Medical marijuana update: Creative Edge’s paperwork problem

Chris Parry Chris Parry, Stockhouse.com
19 Comments| May 12, 2014


Men make plans and bureaucracy smiles.
 
Creative Edge Nutrition (OTO:FITX, Stock Forum) and their CEN Biotech subsidiary have been all over the media of late, talking about how they’ve got ‘the world’s largest and most advanced medical marijuana production facility’ on the way. It’s a nice story, and doesn’t hurt in moving share prices upward, or in attracting investment dollars.
 
I’ve previously put them forward as an example of a company that has a nice vertical integration play going on with their partner companies.
 
So… what happens if it’s all bullshit?
 
On May 1, the company sent out a news release that claimed CEN Biotech was “proud to announce that it has notified Health Canada that its facility is ready for the Pre-License inspection,” adding, “the company accelerated its construction and build-out plans for what will become the world’s largest and most advanced legal cannabis production facility.”
 
Heady stuff, and enough to get them a fat story in the New York Post.
 
“The Ontario site will be able to grow 1.3 million pounds of pot from 50,000 plants — an operation that could produce $5 billion in sales per year when it starts producing in a few weeks after it passes government inspections,” said the Post story by reporter Tom Donnelly. “No more hiding grow lamps in closets: This $20 million facility will churn out pot like other factories churn out aspirin. And it has plans to expand to the US.”
 
“The facility is done, it’s ready,” CEO Bill Chaaban is reported as saying. “It’s laid out [like] a manufacturing facility for prescription drugs.”
 
Cool story, bro.
 
But the story changes somewhat when you dig deeper.
 
The news release Donnelly was writing from quotes Chabaan saying the company was actually ready for pre-license inspection from Health Canada for a “53,000 square foot facility,” clarifying that only 27,000 square feet have been built to date.
 
That much is true. But that size of a facility would make Creative Edge very much a mid-range player – smaller than Tweed by almost two thirds – and it also puts the company a long way away from $5 billion in sales when it starts producing “in a few weeks.”
 
For Creative Edge investors, the devil is in the details, and the details put questions to CEN Biotech’s ability to build the world’s largest facility, or even Ontario’s largest - at least in Lakeshore.
 
If the city of Lakeshore says the company can’t build more than it’s already been given permits for, FITX’s business plan becomes confetti.
 
And as of now, according to Mayor Tom Bain, there are major questions as to whether Lakeshore is prepared for something of the size Creative Edge is talking about.
 
“We’re actually in a meeting right now talking about it,” said Bain on the phone to me Monday morning. “We don’t even have an application in for what they’re talking about. We have approved 60,000 square feet – we don’t have any problem with that. But ‘world’s largest’? That’s not even something they’ve applied for.”
 
Bain explained there would be significant challenges for Lakeshore to sign off on such a project, and that there would need to be detailed investigations done on what it would mean in terms of hydro, water, roads, security, environmental issues, rezoning and more.
 
“They’re allowed up to five employees,” says Bain, a number that would seem to be low even for the existing 60k sq. ft plans. “Any more than that, we have to see an application.”
 
Added to the complications surrounding FITX’s plans for world domination is the timeline for completing such a study: Bain says it would take “between three to six months” to get to the bottom of any expansion investigation, and then it has to go to city approval, and approval may not come without significant infrastructure expansion and discussion as to how that’s going to be paid for.
 
All of which means today might not have been a good time for Creative Edge to drop another news release that talks of a second marijuana facility purchase – a 25 acre plot on the same street as the first.
 
"We purchased the site with the intentions of operating a research and development facility with respect to strain genetics, new grow techniques and bio-medical research," commented Bill Chaaban, President & CEO. "It has been our intention to not only grow and sell medical marijuana, but to be leaders in the forefront of medical marijuana research; In particular, to further identify treatment modalities for specific disease states based on strain selection. We intend to develop and own the intellectual property."
 
Bain says the city has no application to look at in order to approve such a facility.
 
The company has said it is working closely with the city regarding its plans, but that doesn’t appear to be the case according to an email I received that Lakeshore Chief Administrative Officer Kirk Foran allegedly sent to a reader on April 2 that raises significant questions about how FITX are running their show.
 
Foran confirmed for me this morning that the email was his, and that it still applies.

The email: 

I can confirm that a building permit has been issued on this site for an agricultural storage building. A second permit has been issued for an agricultural fence. We have NOT issued a building permit for a medical marijuana grow-op facility. In fact, we do not have an application in our system for a medical marijuana grow-op. Permits for a medical marijuana grow-op are not in order. The Town’s Zoning Bylaw will permit small processing operations under specific zoning provisions. Without scripting these provisions, the bylaw typically allows for small scale processing of agricultural crops grown on site in agricultural zones. Since we do not have an application, the Town cannot determine the scope of the operation in order to render an opinion regarding zoning bylaw compliance. We are therefore unable to determine if zoning would be in order.
 
While you have dismissed “other infrastructure”, I can advise you that the Town has not reviewed its ability to service a medical marijuana grow-op in the absence of an application. I wish to point out that Town staff have not been evasive in answering your questions. We simply do not have a proposal to respond to!  I trust the above explains our position.

 
Foran told me this morning that the application is by no means a sure thing to be approved.
 
The city would need to look particularly hard at the water use of the facility, and that while it would be up to the company to pay any costs required to expand the property’s access to Lakeshore’s water supply, Foran says there’s limited capacity to go around.
 
“If they need too much, I’m not sure what we could do to satisfy that need.”
 
Foran tells me that, in the days since I started investigating this story, the company has been in touch with the city and that an application is expected “in the next few days.”
 
Foran also noted that any assumption that the city will approve the project because of financial benefits to Lakeshore is misguided, being as the tax base for an agricultural facility is “not significant in any way” and is based on 25% of the residential tax rate.
 
This means if the facility will be a drag on Lakeshore, Creative Edge is going to get a significant bill before anything is approved.
 
Foran also notes that Hydro Ontario will need to deal with any needed expansion to electrical load, and that the city will need to run an investigation on the planning side as it pertains to access roads, burden on the neighbours, etc, a process that will take “several months.”
 
Now, it’s important to note that just because the paperwork hasn’t been filed doesn’t mean that Creative Edge CAN’T get approval for the world’s largest marijuana grow op facility…
but that same coda applies to every single marijuana grow company out there.
 
Tweed could claim their facility ‘will one day be the world’s largest marijuana production facility’ and it would be no less legitimate a claim than the one being made by Creative Edge today. I could claim my basement will one day be the world’s largest grow op – the point is, right now, it’s not and no permission has been given for it to one day be so and any permission is potentially a half year away.
 
This means Creative Edge’s big pitch to investors that, if you buy into it, you’re buying a piece of the gorilla in the room, is bogus – at least for now.
 
Long holders of FITX have a lot of assumptions to make to feel like they’re on a good thing right now.
 
  1. You have to assume Lakeshore will okay anything beyond a 60k sq. ft building and five employees, something they haven’t done yet.
  2. You have to assume they’ll be able to pay for any infrastructure issues, perhaps on an ongoing basis.
  3. You have to assume they’ll get their MMPR licensing, something they haven’t done yet.
  4. You have to assume they know how to grow weed, something they haven’t done yet.
  5. You have to assume that a company spending this kind of money, to build before approval or licensing has been given, and which has demonstrated a highly promotional track record to date, is going to be a good manager of your assets.

Personally, I struggle to give benefit of the doubt beyond assumption one.
 
Let’s be clear - the company isn’t alone in this game of build now, ask permission later, just for the record. I’d hazard a guess that most listed companies with plans to legitimize an existing marijuana grow facility have yet to ask the city involved whether the city will be okay with those plans.
 
And a lot won’t be.
 
In fact, in Connecticut, where medical marijuana is legal, the various municipalities that make up that state have overwhelmingly disapproved of marijuana grow ops and dispensaries on their streets, leaving just a handful in operation after two years of legalization, and patients buying from street corners to get their medicine.
 
Invest in what you know to be true – right now, FITX is a 20,000 square foot grow op with permission to grow to 60k. Everything else is promotion.

Addendum: This isn't the first time Creative Edge has been caught moving before having permission to do so. From a Windsor Star article earlier this year:

Despite issuing news releases that it had approval from Health Canada “to grow, distribute, import and export medical marijuana,” Health Canada spokeswoman Sara Lauer said last week CEN Biotech has not received a licence. The company had also stated in a news release in the late fall that it had started construction on its medical marijuana facility, but the town hadn’t issued a building permit for the site. Since then the town has given CEN Biotech a building permit to put up an agricultural building.

CEN Biotech’s parent company is Creative Edge Nutrition, whose CEO Bill Chaaban did not answer questions posed by The Windsor Star about the discrepancies in the news releases. Chaaban said: “Creative Edge is not releasing any new information at this time. You will be apprised of future news releases.”

Also worth noting, according to that article the land purchased by CEN Biotech, "was going to be used by its original owner, Jim Shaban, for a film studio."

NOTE: Before anyone starts to squawk about ulterior motives, that's not how I roll. I'm not in any way invested in Creative Edge, nor Tweed, nor am I shorting anything. I own some VPOR (which I won't write about while I have a stake) and some V.CMT, which I can't lose because it's halted. I used to have some V.PAU, but had to get rid of it so I could write a feature about it. Any time a Stockhouse writer mentions a client company, we disclose the fact, and we don't write about things we own because bias helps nobody.


Elsewhere, Affinor Resources (CSE:C.AFI, Stock Forum) has been trade-halted and the reason has been clarified: They're engaging in a Change of Business process with the CSE. About time - there's no denying Affinor is a weed company, but what will be interesting to gauge is how long that process takes on the more junior junior exchange.

On the TSX, we're looking at a 60-day halt, which is way too long for companies in a space that is catapulting in value daily. The compay doesn't expect the CSE process to tak a substantial amount of time.

 
IN OTHER NEWS:

Bayhorse Silver (TSX:V.BHS, Stock Forum) has decided the medical marijuana sector is not for them, after a short exploration into the business.

A news release today said, “After a comprehensive review by the Company and its consultants of the potential opportunities presented by the legalization of medical marijuana in Canada, and presented by the new legislation in certain States in the U.S., the Company directors have decided to discontinue any further research into this arena, and the consultancy agreements entered into will terminate as per the terms of the agreements.”

“A lot of people are looking to put their money to work,” said Bayhorse head of corporate development Doug Kerr at the GreenRush marijuana investor’s conference in Vancouver last week, but it appears Bayhorse was increasingly pulled between sectors and decided to stick with the bread and butter.

Word from the Bayhorse camp is the company is increasingly bullish on their mining prospects, of which they just acquired another, and decided to give those full management attention, though they believe the MMJ sector has definite potential for others.

As the first mining-to-marijuana company we cover to decide it’s not for them, I have to commend management for taking a hard look at weed not as a means to getting a quick share bump, but as an honest serious business option - and having the stones to stay the course with their original plan.

Full disclosure: Bayhorse is a Stockhouse Publishing client.


Hearing stories about Tweed's (TSX:V.TWD, Stock Forum) crop not being up to par, something I mentioned on Twitter last week. Bay Street types are telling me there are a few issues at the company - they have moved some product, which was worthy of a press release, but they ran out of stock the same day, and there are whispers that both the first crop and second aren't ready for prime time.

Again - whispers. A big player like this in a new space will inevitably be subject to rumour, especially when the stock is wavering. And if anyone has the cash to blow through a few teething problems on the grow side, it's Tweed.

But these stories may be part of the reason the stock price has failed to ramp up, even with product moving out the door. They were certainly enough to make me take a loss last week on the small amount I'd bought, expecting the sales door to open substantially more than it did.


IN BRIEF:
Peace Naturals, which has an MMPR license, had to run a product recall this week, the second such recall based on quality concerns after inspection. Most interesting in the story, it "affected 55 customers", which gives you some insight into how small the numbers are in terms of patient uptake so far.

A great story by Vancouver Sun writer (and former colleague) Tiffany Crawford on the organic Whistler Medicinal Marijuana Company set-up, which has its MMPR, can be found here, with video.

Interesting points to note: Company is signing up 30 new clients a week, no profits as all money is going into expansion and debt repayment, and the first few crops had issues - even thought these guys have grown for ten years plus. 

 
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Check back daily for the latest news in this sector.

For more stories on this sector, see our Medical Marijuana section.

Follow me on Twitter at @ChrisParry

Send tips, news, suggestions to chris(dot)parry(at)stockhouse(dot)com





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Comments

CrashCab
The entire MJ sector looks to be caught up somewhere between a pipe dream and a joke.
2.5 stars
May 12, 2014
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TurdFurgeson
Mr. Parry can you explain how anyone can be down 3000%? No, because it's impossible, but anyone can write anything on here as you have proven heavily
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May 14, 2014
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Aveirinho
On a third note: they are FORCED to build now, get license later. You're acting as if they are trying to go about this in the wrong way. They don't have a choice given how Health Canada is dealing with licensing. Go take a hike and get a day job please.
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May 12, 2014
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jaberwock
Creative Edge's problem is not paperwork. The problem is a CEO who can't distinguish between reality and fantasy
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May 13, 2014
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weedmeplease
They have a huge surprise waiting for them. Largest in Ontario??? I don't think they know about CannaCure out of Fort Erie. They have a former pharmaceutical manufacturing plant that's over 120,000 and can be expanded to over 180,000 by adding mezzanines to the warehouses. Air handlers and all kinds of goodies already in place. They developed their own growing technology, super low start up costs and burn rate. Solid team. For me, I'm waiting to see if they go public because they ...
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May 14, 2014
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marinokv
well written and I appreciate any insight,factual, which helps me in my novice attempts at playing the market, ty.
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May 13, 2014
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TurdFurgeson
How come it was mentioned twice back at the ready to build press conference(once even by the ceo of economic development) that they will have upwards of 50 employees, not to mention other things talked about that don't add up in your story. Tom Bain spoke at the conference and seemed pretty excited about what they're doing and has been there to hear everything we have. If there was a problem with anything, I'm sure there would have been a "meeting" about it a long time a...
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May 12, 2014
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ohnonotagain
The mayor has twice got this wrong. I called the town about one month ago and was told it was 6000sqft and five employees and that was from Mr. Steve Salmons. But this is for the author of the article. Here is a question for you. The company sent a letter to the town stating what their intentions are but the address they gave for those activities is the address of the vet surgery they bought and announced on Facebook which is their supposed R&D and hemp facility, not medical marijua...
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May 12, 2014
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TurdFurgeson
After reading the rest of your article I realize I have wasted my time commenting and even reading this. But, hey, I'm bored. Crazy anyone would believe the misinformation and lies that are abundant here. I hope you don't plan on being a writer at any point in your life. You will starve.
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May 12, 2014
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lucass81
I have a feeling you know little of what you are saying, and your macho remark "so what happens if it is all bulls--t." What kind of a writer are you? I can only guess you are getting paid for bashing this stock. Just lost total respect for you as a journalist.
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May 12, 2014
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