Valens GroWorks Corp. issued the following press release on February 16, 2017:

VANCOUVER, BRITISH COLUMBIA — (Marketwired) — 02/16/17 — Valens GroWorks Corp. (CSE: VGW) together with its subsidiary (collectively, the “Company”) is pleased to announce its engagement under a 5-year, renewable, Professional Services Agreement (the “PSA”) with Arizona-based marijuana cultivation and medicinal dispensary business MKHS, LLC [whose member is MKHS Holding Company, LLC whose member is Kittrell Children’s Trust] and its affiliate MKV Ventures 1, LLC [whose members are MKHS LLC and Westland Capital Advisors SA] (collectively, “MKHS”).

In addition, MKHS has issued to the Company a US$1,212,500 Promissory Note, Loan Agreement and Guaranty that secures repayment of previous advances (collectively, the “Arrangement”). This Arrangement supersedes and replaces the Company’s previously described investment in MKHS and settles all outstanding issues between the parties.

As a result of this Arrangement, MKHS will complete the buildout of the 28,000-sf Farmtek greenhouse expansion, as proposed and funded by the Company in 2016 (the “Buildout”). In accordance with the PSA, payments of US$60,000 per month for management services (“Management Services”) will commence to the Company upon completion of the Buildout, with the initial three month’s payments to be deferred and paid at the end of the third month following Buildout to allow for an initial harvest. In addition, the Company will provide consulting services (“Consulting Services”) to be performed and invoiced monthly, and will be reimbursed for approved out-of-pocket expenses
and sub-contracted services.

In accordance with the Arrangement, loan interest accrues at the rate of 15% per annum commencing May 15, 2016. Principal and interest, as well as US$30,000 in cost recoveries for past accrued fees, shall be payable to the Company by MKHS in arrears commencing at the end of the third month following Buildout, and on the 15th day of each month thereafter over a 5-year term.

MKHS supplies medical marijuana pursuant to the Arizona Medical Marijuana Act, operating an 11,000-sf warehouse cultivation, commercial kitchen and extraction facility, and a nearby fully-secured 9.5-acre operation that includes a 3,000-sf automated greenhouse and 21,780-sf (1/2 acre) Airstream wind-assisted, air-supported greenhouse, and the proposed Buildout. MKHS also operates two state-licensed “healing center” dispensaries, and distributes its own in-house prepared, branded line of edibles, concentrates and extracts.

See “GENOVATION CAPITAL ANNOUNCES BINDING AGREEMENT TO ACQUIRE MKHS LLC.”

“MKHS Investor LLC cultivates medical marijuana. The firm owns certain Arizona medical marijuana companies, dispensaries, and cultivators including Purple Med Healing Center and Green Med Wellness Center. It supplies its product pursuant to the Arizona Medical Marijuana Act. The company is headquartered in Tucson, AZ.”

Tucson Weekly:  “Arizona lawmakers seek greater control over marijuana and ballot initiatives. It seems too much pot is giving Republican state lawmakers an identity crisis as they keep trying to pass greater regulation on the Arizona marijuana industry.  Southern Arizona Rep. Vince Leach introduced a bill that would restrict dispensaries in rural areas from relocating to the cities

Canadian Bioceutical Corporation (BCC), a soon-to-be publicly traded firm, and its Nevada subsidiary, CGX Life Sciences, Inc. announced that they have indirectly acquired two Arizona medical marijuana dispensaries for $25,000,000.  In a January 23, 2017 press release CBC said:

“the purchase price of US$25 million . . . will be satisfied by a cash payment of US$15 million . . . subject to adjustments, and a promissory note in the principal amount of US$10 million . . . payable to the Sellers. The Promissory Note shall have a three (3) year term and bear interest at the rate of eight percent (8%) per anum”

The two medical marijuana dispensaries apparently are owned by Health for Life, Inc., an Arizona nonprofit corporation.  In a January 23, 2017, press release Canadian Bioceutical Corporation stated, “Under the Health for Life (“H4L”) brand, two licensed dispensaries operate in the Mesa area.”

CBC issued a public report called a “Management Report.” This report includes the following statements:

• “BCC provides management, staffing, procurement, advisory, financial, real estate rental, logistics and administrative services to two medicinal cannabis enterprises in Arizona.

• While the Company does not directly own, possess or sell cannabis or cannabis-infused products, it does provide substantial support and exerts considerable influence over these two businesses, which are legally authorized to sell medical cannabis and derivative products.

• Under the management agreement, BCC has material influence over the Arizona operations, and will be required to consolidate their results under IFRS.

• The management agreement has a 20 year initial term with prohibitive break-out clauses.”

Note the statement that the Company does not own, possess or sell cannabis, but it “exerts considerable influence over these two” dispensaries.  Sounds like CBC is paying $25,000,000 for the privilege of exerting considerable influence over the dispensaries as opposed to purchasing either of the dispensaries or the company that owns the dispensaries.

CBC’s Management Report also states,

• “Current total production capacity ~1.6 million grams per year
• Annual Revenue as of 3/31/16 = $8,500,000
• EBITDA as of 3/31/16 = $1,600,000
• Annual Revenue as of 3/31/17 = $19,200,000
• EBITDA as of 3/31/17 = $6,600,000″

EBITDA means “earnings before interest, tax, depreciation and amortization.”  If the 3/31/17 EBITDA will be $6,600,000 then how would the dispensaries satisfy the “not-for-profit” requirement of Arizona’s medical marijuana law?

The Canadian Bioceutical Corporation issued a press release on January 24, 2017, that states:

“it has appointed Elizabeth (Beth) Stavola as President of the Company’s wholly owned subsidiary, CGX. In her new role, Ms. Stavola will be responsible for the operation of the Arizona business, as well as the Company’s other U.S. operations. . . . Ms. Stavola is also the founder of . . . Health for Life Inc.”  Emphasis added.

I don’t know what CBC’s press release means by calling Ms. Stavola a founder of Health for Life, Inc., but she was never an officer or director of the corporation according to the records on file with the Arizona Corporation Commission.  Nor did she sign the Articles of Incorporation that formed the nonprofit corporation.

Note CBC’s organizational chart shown below says that CBC’s two Arizona medical marijuana dispensaries are Health for Life, Inc., and Soothing Options, Inc., both of which are Arizona non-profit corporations.

Here is a summary of the people involved with the Arizona companies named above as set forth on the Arizona Corporation’s website.

• Health for Life, Inc.: Julie Winter (Chairman, President & Director), Michelle Magers (Vice-President & Director), Salvator Martelli (Director) and Liz Nilan (Director).
• Soothing Options, Inc.: Cindy McDonald (Chairman, President & Director), Thomas Nilan, Sr. (Vice-President & Director), Tiscia Bonanno (Director) and James A. Clifford (Director)
• S8 Industries, LLC:  Its members are Beth Stavola and CGX Life Sciences, Inc.  Its sole manager is Beth Stavola.
• S8 Management, LLC: Its sole member is CGX Life Sciences, Inc.
• S8 Rental Services, LLC: Its sole member is CGX Life Sciences, Inc.
• S8 Transportation, LLC: Its sole member is CGX Life Sciences, Inc.

This transaction raises the following questions:

1. Why would anybody pay $25,000,000 or any substantial amount of money to be able to “exert considerable influence” over two Arizona medical marijuana dispensaries that by law must operate on a not for profit basis?

2. Who gets the $25,000,000?  Is it Health for Life, Inc.?  If so, then what does H4L, a not for profit corporation, do with all that money?  If it wasn’t H4L then who gets the money and what is it for because an Arizona nonprofit corporation does not have owners (shareholders)?

3. Will the recipients of the $25,000,000 pay ordinary income tax or capital gains tax on their income?  A requirement for a capital gain is that the taxpayer must sell a capital asset.  What asset would a person have sold that would qualify as a capital asset and capital gain tax?

4. In its January 23, 2017, press release CBC said the $25,000,000 is payable to the “Sellers,” but it does not identify the sellers.  Why?  Who are the sellers?  Why would a public company fail to disclose who it is paying $25,000,000 for the privilege of “exerting influence” over the two dispensaries?

Apparently the not-for-profit Arizona medical marijuana dispensary business cannot generate profits a lot of  money for somebody.