Sky-high margins for Arizona cannabis operations

There are now dozens of Canadian publicly-listed cannabis companies. A number of these companies have developed innovative business plans and/or creatively pioneered niches for themselves in this emerging industry. The selection for investors is dizzying.

While there are many ‘flavours’ of cannabis companies from which investors can choose, the principals of investing remain the same. People want to see strong margins, robust growth opportunities, and a solid business strategy. That one sentence sums up Canadian Bioceutical Corporation (CSE.BCC, OTCQB: CBICF, Forum).

Strong margins? The Company’s initial cannabis operations are located in the state of Arizona. While Arizona plant touching and retail operations by law are non-for profit, running these operations requires substantial management, real estate, finance, logistics, back-office, legal, and other operational inputs that are supplied to it through management agreements. BCC owns the management companies that support the operations. Due to the degree of control over the non-for profit operations, results under IFRS are consolidated at the BCC level. Going forward in this article, therefore, we will refer to the Arizona operations as BCC’s operations.

In its Health for Life dispensaries in Phoenix MSA (metropolitan Phoenix), dried cannabis products retail for between $9 and $15 per gram, in U.S. dollars. In contrast, prices from Canadian cannabis retailers range from $6 to $10 per gram – in Canadian dollars.

Even without the currency exchange differential, it’s easy to see that Health for Life will generate higher margins on its sales than Canadian dispensaries. Add in the exchange rate, and margins for H4L approach a windfall level.

These extremely robust gross margins have allowed an early transition to profitability. For the twelve months to March 31 (Company’s fiscal year end), 2016, EBITDA of the Arizona operations improved from a loss of $1.1 million to a profit of $1.6 million on revenues of $8.5 million. For the year ending March 31, 2017, the Company anticipates revenues and EBITDA for the Arizona operations to grow strongly to over CA$20 million (revenues) and over CA$6 million (EBITDA). While the Arizona results are only consolidated as of January 1, 2017, the results will provide a strong indication of the growth trajectory the Company is on.

Robust growth opportunities? Explaining this requires starting at the beginning of the story. In its original mandate, BCC was a broader distributor of health products, supplying natural health remedies used in treating conditions like diabetes, dementia, and psoriasis. The motivation for BCC’s management in pursuing this line of business is spelled out by President and CEO Scott Boyes:

I became deeply involved with the cannabis industry a few years ago both professionally and on a personal level and became strongly aware of the medical benefits of cannabis, as well as its commercial opportunity, as the medical properties are also increasingly recognized by the medical profession, which has led to a rapid growth, both in Canada and the US, of the medical cannabis market. This is the opportunity BCC is capitalizing on.


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With progress through the MMPR (and now ACMPR) regulatory regimen coming slowly, management began looking for proverbial greener pastures, with their gaze quickly drawn south of the Border. Just as cannabis investors have many companies from which to choose, Canadian cannabis companies have their choice of a large and increasing number of U.S. jurisdictions where (in many cases) the path to cultivation, production, and retailing is considerably more streamlined.


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The Company chose Arizona, ranked as the third-best state for cannabis investment in the U.S. The list of “positives” for cannabis operations in that state is lengthy, especially for a Canadian-based company. Many U.S. jurisdictions, while otherwise attractive, don’t allow foreign ownership of cannabis operations.

This is not an impediment in Arizona. BCC has just as much operational freedom doing business in Arizona as any state-based company. Of equal importance, Arizona allows full seed-to-sale operations, meaning complete vertical integration for cannabis operations.


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Then there are the regulations for cultivation. Typically, cannabis licenses for cultivation issued in both Canada and the U.S. set a specific limit (within the license) on the maximum square footage which can be devoted to cultivation activities.

In Arizona, there is no limit on cultivation. Licensed cannabis companies can grow as much cannabis as they are capable of funding in their operations, subject to complying with quality-control and other rules for cultivation within that state.

Why are profit margins so robust for cannabis dispensaries operating in Arizona? It’s because (relative to most other cannabis jurisdictions) there aren’t a lot of dispensaries in Arizona, and the total number of dispensaries currently allowed in Arizona is relatively limited: only one dispensary per ten licensed pharmacies.


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To summarize: even as a Canadian-based company, BCC has full operational freedom in Arizona. There is no limit on cultivation operations for any licensed producer. There are only 98 operating dispensaries in the entire state, with 126 total licenses granted. Colorado, with a smaller population, already has over 500 dispensaries.

Unlimited production for growers sold from a limited number of retail outlets. As the Company surveyed the business landscape in Arizona, what they saw was the ideal jurisdiction from which to commence cannabis operations.

This left open one important detail: finding the right U.S. business partner which BCC could fold into its own operations. To quote President and CEO Scott Boyes, Canadian Bioceutical’s first Arizona acquisition “had to be perfect.” This takes us back to Health for Life.


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Along with its cultivation and processing facilities, H4L operates two full-service cannabis dispensaries in Phoenix MSA: its “Mesa North” and “Mesa East” outlets, in an urban population of 4.6 million people. However, just these two retailing fronts comprise 5% of the entire cannabis market in Arizona, making H4L one of the largest cannabis operations in the southwestern United States.



The H4L dispensaries also offer a full product line of cannabis extracts, marketed under the MPX brand – an award-winning brand. H4L’s dried cannabis products and MPX extracts have already achieved broad penetration in the Arizona market because of another advantage of cannabis operations in that state.


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Licensed producers in Arizona can sell their cannabis products to any licensed dispensary in the state. This provides the opportunity for continued market share growth in Arizona even if H4L didn’t open any additional dispensaries. MPX product, for instance, are carried by over 40% of Arizona dispensaries.

However as BCC’s management did their due diligence on Health for Life, their interest extended to more than just the business itself. Their focus quickly shifted to the brains behind H4L’s very successful operations.

Specifically, that meant Beth Stavola.

A businesswoman; in her previous career incarnation she was Senior Vice President of Institutional Equity Sales at Jeffries New York. But Stavola is a true entrepreneur and envisioned going into business on her own. As she researched the (then) just-emerging legal cannabis industry, she decided that this was where she wanted to make her mark.

Part of the reason why H4L has been so successful is because Stavola was not totally focused on just dollars and cents. As with BCC’s management, Stavola possesses a streak of altruism. She didn’t merely want to turn a profit with her business endeavours, she wanted to help people while doing so.

It was the combination of the blue-sky economic potential of the cannabis industry and the exciting therapeutic uses for medicinal cannabis which led Stavola to this sector. Even before teaming up with BCC, she had already expanded her cannabis operations into the state of Nevada.

“Our goal is to become a branded, multi-state operator. We are looking to leverage the strength of our H4L and MPX brands, and the production and retail know-how accumulated in Arizona, to enter new markets and capture market share. Targets can either be licensees that need to be developed in early stage markets with significant growth potential, such as the states that recently voted for legalization, as well as strong operators in existing markets that require expansion capital and where we can negotiate a deal that is accretive.”

Nevada is also a cannabis-friendly state, and while not offering all of the advantages of cannabis operations in Arizona, it offers one advantage which Arizona presently lacks: licensed recreational use of cannabis. In Nevada, Stavola’s cannabis enterprise is GreenMart of Nevada.

Stavola’s people-first ethos extends beyond the customers at her dispensaries. She is equally concerned with the well-being of her employees. When Stavola and BCC’s management sat down to negotiate, Stavola was insistent: every H4L employee had to receive stock options as part of the deal, from the skilled growers and technicians all the way through to customer service.

This enlightened attitude leads to not only a highly-motivated work force but also a high level of employee loyalty, meaning low turnover. This is important to operations because producing award-winning, high-margin extracts requires considerable expertise – expertise which H4L doesn’t want to lose to any competing business.


It was easy to see why BCC wanted to partner with Stavola and her H4L operations. What did the Company bring to the table in return? Obviously it starts with the capacity of publicly listed companies to raise capital. Then there is the skill-set possessed by Canadian Bioceutical’s management team.

CEO Boyes has over four decades of business experience in a diverse array of settings and possesses with a strong track record in generating revenue growth and profitability.

Randall Stafford is the Company’s CFO, with over 30 years of experience working with a series of corporations. Michael Arnkvarn is VP of Marketing and Product Development, with three decades of expertise in nutraceuticals. Jason Gully is COO of U.S. operations, and has many years of experience in the cannabis industry. Stavola, herself, naturally stepped into the position of President CGX, the Company’s corporate vehicle for its U.S. operations.

Beyond this, BCC brought one additional plum to the partnership: ultra-efficient grow technology. One of Canadian Bioceutical’s moves which flew under the radar was its acquisition of exclusive licensing of “Roto-Gro” technology. This innovative process boasts several superior attributes.


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When incorporated into BCC’s cannabis cultivation, this high-efficiency grow technology will lower unit costs to less than $1 per gram (USD) for H4L’s dried cannabis products. With a retail price of $9 - $15 per gram and a cost of less than $1 per gram, this means average gross margins in excess of 90%. With the high-margin MPX portfolio of products, it is easy to see that BCC’s profitability is trending in one direction only, up.



This is a revenue (and profit) growth profile which would be envied by most other cannabis companies, whether public or private. To continue this upward trajectory, Canadian Bioceutical needs to expand, and all the Company sees around it is blue sky.

While the current success in BCC’s Arizona operations is a story in its own right, the Arizona acquisition is a template for future expansion. H4L has already acquired a third Arizona license (at a purchase price of $4 million), including a new land parcel valued at $1.5 million.

This will enable the construction of a third dispensary to service the Greater Phoenix area. Construction costs are estimated at approximately $1.2 million with completion anticipated in 4 – 5 months. H4L is also moving into a new building with increased cultivation capacity.

Beyond the opportunities for further expansion and consolidation of the cannabis industry in Arizona, Nevada already beckoned. After concluding BCC’s initial deal with Stavola’s H4L business, the Company quickly acquired an option to extend the partnership to the operations of GreenMart of Nevada and BCC has just announced that it is exercising this option, and is acquiring 100% of the Nevada operations for outright ownership.

However, even before Canadian Bioceutical made its move into Nevada, opportunity knocked. On April 4, 2017; BCC announced signing a letter of intent to acquire a 51% interest in IMT, LLC, a Massachusetts company, much like BCC’s operations in Arizona, supporting already fully licensed for cannabis operations in that state.

Like Arizona, Massachusetts currently exercises tight control over the total number of dispensaries licensed for cannabis sales. Unlike Arizona, Massachusetts has voted for legalization of adult use of cannabis. Assuming the acquisition closes (before the end of May), this establishes the Company in another very favorable U.S. jurisdiction.



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Very strong margins, robust growth opportunities, and a rock-solid business plan: these are qualities which would attract investors to any company. For a Company operating in the rapidly emerging cannabis space, it’s enough to make investors salivate. Throw in early profitability.

The Canadian Bioceutical Corporation is all about helping people. That also includes BCC’s shareholders.


FULL DISCLOSURE: The Canadian Bioceutical Corporation is a paid client of Stockhouse Publishing.