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 can
not generate profits a lot of money for somebody.