Anexco Resources (C.AXO) plan: Retool, rebrand, focus on deliverables and excellence

Chris Parry Chris Parry, Stockhouse.com
8 Comments| July 3, 2014


Tell a stranger you run a medical marijuana company and their reaction will likely be one of suspicion. Let’s face it; given the stigma around marijuana for the last century or so, there are still a lot of people out there that can’t see the medicine for the weeds.
 
Because of that, and because so many former mining companies are suddenly medical marijuana companies, genuine legitimacy is one of the most valuable assets any new millennium weedco can strive for.
 
That’s something a lot of newly minted firms are struggling with in the dot.bong era. Presenting a solid business plan is necessary, finding strong investors is necessary, building a strong management team is a must, and avoiding any associations with people who might screw up a security check is essential. Few companies come out of the gate with their dream team in place, fewer still know what their business plan will be from the get-go. The sector is in constant flux.
 
Anexco Resources is a company that has seen that flux up close, and worked hard to push through it. They’ve had insider buyouts, branding changes, business concept reworks, and there’s a new name and ticker on the way – and that’s just in the last few months.
 
The tumult shouldn’t be seen as a sign of weakness, however – rather, it’s the natural course when a management team finds itself in a new sector that’s changing every day, with opportunities emerging and rules being rewritten on the fly. ‘Staying the course’ may be considered an asset in mining, but in a brand new sector with rules still being written, stasis is tantamount to suicide.
 
Every medical marijuana company is facing these changing tradewinds. Few are equipped to tack quickly and keep the sails full.

 
CLEAN-UP, AISLE 5:
 
Anexco Resources (CSE:C.AXO, Stock Forum) was, pretty recently, talking up a strategy to brand marijuana and marijuana-related products with the ‘BC Chronic’ logo, the thinking being that, internationally, British Columbia bud was seen as some of the more potent and high quality around and that a logo that reflected that would bring big sales.
 
Personally, though I like the potential of branding plays and think it’s a real untapped area of the sector, I didn’t really like the BC Chronic brand. It was too ‘dope’ focused, too provincial, too hip-hop, not professional enough for users over 25, and the plan as it was laid out early on was to keep the brand in-house, rather than license it to others as a mark of quality.
 
Anexco’s directors, at the time, had their own doubts over the plan. Though BC Chronic was what they had come out of the gate with, and conventional wisdom might have been to just push forward until necessity forced a change, the feeling was it would be best to take a step back, retool, adjust for the new market, and come out of the process stronger.
 
This is the ‘dare to be great’ moment for a public company. You can hide many problems and keep raising money until you hit a wall, or you can clean up your game, sharpen your tools, and surge forward with confidence that you’re going to bring it home for shareholders down the line.
 
I checked in with Anexco last week to find them neck deep in their dare to be great process. The BC Chronic brand, which was the platinum sponsor of the Vancouver GreenRush conference just a handful of weeks ago, is gone.  Shortly, so too will be the Anexco name.
 
 
THE RE-EMERGENCE:
 
Anexco Resources is set to formally change its business from resource exploration to Cannabis cultivation and marketing, and the company’s wholly owned operating subsidiary for the new venture is to be called Kaneh Bosm BioTechnology, Inc., a name based on the ancient Hebrew word for cannabis, as identified in the Old Testament.
 
The strategy is no longer to cover the world in BC Chronic stickers, but rather to be a focused, efficient, premium quality cannabis grower.
 
And they want you to know that, which is why they invited me to talk to company President Michael Martinz about the plan going forward, with a mandate to dig as deep as I wanted and present what I found.
 
To be clear, the company has paid my employers, Stockhouse Publishing, for placement of this article on our distribution network. I haven’t been paid by Anexco to write it, don’t own stock in it, and I’m not shorting it or any competitor of it.
 
But it was a tough one to make happen because, as regular readers know, I like to make the companies I write about earn their good press, and that’s not always a comfortable process for a company in flux. To me, talking about the rough seas you’ve pushed through is mandatory. Showing your warts is essential. An investor is going to dig them up anyway, and if you’re not prepared to say ‘yep, that happened, but here’s how we fixed it,’ it tells the investor there’s something to hide, even if that’s not necessarily the case.
 
Anexco is a company that has not taken the easy route to production. It hasn’t been smooth sailing. There have been issues that needed addressing and, to their credit, they addressed them before I came along.
 
But they didn’t exactly want to put those issues in flashing neon. So part of the process of putting this piece together has involved our working with the company in an effort to show them that it’s okay to open the kimono.
 
Company reps saw my story during the fact-checking process and wanted to change things. Not important things – some legal stuff, some fact-checking detail - that’s all fine and a necessary part of the process of getting a good story together. But there were suggestions, as there always are when money’s on the line, that it would be great to talk about the future and not the past so much.
 
I get it. But I don’t do that.
 
It took some time. We did some team building exercises, some trust falls, we went on a vision quest and ate peyote in the desert, did a little fire-walking, some Tony Robbins tapes - and, eventually, journalist and management got to a mutually understood place – a place where I felt comfortable putting my name to their story, and they felt comfortable dropping trou.
 
So let’s make it rain legitimacy. This is the Anexco/Kaneh Bosm story.

 
THE JERRY MAGUIRE MODEL: FEWER CLIENTS, BETTER SERVED
 
Michael Martinz is a plant specialist, but foremost a weed guy. He’s been involved in Jatropha biodiesel projects and he’s financed a couple of mining plays and he’s done business in China and Africa and Japan, but it’s the weed business where he’s swings the hardest. He grew 1000 hectares of industrial hemp in the late ‘90’s, and he co-developed ‘the centurion machine’, which is a cannabis trimming and processing machine that is sold worldwide.
 
Part of what he plans to do with Kaneh Bosm is to operate a 6,000 sq. ft. facility, with 388 1000-watt lights with an annual grow capacity of 2500 kilograms in B.C.’s Okanagan region. He’s hoping to have a definitive agreement in place on that property in the coming weeks, and an LP application will be run through it.
 
“The facility was built to Health Canada’s standards specifically,” says Martinz, “and our consultant on putting together our LP application has an 80% success rate. The security on the site needs to be upgraded, adding cameras in each room and a storage vault, but we’re very confident we can work through those quickly.”
 
Pressed for a timeline, Martinz says the “first inspection could happen within eight weeks, and work should take three to four weeks to move forward to the next stage.
 
The company has $150k in cash – not a lot, but sufficient considering the low burn rate the company boasts.
 
What’s to love about how the company is set up is how tight the share structure is. With less than a $2m market cap, 13.8m shares outstanding, and cash in hand having been brought aboard by the founders’ shell company, the company has room to raise financing in abundance before the share structure gets anywhere close to stanky.
 
“It’s been trading quiet,” says Martinz, “which is fine because we’ve been buying out weak hands and some shareholders we needed shifted aside. Now we’re focused on building out what we have and once that story becomes real in people’s minds, we hope that share price is going to move in a good direction.”
 
But how does a 6k sq. ft. facility compare as a business model to the 150k+ mega-models we’re hearing about from Supreme Pharmaceuticals and Tweed and the like?
 
Martinz is of the opinion that bigger doesn’t mean better. In fact, this company takes the stance that mo’ volume brings mo’ problems.
 
“We’re seeing a lot of companies striking out with big square footage production announcements, and frankly we’re not in the ‘promising the world’ game,” says Martinz. “Our team is split between boots on the ground and market finance guys. There are a lot of suits caught up in metrics and crazy square footage, and to us that’s a recipe for disaster. In order to produce a quality product, a lot of care and attention must be given to each plant, and that just won’t be the case in mass market facilities. In fact, we’re already seeing that already in the early movers.”
 
“A little growing pain will occur for everybody. We can produce 2500 kilograms a year in a facility the size of the one we have an LOI on, and that gives us a good base to introduce the market to a premium product that will set a benchmark that, we hope, decimates the industrial grade, mass-produced products.”
 
Longer term, Martinz expects there will be more greenhouse opportunities in the Okanagan “which could provide us with low cost high volume production.”
 
But until the company  has built a demand, there’s no reason to go hog wild on supply.
 
“We plan to grow indoors under lights for 3 to 4 weeks, then bring the plants out to a shaded greenhouse,” he says. “We figure we can squeak in four crops a year. There might need to be some auxiliary lighting during some periods, but we want to be a low hydro cost operation that is flexible enough to move with industry needs.
 
To that, the potential Kaneh Bosm greenhouse facility would be a modular growing system built out, initially, over 6000 sq. ft.
 
Some larger growers will be in a position where they can screw up a 4,000 sq. ft. grow room and have another 146k sq. ft to fall back on, but a small supplier will need to be more focused on ensuring there are no mistakes.
 
Martinz sees the potential for peril, and thus has lined up a team of growers he says are beyond reproach.
 
“Tweed’s head grower has a single year of experience in Denver, while our team has a cumulative experience level of 60 years in marijuana,” he says. “Other companies have hired a bunch of PhD botanists and they’re having issues.  It’s called weed, but people who think it grows like weed are in for a challenge. There are some strange things this plant does; it responds to things in strange ways, and if you have ingrained knowledge of food crops, you have a steep learning curve to get a premium crop out.”
 
It’s fashionable to beat up on Tweed for its inability to get a consistent flow of weed out the door since its high profile launch. Every medical marijuana expert I speak to uses them as a comparable to show how they’re not going to make the same mistakes. Kaneh Bosm is no different but makes a point of outlining how their plans are different from square one; that is, right from the obtaining of source material.
 
“One company came to Kelowna and bought a bunch of street strains,” says Martinz. “They may have 80 strains but they don’t know what they are. Our priority is to develop genealogy of the strains so we’re sure of what we have and customers know exactly what they are purchasing. We plan on going to California and Amsterdam to purchase seed to grow as mothers so we can definitively know exactly what’s what.”
 
That’s important for a number of reasons. Like a photocopy of a photocopy, genetic sustainability is lost when a mother is cloned multiple times. The vigor of the plant can suffer, as can the effectiveness of the end product, so Martinz surmises that if producers have strains of unknown quality, some of their reported crop failures may be related to that.
 
“In my time, whenever I haven’t been able to get high quality genetics from a known source, if you just grab whatever’s available, it turns out to be a disaster. Watching a seedling grow from seed, as opposed to a fifth or tenth generation cutting, there’s a spectacular difference in performance and the end product.”
 
At this point, a lot of medical marijuana stock boosters reading this article are possibly rolling their eyes. A big segment of the investors in this space get positively giddy when they see grow facilities with lots of zeroes in their measurements, but just as there’s room for a Jones Soda to make millions alongside the industrial Cokes and Pepsis, the company is betting that a small run of premium product will be a nice path forward – certainly enough to drive a low market cap/low share structure play to several multiples.
 
“The grey market that exists presently has seen a massive reduction of wholesale pricing levels, to the point where some dispensaries are already selling for $4 to $5 per gram, or less, in Vancouver. We’re looking at selling a AAA grade product at the $6-8 mark, with costs at $0.80 a gram from indoor production, and half that in a greenhouse. That’s something you can build a solid following around and make great revenue on.”
 
“We’ve already seen some Licensed Producers flailing in the growing department, buying from [small producer] Whistler MMC rather than growing their own,” he says. “Distribution will come looking for product to fill the pipe and we plan to be one of the sources in demand at the retail level.”
 
“The consuming public are more interested in purchasing a product with quality assurance and guarantees that the product will work rather than playing with a street product,” he says, adding, “Quality will find a following, it always does.”
 
Martinz believes there’s a lot of shaking out yet to be done in the marijuana space, and that the court injunction in place in Canada, which allows MMAR license holders under the old system to keep growing for themselves in the interim will see new rules emerge.
 
“I think [the rules will] be modified to allow people to maintain their sovereign rights to make their medicine, under limitations. The former system was open to abuse of the rules, with huge facilities being put in place that clearly aren’t about personal production. Once the rules are corrected, those larger facilities could be eliminated and people doing their own thing will likely continue. But the cost and time spent growing your own will see some switch to purchasing.”
 
When I ask if he thinks the vast majority of grey market patients will come over to the new system, Martinz says yes – in time. But they won’t come without a fight.
 
“You know, most people in the grey market are seeing a product that their supplier is able to make the highest margin on. He’s buying the lowest cost product he can get away with while keeping clients happy, and 80% of people have never seen what true high quality cannabis looks like. Once they try it they’d never go back.”
 
 
MEDICINE TO THE MARKET:
 
Those companies working within the Canadian system are faced with many places in the medical marijuana process where they have to make a big decision. For example, how do you build out a network of customers when you’re not allowed to advertise?
 
The company looked at the rules and decided they might be best served simply not playing that game at all, and instead leaving it to others.
 
“The soft answer to the marketing question is, the rules need to be bent a bit to acquire those customers,” says Martinz. “It’s a tough situation.”
 
“Our decision is to use a third party physician-referring dispensary network. Some have nearly 9,000 patients that they have scripted licenses for. Because of the rules as they stand, they can’t direct you to a drug company, they have to give patients a choice. They’ll inventory product from several producers, there’ll be a social media component, and we plan to be in the mix there. We also recently got a call from another group that has an online facilitation service, they put the customer and producer together. Some of these third party services will be really building out the market going forward, and quality will be the number one determinant as to who they keep selling and what customers keep buying.”
 
Martinz says his company would be happy to bring people and partners on as sales reps, but a lot of those plans up in the air due to the grey area that is the system currently, with two licensing systems mixed together while the nation waits for courts to figure it all out.
 
“That is something we’re working on with dispensaries currently in the grey area. Some have 5,000 member patient lists. If we can convert them over to us, that would be a company builder. With a smaller scale, our costs are down and with one good partnership we can move our entire crop with one shipment.”
 
The B.C. Okanagan has a history of weed production, and not necessarily one that you’d like to date your daughter. Martinz sees his company’s geographic location as a definite asset in terms of attracting knowledgeable labor, but knows there’s a thick line between knowledge acquired by hands in soil and knowledge acquired with forehead tattoos.
 
“There are two types of people involved in the grey market; one was the full blown criminal who wanted that life, and the other was people who saw opportunities to make some side income that are typically brilliant people whose talents weren’t being utilised in the normal workforce. Those people have no interest in criminality, they just saw a chance to make some side income and live well. That defines the people we’re going to be associated with, very quiet, sophisticated people. We’ll dig up some granola dudes from the Kootenays who work for eight months growing and travel for four months on the proceeds.”
 
The bottom line is to grow this business out organically, keeping a tight share structure along the way.  We joke this is a strange one for the market guys who are used to pissing money down a drill hole. We want that money to produce more money. Real business. In terms of financing, we are planning on of doing a small raise to keep things moving ahead until the LP is approved, more to maintain our capital structure. We don’t want to dilute. Once we have that LP application we should get a lot of attention.
 
There’s another aspect to this company, and it’s one that doesn’t involve simply growing. That side of the business is still in the formative stages but involves MMJ-related industries, something that will present more revenue options than a single grow facility.
 
“We are looking at some other business divisions which can mitigate the risk of oversupply and get us into other markets and marketplace controls,” says Martinz.
 
These include a recent move into the cannabis dispensing kiosk world, and a possible third party physician dispensing network. Though both of these ideas are in the early stages, they show the willingness of the board to pivot as changing tides reveal new market opportunities.
 
“I don’t know that any group has come up with an enviable plan in in its entirety,” says Martinz. “It’s such a new corporate venture across the board that I don’t think anyone has solved the puzzle yet on how to best profit. Once our business model is developed and out there, I think others will look to us and say ‘why didn’t we think of that?’ but we’re going to take it slowly. Deliberately. Professionally.”
 
Credit where it’s due, a lot of the hard work on the whole ‘professional’ side of things has already been done.

--Chris Parry
@ChrisParry on Twitter
Chris(dot)parry(at)Stockhouse(dot)com
 
FULL DISCLOSURE: Kaneh Bosm has paid a fee for the distribution and placement of this article through the Stockhouse marketing network. The author was not paid by Kaneh Bosm for the creation of the story and owns no Kaneh Bosm stock, in accordance with Stockhouse’s conflict of interest rules and his own journalistic integrity. Kaneh Bosm was not given the right to dictate, alter, edit, suggest changes to or write any of the document before it was released, though the document was seen by Kaneh Bosm prior to distribution for fact-checking purposes and compliance, and some statements were changed on legal advice. Do your own due diligence, and don’t get high on your own supply.


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Comments

StockGuru2k11
Chris, I highly suggest you take a look at GRF - MATICA ENTERPRISES. Have a chat with Boris Ziger the CEO I think we are sitting on a time bomb about to explode any second now. Their JV with ChroniCare will be a winner Cheers THE GURU
2.5 stars
July 4, 2014
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TechDrive
Once again...ridiculous article with no verifications: I cannot believe Chris Parry has not been sued. “Tweed’s head grower has a single year of experience in Denver, while our team has a cumulative experience level of 60 years in marijuana,” What!?! Ryan Douglas has more than 15 years commercial growing experience. Who cares if it in Denver! Verify your facts Chris, you consistently write articles with no verification of what you write....ridiculous, I can't believe anyone takes yo...
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July 4, 2014
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antonaki1
Hey Chris, met you at Greenrush, thanks for excellent article on Anexco. I've held this stock based on Martinez being involved. Love the way this company thinks. No question, quality will be the way to go in the MMJ market. Once MJ becomes legal, than quantity might become of more importance. Till then, quality and tight share structures are a can't lose proposition.
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July 3, 2014
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Gitchy
LOL, ya Chris, guru's rampant pumping and spamming of this trash has it moving backwards...help him out eh.
2.5 stars
July 5, 2014
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Tweedlede
I wonder if this is the "pump and dump" guy that Chris Parry was venting about on Twitter.
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July 4, 2014
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stateside
A feel sorry for the posters with the hate-filled rants here. What a miserable life you must lead. Hopefully for your sake there are better times a head. Try smiling :). stateside
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July 6, 2014
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cparry
Tweedlede: You've got it entirely wrong. Techdrive: What you repeated was a direct quote, not my words. Don't like the quote? Take it up with the person who said it.
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July 7, 2014
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Tweedlede
Yup just checked Chris Parry's Twitter, and all the ranting about a company refusing to mention their past, their founders pump and dump style, and trying to have Chris Parry pass off their opinion as his own are deleted. Anexco Resources just got scratched off my list of stocks to watch.
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July 4, 2014
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