to point their

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smartphone camera at that QR code, and they’ll be able to see third-party verification all the way back to the fields that cow grew up in.

At a cost of $0.01 to $0.03 per pound, the additional cost is easily absorbed by the retailers and customers, and the transparency advantage is overwhelming.

For example, that rib eye pictured above would only cost another $0.02 or so out of the $9.54 total.

The estimated addressable market is $2.7 billion based on annual domestic beef, pork, and chicken production.

Recent Results

WFCF has seen strong growth over the last nine years, with sales growing from $1.1 million in 2006 to $10.4 million in 2015, representing a compounded annual growth rate of about 28%.

The most recently resulted data from fiscal 2015 and the fourth quarter supports this trajectory and shows some additional strength.

Total revenues for the year ended December 31, 2015, increased 18.6% year-over-year (YOY). Service revenues were up 20% YOY, and product sales increased 11.4% YOY.

Full-year net income was up 133% YOY, Q4 net income was up 139% YOY, and net cash generated for operations for the full year was up 89%.

Cost of revenues for fiscal 2015 was approximately $5,540,700 compared to approximately $5,001,600 for fiscal 2014. Gross margin for 2015 increased to 46.7% of revenues compared to 42.9% for 2014.

WFCF cited the following for the improvements:

• Absorption of costs over a higher sales base

• Tweaks to its product mix

• Bundling opportunities where it can provide multiple verifications and/or certifications with one site visit

On a trailing twelve-month (ttm) basis, the company has some solid quarterly metrics for such

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a small operation that is focusing on rapid growth and capturing market share:

• Gross profit of $3.76 million (5.14% margin), operating margin of 7.65%.

• Return on assets of 6.06%, return on equity of 6.68%.

• Revenue of 10.4 million, revenue per share ratio of 0.44.

• Diluted earnings-per-share of 0.02%.

• Quarterly earnings growth (YOY) of 138.9%, though revenue growth (YOY) was -8.2%.

Q4 2015 results revealed that WFCF is sitting on $3.78 million of total cash, representing $0.18 per share. Total debt came in at just $22,620, which is an aberration.

WFCF has revolving business debt facilities that are far larger than the total debt listed, so we can expect this figure to fluctuate quite a bit.

This also highlights how WFCF — even while growing at a strong clip and reinvesting to grow both organically and via M&A — is running with some really clean books.

It generates more money than it is spending while creating long-term growth, an enviable position for such a small company.

This isn’t a leveraged play in any sense right now, and the company will have the opportunity to take on more debt when it is prudent.

Current Share Structure and Recommendation

WFCF is the product of a “mom and pop” operation, and its insider share holdings represent that. WFCF’s management owns about 50% of shares outstanding, 30% of which are held by husband and wife John and Leann Saunders, who lead the company and have rarely ever sold shares.

There are 23.81 million shares outstanding with a float of 11.47 million. In other words, about half of the shares that exist are not on the public market. There are no disclosed institutional investors.

The 52-week high is $3.42 and the low is $1.62.

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The market capitalization is a little over $50 million, enterprise value is $41.92 million, price to sales (ttm) is 4.39, price to book (ttm) is 6.78, and EV/EBITDA is 42.86.

All of this is concrete proof that this is not a company to value in the same way as your larger holdings. This is a growth play with solid potential and good books. However, if growth doesn’t continue for any reason, current valuations are quite expensive.

Growth with strong books is the catalyst for this play, pure and simple. This is a good thing. We know exactly what we want and will not be easily distracted by any financial engineering or intangible promises.

If current trends persist, we’re looking at strong share price growth in the coming months and years. If it doesn’t materialize, we’ll know it is time to find other opportunities.

There is another caveat to include as well — WFCF is a fairly illiquid company. Average daily volume over the last three months is just under 10,000.

In other words, large investor purchases or sales can easily create wild swings in share prices over short time frames.

While entering or exiting a position in WFCF, do so in small batches with buy and sell limits. You don’t want to cash out or buy in with an open order, only to exhaust all the shares listed at the current price and end up paying more or selling for less based on current share offerings.

With all that said, I’m confident in WFCF, its management, and its trajectory.

With market trends, competitive advantages in a virtually untapped business opportunity, and a strong, deeply invested husband-and-wife team at the helm, the company will rapidly justify current share price levels, and then plenty more.

We’re buying shares of Where Food Comes From (OTC: WFCF) and adding it to our high-risk growth portfolio at or under $2.50.

That’s it for this month.

Godspeed,

Jimmy Mengel Investment Director, The Crow’s Nest

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The Crow’s Nest, Outsider Club LLC Copyright © 2016, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Crow’s Nest or Outsider Club LLC does not provide

individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after

consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable

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