Inside the US Marijuana Money Grab Happening Now

In the US, states legalize marijuana through ballot initiative or the legislature. Ballot initiatives typically allow for an unlimited number of licenses to produce and sell marijuana. Legislatures allow “highly-regulated” or “controlled” marijuana markets by creating a small number of licenses. 20 out of 31 legalized markets in the US operate as state-sanctioned oligopolies. This 150-page whistleblower report (excluding exhibits) is an in-depth and behind-the-scenes look into who is cornering this industry, how the industry is being cornered and how much money is being made as a result. This report focuses on five oligopolies in which we have the most industry experience – FL, MD, AR, VA and LA.

 


Marijuana licensing is blatantly rigged

This is how a handful of politically-connected and ultrahigh net worth individuals are cornering the industry:

  • Pay lobbyists and fund political campaigns: FL, MD, AR, VA
  • Write the market’s laws and regulations: FL, MD, LA
  • Access the license awarding process: FL, MD, AR, VA, LA
  • Coordinate with other winners: FL, MD, AR, LA
  • Delay or prevent new licenses: FL, MD, AR

In Florida, the legislature created five licenses and restricted marijuana applicant eligibility to the state’s largest plant nursery owners. Five of these nurseries were selected to a “negotiated rulemaking” committee to write the industry’s rules and the application evaluation process. Four of these nurseries were chosen out of twenty-four applicants, including Costa Farms (Curaleaf) which sells $500 million in ornamental plants annually. Applications were ranked without being scored. The fifth nursery eventually won too.

Through legal marijuana, these five states have handed out $1.8 billion in current value to pharmaceutical, nursery, banking and media executives, political mega-donors and governor appointees, real estate and casino moguls, coal barons and a former state Attorney General. 

In Maryland, Michael Bronfein (Curio Wellness), a top Democratic donor nationally, partnered with lead investor David D. Smith, the executive chairman of conservative media conglomerate Sinclair Broadcast Group who is personally worth over $300 million. Curio was one of seven companies awarded licenses to grow, process, retail and deliver marijuana throughout the state.

 


The rich sue the state and then settle for profit

In these five states, 350 unsuccessful groups have lost $5 million in fees and $70 million developing applications. These include many disadvantaged groups who pooled resources. These also include a handful of groups who could afford to litigate, who later gained new licenses legislatively (Maryland, Florida) or settled in other ways (Arkansas, Louisiana) – arrangements that conceal and perpetuate political corruption.

In Arkansas, a circuit court judge ruled marijuana license awarding unconstitutional, later reversed by the Supreme Court. The state then obstructed the appeal process by not issuing denial letters to losing applicants. The FBI is investigating bribery involving one of five marijuana commissioners, Dr. Carlos Roman. Unsealed court records from another federal investigation show text messages in which an FBI special agent “laughed out loud” at the appointment of attorney Travis Story to the marijuana commission.

 


The underlying injustice

The way that marijuana is transitioning to legal markets is just another example of politics as usual in public procurement-like processes. But there’s more in this case. Historically and to this day people of color and the poor are disproportionately targeted, arrested and incarcerated because of illegal marijuana. The ACLU has found that despite roughly equal use in the US, blacks are nearly 4x more likely than whites to be arrested for marijuana. Marijuana arrests account for over half of all drugs arrests in the US. Millions of careers, families and lives have been derailed and ruined because of illegal marijuana, most often for petty possession.

Now, legal marijuana continues to discriminate as those derailed by illegal marijuana are barred from entering the legal industry or otherwise incapable of competing for opportunity in this rigged system. Billions of tax dollars collected from marijuana nationally – including billions in federal taxes – are not disproportionately benefitting this affected population.

Virginia, the 30th state to legalize marijuana, disregarded incentives for disadvantaged business participation and barred ownership and employment for anyone who has been convicted of marijuana possession and paraphernalia misdemeanors – while exempting owners of winning groups and their criminal history questionnaires from FOIA law. One of five medical marijuana winners is part of a proposed $150 million resort casino in Bristol backed by coal barons with ties to Ukrainian billionaire Rinat Akhmetov.

 


Blowing the whistle

Most states yet to legalize marijuana, including most of the South, do not allow ballot initiatives. In existing marijuana oligopolies, license winners are now going public and raising hundreds of millions through the Canadian Securities Exchange (CSE) – in some cases amid FBI investigations. IRS code section 280-E squeezes profits for marijuana businesses resulting in early exits and accelerated consolidation. Cowen Group projects $75 billion in legal US marijuana sales by 2030. Effects of the “legal cartel” legalization and business model on the affordability of uninsurable medical marijuana should also be looked into further.

In Louisiana, GB Sciences has become an effective monopoly and is preparing to charge pharmaceutical-level pricing this November, forcing most patients to decide between debilitating costs or remaining in the cheaper yet criminalized market with some of the harshest possession laws in the US.

Lastly, to make an effort against the politicizing of this information, Democratic and Republican governments alike continue to reward billions to the already rich and powerful through legal marijuana.

 


Florida Summary
Projected marijuana market: $5 billion

The legislature legalized marijuana in 2014, creating 5 vertically-integrated businesses that could retail across the state. As the law was being developed, applicant eligibility was restricted to the largest plant nurseries in Florida with 30 consecutive years in operation. Black and small farmers protested. 5 eligible nurseries, including Costa Farms with annual sales of $500 million, were selected to an exclusive rulemaking committee and then wrote the market’s rules and license award process while evading legislative oversight. 24 nurseries applied. Applications were ranked without being scored. 4 out of the 5 nurseries on the rulemaking committee were awarded licenses, including Costa Farms (Curaleaf). Chestnut Hill Tree Farm (CSE:LHS) owner Jay Odom, a prominent real estate developer, had been sentenced to 6 months in jail for federal campaign finance violations a couple of years earlier. Trulieve (CSE:TRUL) Chair, CEO and owner Kim Rivers is tied to an FBI grand jury probe into public corruption in Tallahassee. New laws in 2016 and 2017 expanded the market size and enabled previously unsuccessful applicants in pending litigation to win licenses, including GrowHealthy which had already purchased a facility for $2 million. The 2017 law also created new licenses to be issued through new applications, including one for Black farmers discriminated against by the USDA. A circuit court judge found that the Black farmer licensing provision actually discriminated against Black farmers, and a Native American group is now suing the state over this allotment. Requests for application for new licenses are yet to be released a full year after the law’s required licensing deadline. The original 5 winners control 47 out of 51 total marijuana retail outlets in the state. Florida marijuana sold $100 million at retail over the past 6 months despite high prices, and sales are growing exponentially. At least 3 out of the 14 current licenses have already exited, including a recent winner who sold for $50 million pre-revenue in September 2018. Meanwhile, a circuit court judge in Florida just ruled that limiting marijuana licenses is unconstitutional per Amendment 2, a successful ballot initiative led by attorney John Morgan.

 


Maryland Summary
Projected marijuana market: $1.5 billion

7 companies won vertically-integrated marijuana licenses – growing, processing and retail with delivery – in Maryland in 2016, led by Curio Wellness and Doctor’s Orders. Curio Wellness, led by Michael Bronfein who is one of largest Democratic donors in the US, raised $30 million at a $50 million pre-money valuation with lead investor David D. Smith, chairman of the conservative Sinclair Broadcast Group who is personally worth over $300 million. License winners celebrated at Bronfein’s home after winning. Doctor’s Orders, led by Glenn Weinberg (Live! Casino) and other wealthy businessmen, raised money at a $40 million pre-money valuation. They partnered with Vicente Sederberg and former legislator Dan Morhaim, who worked on rulemaking as the architect of legal marijuana in Maryland without disclosing his financial arrangement with Doctor’s Orders. The Washington Post uncovered conflicts of interest during the evaluation process; a founder of winner Temescal Wellness, for example, scored applications as part of the evaluation committee. Several former law enforcement heads, including county sheriffs and a state police chief, were on teams that won licenses. Winner Vireo Health, suspended by Maryland regulators for smuggling $500,000 worth of marijuana from Minnesota to meet a compliance requirement for its New York operations, was recently reinstated after transferring ownership into a different LLC. After nearly 2 years of legal action from unsuccessful applicants and protest from the Legislative Black Caucus, Maryland passed overhaul legislation in May 2018 creating a few new valuable licenses for existing politically-connected license holders, one for litigant Green Thumb Industries (CSE:GTII), and a few through new applications that are not yet available. After 200 groups submitted 1,000 applications the first time, prospective applicants are dissuaded this time around. Meanwhile, $50 million worth of marijuana was sold at retail in the market’s first 8 months.

 


Arkansas Summary
Projected marijuana market: $600 million

Marijuana in Arkansas was first legalized by ballot initiative in 2016. 5 production license winners were announced in February 2018 and include the LaFrance family which sold its pharmacy chain to Walgreens for $550 million, Oklahoman Warren Ross – whose construction company secured $725 million in federal contracts over the last decade – partnered with former Attorney General Dustin McDaniel and the Chairman of both HomeBanc and the Arkansas State Police who is personally worth $125 million, and wealthy appointees to the Arkansas Economic Development Commission who partnered with Democratic Party leadership. Commissioner Travis Story is the attorney for the owners of winner Osage Creek. Prominent Black farmer Abraham Carpenter, partnered with Baltimore-based civil rights attorney Billy Murphy, was disqualified while other winners who failed to meet minimum qualifications were not. Unsuccessful applicants sued the state. A circuit court judge ruled the marijuana license awarding process unconstitutional, a ruling later reversed by the Supreme Court. An unsealed court filing indicated that the FBI was investigating bribery involving Commissioner Carlos Roman. An ongoing FBI investigation into a massive kickback scheme in Arkansas implicates at least 24 current and former bipartisan legislators, including the Governor’s family and Commissioner Travis Story’s law firm partner. Former legislator Hank Wilkins VI, owner of a marijuana license through his son, pled guilty to taking $100,000 in bribes from a Preferred Family Healthcare lobbyist accused of plotting to kill another coconspirator. An Arkansas Democrat-Gazette investigation found that winner Delta Medical Cannabis Company plagiarized large and important sections of its application through a former head of the Alcohol Beverage Control Division Michael Langley. The Commission officially awarded licenses as soon as the circuit court’s injunction was lifted, then blocked legal recourse for unsuccessful applicants. The selection process for the 32 dispensaries, with over 200 applicants, was outsourced following public backlash. A government spokesperson informed local media that many dispensaries have already begun construction ahead of the postelections November 2018 license announcements.

 


Virginia Summary
Projected marijuana market: $1.5 billion

In August 2015, an eventual winner of 1 out of 5 licenses in Florida named Surterra retained lobbying firm McGuireWoods to legalize marijuana production and sales in Virginia. The ensuing 2016 law legalized 5 vertically-integrated regional monopoly licenses. The Board of Pharmacy selected a 14-member panel consisting of Surterra and local business interests to develop emergency rules. An administrative judge then found that Surterra failed eligibility requirements for its license in Florida. In 2017, application owners and scoring results were exempted from Virginia’s FOIA law. The 2018 “Let Doctors Decide” bills, backed by leading marijuana advocacy group NORML, expanded patient access and the future market size. The Board released its request for applications in April 2018 while amending emergency rules and before proposing and finalizing these rules, delaying public feedback until after applications were submitted. The Board received 54 applications – many more than it expected – then delayed license awards. The Board assembled an anonymous ad hoc committee to evaluate applications; the evaluation took place in secret at the recommendation of the AG’s office. The Board separately discussed “actual or probable” litigation. NORML called for transparency to know if winners had failed compliance in other markets; Surterra had missed an inspection deadline in Florida a couple of months earlier. In August 2018, Surterra raised $65 million from billionaire Beau Wrigley. It has contributed $50,000 to Governors McAuliffe and Northam, spent at least $120,000 on lobbying in Virginia, and closed job postings for the Northern Virginia and Richmond regions. The Washington Post reported in August 2018 that PharmaCann also applied. PharmaCann is backed by mega-millionaire Dan Tierney who, through MedMen, acquired his 2nd license in New York from a group with FBI-alleged ties to the Gambino crime family. On September 25, the Board announced 5 winners, including PharmaCann, Columbia Care worth $1 billion privately and Green Leaf Medical, a winner in Maryland. Dharma Pharmaceuticals is part of a proposed $150 million resort casino in Bristol backed by coal barons Jim McGlothlin and Clyde Stacy, who are tied to Ukraine’s richest man Rinat Akhmetov through MetInvest Group. Dalitso LLC, the winner in most valuable region Northern Virginia, is tied to billionaire Suzanne Hillman and mega-millionaire David Smith (Sinclair Broadcast Group), and partnered with NORML’s business consulting arm Virginia Cannabis Group.

 


Louisiana Summary
Projected marijuana market: $1 billion

After attempts in 1978, 1991, 2014 and 2015 to legalize medical marijuana in Louisiana, the legislature ultimately did so in 2016, giving LSU exclusive production rights with 9 licensed pharmacies. After protest from the Legislative Black Caucus, HBCU Southern University was added, forming a producer duopoly. As a result of pharmaceutical lobbying, Louisiana’s marijuana law requires that certain patients either exclusively use FDA-approved marijuana and cannabinoid medication – GW Pharmaceutical’s (NASDAQ:GWPH) Epidiolex and a couple of others – or at least go through fail first protocols before accessing state-produced marijuana. Seven groups applied to partner with LSU; the requirement of a $1 million bid bond that could easily be kept by LSU suppressed applicant turnout. LSU contracted with GB Sciences (OTCQB:GBLX) despite $28 million in accumulated deficit and failed minimum qualifications that were disqualifying in the case of 3 other applicants. GB Sciences struggled to raise capital, then paid $1.7 million for the build-out of LSU’s production and research facility to its CEO’s son’s museum exhibit company. 7 groups also applied to Southern University, which heralded marijuana as a financial savior and the most important development in the university’s history. Southern selected Advanced Biomedics in September 2017 for a 5-year term with two optional 5-year renewals. Advanced Biomedics’ founder and mega-millionaire investor sued each other in April, then this investor threatened to sue Southern for financial damages if it proceeded to contract with a different group. Southern finalized a full 15-year contract with this investor in May 2018 guaranteeing $18 million to the university, almost twice the size of its endowment. Southern is yet to receive a penny, and Advanced Biomedics has made no progress developing its marijuana operations. Consequently, LSU / GB Sciences is an effective monopoly and now plans to charge Epidiolex-level prices: $32,000 / patient annually, which is 25x the price that LSU projected in 2016. Most patients will soon have to choose between debilitating costs or staying in the criminalized market. Rx Greenhouse, which finished ranked 1st in the New Orleans pharmacy region, is suing the Louisiana Board of Pharmacy for selecting 4th ranked H&W Drugs Store instead as the winner in New Orleans. H&W Drugs Store is 100% Blackowned.

 

 


Florida Marijuana

 


A) Market Statistics:

  • Adult-use marijuana projected annual retail market: $5 billion
  • Business legalization date: June 16, 2014
  • Eligible applicants: 21-99 (Florida Department of Agriculture)
  • Number of applications submitted: 24
  • First winners announced: November 23, 2015
  • First retail sales: July 26, 2016
  • Patients registered to date: 115,000
  • Retail sales to date: $100 million ($85 million since February 2018)
  • Legal businesses: 14 vertically-integrated (including 7 since August 2017)
  • Liquidations to date: 3
    1. $26 million – Aphria (TSX:APH), though US subsidiary Liberty Health Sciences
      (CSE:LHS), acquires CHT Medical in May 2017
    2. $48 million – iAnthus Capital (CSE:IAN) acquires GrowHealthy in January 2018
    3. $53 million – MedMen (CSE:MMEN) acquires Remeny Wellness in September 2018
  • Current marijuana license value distributed by state: $600 million

 


B) Market Developments:

A handful of the largest plant nursery owners in Florida wrote the rules and secured the state’s marijuana market. Several of these winners have already exited the market by selling to publicly-traded Canadian companies. The state passed a special session law in 2017 to award additional licenses, but nearly a year past the deadline, new groups have yet been able to apply. All eyes are on a recent circuit court ruling finding the state’s limited licensing regime unconstitutional, as well as plans for a 2020 adult-use ballot initiative.

 


Marijuana business applicant eligibility limited to largest nurseries in Florida

On June 16, 2014, the Florida legislature legalized low-THC medical marijuana limited to patients with cancer, chronic seizures or severe and persistent muscle spasms. The law allowed for 5 vertically-integrated businesses to grow, process, retail and deliver marijuana in Florida across the state. The eligibility of applicants for these businesses was restricted to plant nurseries registered to cultivate more than 400,000 plants – the Department of Agriculture’s largest category of nursery stock inventory – that have also operated for at least 30 continuous years. The Department of Agriculture estimated that 99 nurseries were eligible to apply, after initially estimating 21 and then 39 nurseries were eligible. Successful applicants would have to post a $5 million performance bond held by the Department of Health for two years.

Outside of the legislature, attorney John Morgan led a ballot initiative campaign called Amendment 2 that aimed to expand qualifying medical conditions and the percentage of THC allowed. The opposition, financed largely by Sheldon Adelson who contributed $5 million, outspent the initiative 3 to 1 in the final months. In November 2014, Amendment 2 fell just short of the 60% required supermajority needed to pass in Florida.

During public comments for the Department of Health’s proposed rules, several participants opposed the lottery method to select winners, preferring a merit-based approach. In September, Costa Farms sued the Department of Health over its proposed lottery-style method and later won. The Department of Health chose to withdraw its rules entirely and start over. On December 16, 2014, it issued a notice for a rulemaking session open to the public, then withdrew this notice the following day.

 


Exclusive rulemaking committee filled with business interests

On January 5, 2015, the Department published a notice for a selective “Negotiated Rulemaking Committee.” Florida law recommends that agencies use negotiated rulemaking when strong opposition to rules is anticipated. The Department of Health was also delayed in implementing the medical marijuana program by then. Per its notice, the negotiated rulemaking committee members would be selected from representative groups including “1. A nursery that meets the (business eligibility) criteria in the Florida Statutes.” The Office of Compassionate Use (OCU) within the Department of Health selected 12 members to the rulemaking committee, 5 of which were nursery owners and future applicants. 2 other members had ties to future nursery applicants, including the head grower for McCrory’s Nursery (GrowHealthy) which had already spent $2 million buying a 200,000-square foot production facility. 

The rulemaking committee also developed the evaluation process: there would be 3 evaluators – the director of the OCU along with 2 appointments made by the Secretary of the Department of Health. Secretary of Health John Armstrong appointed Ellyn Huston and Christian Bax. The rulemaking committee and the OCU avoided legislative ratification by under-projecting and omitting regulatory costs – projecting there would a total of 15 applicants paying a one-time application fee of $60,063, along with an “unknown renewal fee” that required no statement of regulatory costs, per the OCU.

 


Black and small farmers protest

In March 2015, members of the Florida chapter of the Black Farms and Agriculturalists Association protested the racial and economic injustice of the medical marijuana law at a senate committee hearing. They claimed that none of the state’s Black farmers would be eligible for the businesses, at least in part due to discriminatory lending practices by the USDA, the legal recourse for which – culminating in class action suit Pigford v. Glickman – took precedence over running businesses for 30 consecutive years. The law as written “carved out… not just the black farmers but the small farmers,” said Howard Gunn, the president of the Florida chapter of the association. Republican Senator Rob Bradley, co-sponsor of the original legislation, said the law had a “disproportionately negative impact on minority farms.”

Application windows were open for 3 weeks between June 17 and July 8, 2015. 24 nurseries applied. Officials planned to notify winners by August 8. On July 20, two weeks into the evaluation period, Director of OCU Patricia Nelson left her position to rejoin the Governor’s Office, renewing public concerns for even more delays in the program’s implementation. On July 22, Christian Bax was announced as the office’s new director, an appointment later investigated by Politico – Bax’s r sum  touted experience in the marijuana industry that remains unsubstantiated, and his father is a long-time Republican donor appointed to the Public Employees Relations Commission by Governor Rick Scott. Applications were ranked without being scored.

 


4 out of 5 winners were on the rulemaking committee:

On November 23, 2015, the winners were announced: Costa Farms (Curaleaf), Knox Nursery (Cansortium), Chestnut Hill Tree Farm (Liberty Health Sciences) and Hackney Nursery (Trulieve) had each been selected to the rulemaking committee. Miami-based Costa Farms, owned by the Costa family, is the largest ornamental plant producer in the US generating $500 million in annual revenue. Chestnut Hill co-owner Jay Odom, a politically-connected real estate developer, had been sentenced to 6 months in jail for federal campaign finance violations in 2013. The fifth winner, Alpha Foliage (Surterra Florida), does not appear to have had representation on the rulemaking committee. Surterra Florida is managed by the Havenicks, who own several casinos in Florida, and Robert “Jake” Bergman and Wesley Van Dyk of Atlanta-based Valkyrie Capital. Surterra issued an RFP to find a processing partner for Florida in the Spring of 2015. It selected a company that had responded in detailed fashion. This company presented Surterra with an LOI, but did not hear back again. It is unclear whether Surterra used this content in its applications in Florida and other states.

12 unsuccessful applicants petitioned for administrative hearings within two weeks.

In March 2016, Secretary of Health John Armstrong lost his job after the Senate refused to reconfirm him in what the Miami Herald called “a rebuke to a governor-appointed agency head not seen in more than 20 years.” Also in March, HB 307 was signed into law, expanding the market through the legislature including no limit-THC for experimental treatments. This legislation also required the Department of Health to grant cultivation authorization to the 5 winners – notwithstanding any prior determination that the applicant failed to meet statutory requirements. An administrative judge found months later that Alpha Foliage had not met the statutory requirement for nursery eligibility. HB 307 also paved the way for up to 5 new businesses, if the Department of Health, Division of Administrative Hearings or other relevant court determined that unsuccessful applicants were entitled to authorization. In April 2016, San Felasco Nurseries (The Green Solution) became the 6th authorized business, and in December, the Department of Health settled with McCrory’s Nursery (GrowHealthy), which became the 7th.

 


Ballot initiative triggers big valuations

The relaunched Amendment 2 ballot initiative passed on November 8, 2016, boosting patient registry projections from 7,000 to 500,000. At least 2 of the 7 authorized businesses secured investments that same day, with San Felasco raising $6.5 million and Surterra raising $10 million. The winners raised money at large valuations – with one unnamed group at least pitching a valuation of over $100 million – on the premise of an advantageous head start in this emerging billion-dollar market. Following Amendment 2, lawmakers were expected to add more operators to Florida’s market.

 


Substantial lobbying to keep number of operators at 7

In April 2017, the Tampa Bay Times published “Meet Florida’s Legal Drug Cartels,” revealing the 7 winners employed leading lobbyists at the capital and contributed over $500,000 to campaigns during the 2016 and 2018 election cycles. The Tampa Bay Times received a leaked May 2017 pitch deck for Surterra, in which private equity firm The Costera Group, founded by former Goldman Sachs partner Richard Kimball, was brokering the purchase of $10 million in Surterra shares being unloaded by existing shareholders at a $42.5 million valuation. In this deck, Surterra projected $138 million in gross revenue by 2021 through 55 retail outlets and with expectations that the state would limit the number of competitors in the near future. Both Kimball and Surterra’s chief development officer pitched this deal to prospective investors.

New special session legislation SB 8-A was passed in June 2017, granting 10 new licenses. The first group of new licenses – to be licensed first and by August 1, 2017 – were former applicants that had one or more administrative or judicial challenges pending as of January 1, 2017, or who had a ranking within one point of the highest ranking in its region.

The second group would be new applications to be licensed by October 2017, including one recognized class member of Pigford v. Glickman that was also a member of the Florida chapter of the Black Farmers and Agriculturalists Association. The law also gave preference to 2 new or original applicants “that own one or more facilities that are, or were, used for canning, concentrating or otherwise processing of citrus fruit or citrus molasses and would use or convert the facilities or facilities for the processing of marijuana.” The law capped the number of dispensaries at 25 per license holder, and required 4 additional licenses with each increment of 100,000 patients registered.

 


Remedial measure is itself discriminatory

On September 22, 2017, 80-year old Black farmer Columbus Smith sued the Department of Health over discrimination in the Pigford v. Glickman provision in SB 8-A. Columbus Smith tried to join the Florida chapter of the Black Farmers and Agriculturalists Association and was turned down. The National Black Farmers Association assisted in this lawsuit with Columbus Smith. On December 28, a temporary injunction was granted to Columbus Smith. Governor Rick Scott signed a law in April 2018 eliminating the association membership requirement, at which point Mr. Smith dropped his suit.

 


C) Outlook:

As of the end of August 2018 – approaching a year past the state’s deadline for new applications – groups have yet had the opportunity to apply for new licenses including the single license reserved for a class member of Pigford v. Glickman. Meanwhile, in the last year, 7 additional original nursery applicants have been approved including Treadwell Nursery (Remeny Wellness), which sold to MedMen for $53 million in September 2018. The winners have 51 retail locations among them, 47 of which are held by the original 5 winners. The more recent winners are not pursuing a brick and mortar retail strategy, focusing instead on wholesale delivery. State-wide delivery is now available through Curaleaf (Costa Farms). The state does not track the number of marijuana deliveries.

Regarding the grouping required to have been licensed by October 2017, the Department of Health proposed rules that require that applicants be a registered nursery (of any size now), post a $60,830 application fee and, in the event of a notification of award, post a $5 million performance bond. Per SB 8-A, because these are emergency rules, these rules do not require legislative ratification. Meanwhile, Florida surpassed 100,000 active registered patients in April, triggering 4 new licenses. The Department of Health projects 400 applications for these 4 licenses. It is unclear when applications for either of these two new license groupings will be available.

There are currently 11 active administrative and judicial cases against the Department of Health and the renamed Office of Medical Marijuana Use (OMMU). These include Joe Redner’s case against limitations and special classes of licenses, John Morgan and People United’s case against the smoking ban, and a Native American farmer seeking qualification for the Pigford v. Glickman allocation. On August 2, a Florida circuit court ruled in Redner’s favor finding that limited licensing is unconstitutional – Amendment 2 placed no caps on the number of licensed marijuana businesses in Florida. The judge also found that granting special classes was unconstitutional, referring to the 7 previously-unsuccessful applicants that were given licenses through SB 8-A. The judge determined that the legislature and health department “have simply chosen to restrict access to this (licensing) framework.”

To cover application review costs ($7.3 million with 400 projected new applications), ongoing litigation ($1.5 million) and other expenses, the OMMU was granted $13.3 million in additional funding. The Joint Legislative Budget Commission unanimously approved the budget request while rebuking it; Rep. Janet Cruz described what the OMMU had to done to medical marijuana in Florida as “sabotage” with “intentional ineptitude.” Days later in late July, OMMU Executive Director Christian Bax resigned.

Outside of Florida, Knox Medical (Cansortium) and Surterra won 2 out of 3 CBD licenses in the TX medical cannabis market, issued in September and December 2017 respectively. Cansortium also operates in Puerto Rico. Costa Farms sold to or merged with Curaleaf (PalliaTech) in March 2018, with undisclosed terms. Curaleaf owns and operates other operations in CT, MD, MA, NJ, NY, ME, PA, AZ, OR and NV, and according to a term sheet reviewed by Bloomberg, is currently seeking a pre-IPO valuation between $3 and $4 billion on the Canadian Securities Exchange (CSE). Trulieve’s (Hackney Nurseries) current CEO and co-owner Kim Rivers is tied to an FBI grand jury probe into public corruption in Tallahassee. Rivers resigned from the Downtown Improvement Authority board, which she had formerly chaired. Indictments are expected soon. Trulieve (CSE:TRUL) will list publicly in Canada on September 25, 2018. Kim Rivers owns 18.75%.

 

 


Maryland Marijuana

 


A) Market Statistics:

  • Adult-use marijuana projected annual retail market: $1.5 billion
  • Business legalization date: April 14, 2014
  • Number of applications submitted: 1,046
  • First winners announced: August 15, 2016
  • First retail sales: December 1, 2017
  • Patients certified to date: 37,500
  •  Retail sales to date: $46 million
  • Legal businesses: 7 vertically-integrated (out of 15 grower, 15 processor and 102 dispensaries)
  • Pre-investment valuations: $40 and $50 million (for 2 known vertically-integrated businesses)
  • Current marijuana license value distributed by state: $645 million

 


B) Market Developments:

In 2016, a handful of wealthy, politically-influential and out-of-state interests won the rights to grow, process and dispense marijuana with delivery in Maryland. The Washington Post uncovered major conflicts of interest in rulemaking and licensing, and the Legislative Black Caucus protested the lack of minority ownership. This led to a disparity study and overhaul legislation in 2018, conceding little in the way of new ownership opportunity… All in the context of a Governor’s race and the push to become the first adult-use and billion-dollar market in the Mid-Atlantic.

Governor Martin O’Malley signed HB 881 and SB 923 into law on April 14, 2014, tasking the Natalie M. LaPrade Medical Cannabis Commission (MMCC) and the Department of Health with developing regulations including a process for business licensure. The Commission is named after house bill sponsor and member of the Legislative Black Caucus Baltimore City Delegate Cheryl Glenn’s mother, whom Del. Glenn believed would have benefited from medical marijuana in the last months of her struggle with kidney cancer. Maryland received a whopping 1,046 applications from 223 applicants by the due date of November 6, 2015. This was 3x the number of applications that MMCC expected to receive, and MMCC delayed its licensing decisions indefinitely. The state collected $1.3 million in nonrefundable application fees. MMCC planned to license up to 15 growers, 15 processors and 109 dispensaries.

 


Washington Post reveals applicant political ties before announcements

On June 26, 2016, following a FOIA request with the MMCC, the Washington Post identified the owners and officers of the applying entities. 56 applicants had local political and law enforcement ties, with teams comprising former sheriffs, state lawmakers, DEA officials, wealthy business executives and well-connected political donors to both parties. Featured in the Washington Post article was Democratic mega-donor Michael Bronfein, CEO of applicant group Curio Wellness, who previously co-founded Remedi SeniorCare that landed a $300 million equity investment from Centerbridge Partners in 2011. The Baltimore Sun later identified that David D. Smith, executive chairman of conservative TV station conglomerate Sinclair Broadcast Group and personally worth $325 million is a leading investor in Curio Wellness

On July 16, the Washington Post published “Lawmaker who pushed medical pot in Maryland is part of team applying to sell the drug,” referring to Del. Dan Morhaim who had hundreds of communications with the MMCC in his capacity as an influential legislator without disclosing his financial incentives with applicant Doctor’s Orders. Doctor’s Orders, partnered with marijuana law firm Vicente Sederberg, is backed by CEO Glen Weinberg, Principal Emeritus at real estate developer The Cordish Companies (Live! Casino), COO and DC restauranteur Jeff Black and prominent Black venture capitalist Herb Wilkins Jr. (BET, Radio One).

 


Big money, politics and out-of-state interests win exclusive production rights:

On August 15, 2016, the MMCC announced pre-approvals for grower and processor licenses. 7 companies won the most sought-after combination of grower and processor licenses. These 7 include Curio Wellness and Doctor’s Orders, mentioned above. Holistic Industries features the former head of the Department of Health and the current President of the state’s Fraternal Order of Police, and is backed by Richard Cohen, Chairman of real estate developer Willco (20 million square feet in metro DC). Holistic Industries was endorsed by Democratic Senate President Thomas Miller, who wrote letters to regulators praising Cohen and recommending Holistic’s applications be approved.

Three other winners had won multiple competitive license applications in other states. They include Temescal Wellness of Maryland backed by Baltimore attorney investors Paul Bekman, Eric Radz and Craig Schulman and managed by the Rebholz family, with other operations in Massachusetts and Rhode Island; MaryMed (Vireo Health) with operations in Minnesota and New York led by CEO Kyle Kingsley; and Maryland Compassionate Care and Wellness (Windy City Cannabis) led by Chicago-based CEO Steven Weisman. The seventh winner Kind Therapeutics (MariMed) is led by Annapolis physician CEO Susan Zimmerman and includes former Baltimore County Police captain Richard Howard.

 


Money raised at big valuations and winners celebrate together

Michael Bronfein of Curio Wellness raised $25 million from friends at a $50 million pre-money valuation, completing this fundraise ahead of license announcements in August. The Baltimore Sun later reported that Curio raised $30 million. Doctor’s Orders raised less money at a $40 million pre-money valuation. Several of the winning groups celebrated at Bronfein’s home after winning. The prime objective among winners was to protect the current number of licenses ahead of an adult-use legalization targeted for 2018. In the weeks following license pre-approvals, numerous processor winners made calls to experienced operators looking for know-how and partnerships. These processor winners had little to no knowledge despite succeeding in a supposed merit-based selection process.

 


Lawsuits and legislative protest ensue

In September 2016, unsuccessful applicants filed suit. Green Thumb Industries, joined by Maryland Cultivation and Processing, filed suit after the state had awarded 2 lower-scoring applicants grower licenses for geographical diversity reasons – Holistic Industries and Shore Natural Rx. MMCC had selected 15 growers from a pool of 25 that were the highest ranked by a sub-contracted evaluating organization. Another lawsuit was then filed by Alternative Medicine Maryland, 80% Black-owned and led by New York-based Black physician and businessman CEO Greg Daniel, accusing the state of failing to consider racial diversity in awarding licenses. Only one Black-controlled group, Seven Points Agro with 100% Black-ownership, won a processor license, known to be significantly less valuable than a grower license.

The Legislative Black Caucus planned to use any means necessary to stop the MMCC from issuing final approvals until more grower licenses were awarded to minority-owned businesses. “We will not be accepting crumbs,” said Del. Cheryl Glenn, now Chair of the Legislative Black Caucus. Del. Glenn later said: “It’s a billion-dollar industry (in Maryland) and we’re not going to allow that to start up and flourish with no African-American participation. Especially given the history of incarceration of African-Americans over the past years because of marijuana. And so now that it’s legal for medicinal purposes we can’t have any part of that business? That’s ludicrous, and it’s unacceptable.”

 


The 7 grower-processor winners all win dispensaries too

In December 2016, 102 dispensaries were awarded. All of the 10 pre-approved growers that submitted applications for dispensaries were awarded dispensaries, including the 7 grower-processor winners. With legal delivery, these 7 companies were given the competitive advantage to offer the lowest-cost products statewide. The other 3 grower-dispensary license holders share this advantage specifically with non-processed forms of marijuana. They include Freestate Wellness, led by Cary Millstein and the Fischell family (biotechnology patents and Johns Hopkins University). HMS Health is owned by Shakil Siddiqui, who founded Haris Design and Construction that helped renovate the DC Metro system, and includes Mr. Siddiqui’s son and Islam Siddiqui, a former high-level appointee in the Obama administration and former ag-tech lobbyist. Harvest of Maryland (Harvest Inc.) is owned by Arizona-based CEO Steve White and set up a 5% profit-sharing program with the Western Maryland town of Hancock, building a facility in a vacated publicly-owned warehouse. “David D. Smith” is also listed as an owner of Harvest of Maryland LLC.

During the 2017 legislative session, legislation that would have increased minority ownership failed in the last minutes of the session. The Legislative Black Caucus demanded a special session from Democratic leadership, issuing an ultimatum on future legislative and electoral cooperation with the Democratic Party. In late April 2017, Republican Governor Larry Hogan commissioned a disparity study to be completed as expeditiously as possible. In July 2017, the Governor overhauled the MMCC, making 10 appointments and doubling the commission’s minority representation.

 


Washington Post uncovers conflicts of interest in the evaluation process

After another public records request, the Washington Post in July 2017 uncovered a conflicts of interest scandal in which several of the independent experts hired to review applications had ties to the companies whose applications they reviewed. MMCC had contracted with the Regional Economic Studies Institute (RESI) at Towson University, which selected 20 industry experts and then oversaw these experts as they evaluated applications. This RESI contracting arrangement was the subject of a “blistering” legislative audit, which found that MMCC skirted state contracting rules and allowed costs to balloon. RESI cited the use of a double-blind process, however the Washington Post found that it was possible in certain cases to identify which companies were behind which applications.

Temescal Wellness – whose Massachusetts operation was founded by RESI-appointed industry expert Julia Germaine whose husband was an owner/officer in Temescal at the time it applied in Maryland – as well as Doctor’s Orders (Del. Dan Morhaim) were suspended and probed by MMCC in August 2017 for conflicts of interest. Both were reinstated in October 2017 after MMCC found no evidence of corruption. It is unclear whether Doctor’s Orders had failed to meet an operational deadline compliance in August before or after its suspension by MMCC.

MaryMed (Vireo Health) was initially denied approval in June 2017 after the MMCC concluded – based on information obtained from the Minnesota Bureau of Criminal Apprehension in its criminal investigation of Vireo for diversion of marijuana from Minnesota to New York – that Vireo had likely diverted marijuana across state lines. Vireo Health transferred its 90% ownership in MaryMed into a new LLC and had its licenses reinstated in July 2018 after an administrative law judge ruled that there was no reasonable likelihood that MaryMed participated in interstate smuggling.

The Washington Post Editorial Board published “Maryland is mired in a medical-marijuana morass” on August 8, concluding that “Any hint that the selection is somehow unfair, or tainted by personal connections, subverts faith in the process and the government… Any further revelations could derail the whole procedure; here’s hoping it doesn’t come to that.”

 


Baltimore Sun reports on lobbying and campaign contributions

In September, the Baltimore Sun published “Meet the companies launching Maryland’s cannabis industry,” reporting that executives of three of the winning companies – Holistic Industries, Curio Wellness and ForwardGro – donated over $400,000 to both parties in recent years. As a corporation, Holistic donated nearly $50,000 to local officials in 2016. Holistic worked with the highest paid lobbyist in Maryland, Gerry Evans, bringing onto the team his son-in-law Richard Polansky. ForwardGro, the grower-only license led by Gary Mangum – co-founder and CEO of Bell Nursery generating $125 million in annual sales, donor to Governor Larry Hogan and appointee to the executive board of the Maryland Stadium Authority – was the first grower approved by MMCC. In November, the Executive Director of MMCC Patrick Jameson resigned for undisclosed reasons. The first and preceding director Hannah Bryon had stepped down in January 2016.

 


Marijuana law gets overhauled

On January 17, 2018, the disparity analysis was released at the onset of the legislative session. It concluded that the state’s industry-wide 2017 Disparity Study provided strong evidence to use race and gender-based remedial measures in industries relevant to medical marijuana. It did not specifically look at the marijuana industry in the context of disproportionate targeting, arrests and incarceration of racial and economic demographics. The study gave lawmakers legal grounds to create new licenses designated for women and minority-led businesses. Currently, MMCC diversity statistics show “35% racial and ethnic diversity participation” and “57% minority participation including females.” “Participation” refers to number of owners, not ownership percentage.

The Natalie M. LaPrade Medical Cannabis Commission Reform Act was pre-filed in the house in September 2017 and first read on January 10, 2018. On March 12, the Baltimore Sun published “Plan to diversify Maryland marijuana market might boost white firms instead,” writing “a new round of licensing was supposed to give Black-owned firms that were all but shut out of the first round another chance to gain a foothold in the lucrative industry. But the legislation lawmakers have now come up with favors companies that already hold licenses to grow and process marijuana.”

3 new processor licenses were set aside for companies that already held grower licenses. These companies are ForwardGro, HMS Health and Harvest of Maryland (Harvest Inc.), mentioned earlier. Harvest of Maryland (Harvest Inc.) became the 8th vertically-integrated operator in Maryland, with growing, processing and retail with delivery. Black-controlled processor Seven Points Agro received 1 new grower license. This allocation was supported by Del. Cheryl Glenn during legislative negotiations because it was possible that other Black-controlled groups would remain without grower licenses. In February 2018, Alternative Medicine Maryland settled its lawsuit, indicating it would apply for new licenses. In April, plaintiff Green Thumb Industries announced that it would receive pre-approval for a grower license.

The Natalie M. LaPrade Medical Cannabis Commission Reform Act was signed into law on May 15, 2018 by Governor Larry Hogan. 4 new grower and 11 new processor licenses will be up for competitive application scheduled for October 2018 (no new developments as of October 1). Compared to original operators, new licenses will have a two-year delay in entering the existing market and earning market share. The state will not issue new dispensary licenses.

 


Consolidation begins

Despite rules implemented to limit ownership to 1 grower, 1 processor and 1 dispensary, at least 2 companies are operating multiple dispensaries in Maryland, as reported by the Baltimore Sun in July 2018. In public filings, Green Thumbs Industries (CSE:GTII) now publicly traded in Canada and on the US OTC, disclosed it had controlling ownership in 5 dispensaries in Maryland. MPX Bioceutical Corp (CSE:MPX has an option to buy 3 dispensaries for a total of $2.5 million mostly in cash.

MMCC Policy Director William Tilburg in a policy committee meeting pointed out that several entities are gaining control through management agreements involving no ownership transfers. These entities “now manage three, four, five, six, seven dispensaries, where the management gets 99% of the revenue.” Green Thumb Industries has also disclosed management arrangements with Maryland dispensaries. Harvest Inc. has approached Maryland dispensaries, with the email message “if you have any interest in selling your license in Maryland, then call me… Also, if you know of any groups that are considering selling, I’d like to discuss this as well.” 

Independent dispensary owners are concerned about their ability to compete with verticallyintegrated pricing. Del. Cheryl Glenn said: “It looks like we’ll be going into session with another emergency bill” and supports forcing consolidator divestiture.

 


C) Outlook:

Prospective applicants are dissuaded to spend time and money to apply for the new licenses because of what happened in the first round. Groups that applied for grower licenses in 2015, for example, spent around $200,000 per application on average. Many applicants secured real estate by paying lease months before submissions; these fixed costs with licensure delays also caused substantial financial loss.

It’s important to note that the state increases capital expense requirements for growers by creating an oligopoly and having preference for “controlled” and “highly-regulated” indoorwarehouse cultivation and artificial growing environments. Nonetheless, you do not need to already be a multi-millionaire to raise capital for your startup enterprise. Will MMCC’s emergency regulations for new licenses take into account economics in prioritizing disadvantaged enterprises? Maryland’s Disadvantaged and Minority Business Enterprise programs have net worth-based eligibility requirements.

Outside of Maryland, Holistic Industries currently operates in DC, CA, MA, and PA. Vireo Health (MaryMed) is in MN, NY and PA. Temescal Wellness is in MA and NH. Windy City Cannabis (Maryland Compassionate Care and Wellness) is in IL. Harvest Inc. claims to hold marijuana licenses in 7 states including OH, IL, PA, NV and AZ, and manages one of the winning groups in AR. Green Thumbs Industries also owns licenses in PA, IL, OH, MA and NV. Doctor’s Orders may have expanded in two other states under a different name, per its national consulting arrangement with Delegate Dan Morhaim.

 


Arkansas Marijuana

 


A) Market Statistics:

  • Adult-use marijuana projected annual retail market: $600 million
  • Business legalization date: November 8, 2016
  • Number of applications submitted: 319
  • First licenses issued: July 10, 2018 (cultivation facilities)
  • Sales to date: N/A
  • Patients certified to date: 5,800
  • Retail sales to date: N/A
  • Legal businesses: 5 cultivation facilities and 32 dispensaries
  • Cultivation facility pre-investment valuations: $20 million avg.
  • Dispensary pre-investment valuations: $8 million avg.
  • Current marijuana license value distributed by state: $360 million

 


B) Market Developments:

Legalized by ballot initiative in 2016, medical marijuana in Arkansas has been mired in highprofile controversy since license winners were announced in February 2018. The licensing process was ruled unconstitutional in Circuit Court and reversed in the Supreme Court on a technicality. An FBI probe into corruption and kickbacks looms over a substantial and bipartisan portion of the general assembly. Now, the FBI is also investigating marijuana licensing over commissioner bribery and potentially more. Governor Asa Hutchinson and Attorney General Leslie Rutledge are seeking reelection this November.

Ahead of November 8, 2016, Issue 6 (Amendment 98) outraised grassroots campaign Issue 7 tenfold, backed by three financiers including a member of the billionaire Stephens Inc. family ($625,000), the Polk family ($500,000), and William “Cheney” Pruett ($640,000) behind payday lender CashMax who had earlier invested in a failed 2015 ballot initiative in Ohio that would have given 10 investor groups exclusive production rights in the medical market. In October 2016, the Arkansas Supreme Court invalidated 12,000 signatures from Issue 7, disqualifying it from the ballot. On November 8, Amendment 98 was approved by voters 53% to 47%, making Arkansas the first state in the bible belt to legalize marijuana.

Amendment 98 instructed the Governor, the senate president and the speaker of the house to select 5 members to the Arkansas Medical Marijuana Commission (AMMC) to develop rules along with the Alcohol Beverage Control Division and the Department of Health. Amendment 98 allowed the General Assembly to make amendments by two-thirds vote, except to the sections legalizing marijuana and the number of licenses allowed – between 4 and 8 cultivation facilities with processing, and between 20 and 40 dispensaries with processing, limited cultivation and delivery. 60% of owners had to be Arkansan, and the Commission in its rules later added that 60% of ownership had to be Arkansan. 

The rulemaking process moved ahead relatively smoothly. The selection process for dispensaries was initially proposed as lottery-style, but after public comments in March 2017, the Commission made the entire selection process merit-based. Requests for applications were released on June 19, 2017 and due on September 18, 2017. 95 cultivation facility applications and 224 dispensary applications were turned into the ABC by September 18, totaling 319. Applications averaged 1,000 pages each, with the merit-based portion limited to 25 pages with unlimited exhibits. The average application cost was reported between $150,000 and $200,000. The state collected $3 million in gross fees from marijuana applications.

 


Troubling signs early on

Commission meetings were filled with lobbyists from the start, and associates of cultivation facility applicants known at the time had donated over $90,000 to Governor Asa Hutchinson’s re-election campaign. There were grumblings among applicants that certain applicants had personal meetings with a governor staffer, including hosting this staffer at their prospective facility sites. This staffer was present at Commission meetings and was seen walking into meetings with the Commissioners from a private room.

Two FOIA requests were privately obtained, analyzed and distributed to top media outlets in Arkansas. 1,600 individual owners and officers had applied, 75% of which were Arkansan. One day before cultivation winners were announced, the Arkansas Times wrote “Chaos and conspiracy theories? Consider that a shadowy group has been working for weeks… to compile a detailed analysis of all of the interlocking relationships, political allies and big money that you can find throughout the applicants and regulatory process for marijuana in Arkansas.” The Arkansas Times included a prediction from this analysis about who would win, which predicted 2 out of 5 correctly.

 


Big money and politics win the 5 cultivation licenses

On February 27, 2018, the Commission announced #1 Natural State Medicinals Cultivation (NSMC), #2 Bold Team, #3 Natural State Wellness Enterprises (NSWE), #4 Osage Creek Cultivation, and #5 Delta Medical Cannabis Company (DMCC) as the cultivation facility winners. 

#1 NSMC owners include the current CEO and President of USA Drug Stores and its previous owners Wendy and Stephen LaFrance Jr., who sold USA Drug to Walmart for $550 million in 2012. NSMC owners also include prominent Black doctor Alonzo Williams and wife Susan Williams, who hold considerable sway with the state’s Legislative Black Caucus. 51% woman owned and 25% minority-owned, NSMC is 60% minority-owned under the state’s new Arkansas Minority Business Enterprise Certification Program and received full points for diversity in the application.

#3 NSWE was founded and is managed by Oklahoman Warren Ross of the Ross Group, which has secured $725 million in federal construction contracts since 2007. Former AG and current lobbyist Dustin McDaniel and family are also owners. Dustin McDaniel lobbied against the Arkansan ownership requirement; Warren Ross’ broader financial position in his company is not reflected by his 0.31% ownership in the applicant entity. Owners also include John Allison, Chairman of the Arkansas State Police with a net worth estimated at $120 million, and the son of former legislator and Jefferson County Judge Hank Wilkins IV. NSWE, submitting 2 applications that tied for 3rd with identical scores, was competing for economic development incentives in two regions – in Jefferson County and Jackson County. Harvest Inc. is the company’s management partner.

#5 DMCC is owned by CEO Doug Falls, a Commissioner with the Arkansas Economic Development Commission (AEDC) who owns and operates a $30 million annual revenue lamp manufacturing facility with factories in Arkansas and China. The husband of another AEDC Commissioner is also an owner in DMCC, as is the mother of Democratic Party of Arkansas Chair Rep. Michael John Gray. The previous head of the party, Jason Willett, was listed as the owner of the original entity and is listed as the incorporator/organizer for the newest LLC with the same name.

#2 Bold Team and #4 Osage Creek Cultivation (the latter partnered with Johns Hopkins Medicine’s Jeffery Young) had not yet surfaced as having significant wealth or strong political connections.

Back to the February 27 AMMC meeting, the Commission agreed to reconvene on March 14 to officially award licenses so long as the winners posted their licensing fee and performance bond within 7 days of receiving notice. The application belonging to wealthy and politically-active Black farmer Abraham Carpenter, partnered with prominent Baltimore-based civil rights attorney Billy Murphy, had surprisingly been disqualified.

 


Quickly building a legal case against the Commission and ABC

The most glaring scoring discrepancy, the focus of early media reaction to the licensing decision, was by Commissioner Carlos Roman who gave two groups scores in the 90’s out of 100 – #1 NSMC and #51 Natural State Agronomics led by AEDC Commissioner Ken Shollmier (who planned to invest $45 million into his company) – with the next highest score in the 70’s and a median score of 57 overall. With 21 points out of 500 separating the 5th place winner with the 20th ranked group, every point mattered. News broke revealing that Commissioner Travis Story is an attorney for the owners of #4 Osage Creek, to which he gave his second highest score. #38 Naturalis Health, backed by Jackson T. Stephens III who co-financed the ballot initiative and spent $3 million on its proposed facility, filed suit in circuit court. #9 Delta Cannabinoid Corporation also sued, finding that all 5 winners failed to meet minimum requirements after reviewing redacted applications released via another FOIA request. Among the findings was that #3 NSWE received full points for racial diversity through majority owner William Ryan Young despite Mr. Young listing his race as White in his Arkansas State Police criminal background check.

 


Circuit Court Judge rules awarding process unconstitutional

Judge Wendell Griffin – who had sued the Supreme Court for removing him from cases involving the death penalty (which he had protested famously) – initially granted a temporary restraining order to plaintiff Natural is the morning of March 14, 2018, hours before the Commission was scheduled to officially award licenses. At the preliminary injunction, the state raised a “sovereign immunity” defense, a precedent set two months earlier by the Supreme Court; Gov. Hutchinson had instructed agencies to not use this defense without his permission. On March 21, Judge Griffen declared Arkansas’ licensing process “null and void” while lamenting delays in medical marijuana availability for patients; over 4,000 patients had already registered for medical marijuana. Regarding the conflicts of interest between Commissioners Roman and Story and #1 NSMC and #4 Osage Creek respectively, Judge Griffen wrote “it is certainly enough to create a reasonable suspicion of unfairness, even if it does not establish actual bias… Consequently, the cultivation facility licensing decision in which they participated cannot stand.” The state appealed, and the case headed expeditiously to the Supreme Court.

The Pine Bluff Commercial in a May 1 editorial called the marijuana license selection process a “circus sideshow,” determining after much research that “the process may have indeed been flawed.” On June 19, the Arkansas Times published “Marijuana applications need a recount.”

 


The backdrop of a deep-reaching FBI political corruption crisis

The FBI’s investigation into kickbacks and illegal political activity in Arkansas, has, so far, led to 6 former legislators pleading guilty or being convicted of federal corruption charges, including Jefferson County Judge Hank Wilkins IV, the father of an owner in #3 NSWE, who pled guilty to taking $100,000 in bribes from Preferred Family Healthcare while serving in the state legislature. Former state senator Jon Woods, found guilty and sentenced to 18 years in prison for directing $400,000 to Ecclesia College and Preferred Family Healthcare for kickbacks, had also tried to direct medical marijuana tax revenues to Ecclesia College through Amendment 98. This scandal began unraveling in January 2017, after which 80 FOIA-related bills were passed during the legislative session. At least 24 current and former Arkansas legislators are implicated in the Ecclesia College and Preferred Family Healthcare schemes alone, including Commissioner Travis Story’s law firm partner Rep. Bob Ballinger, former senate president and Gov. Hutchinson chief of staff Michael Lamoureux, and the Governor’s nephew Rep. Jeremy Hutchinson, recently revealed as\ a co-conspirator for allegedly taking $500,000 in bribes and indicted on wire and tax fraud charges.

 


FBI investigating marijuana licensing bribery

Days before the June 7, 2018 Supreme Court hearing, the state filed a letter under seal with the court. This letter was unsealed hours after the Supreme Court hearing, revealing that an unnamed Commissioner had said he was offered a bribe by applicant Natural State Agronomics. The letter continued that the commissioner gave Natural State Agronomics his second highest score, significantly higher than scores awarded to that entity by other commissioners, while noting that “there is no specific law or regulation requiring a commissioner to report a bribe attempt.”

The letter revealed that this matter was subject of an ongoing law enforcement investigation, in which the Arkansas State Police denied involvement and for which the FBI had no comment. A secret video recording of a conversation between Commissioner Roman and Ken Shollmier, now in the hands of two state legislators as an audio file, indicates Commissioner Roman was himself soliciting bribes. Also in June, Speaker of the House Jeremy Gillam resigned from the legislature.

 


Supreme Court reversal

On June 21, the Supreme Court ruled that the Circuit Court did not have the jurisdiction to take up the Naturalis case because unsuccessful applicants had not formally been denied licenses. Chief Justice Dan Kemp concurred with the majority opinion, but noted that “the court may, however, reverse an agency decision if the substantial rights of the petitioner have been prejudiced.”

 


#5 DMCC plagiarized and submitted application from #48 Courageous Ann via a former director of ABC

On June 27, the Arkansas Democrat Gazette broke news that #5 Delta Medical Cannabis Company had copied large and important sections of its application from applicant #48 Courageous Ann. Courageous Ann is led by the Polks who co-financed Issue 6. Electronic fingerprints on DMCC’s internal documents and company emails showed how contents from Courageous Ann funneled into DMCC through accounts linked to its previous attorney, former director of the Alcohol Beverage Control Division (2007-2013) Michael Langley.

 


Commission formally awards cultivation licenses and blocks legal recourse

The Circuit Court’s injunction was formally lifted on July 10, at which point the Commission, without holding a meeting, formally awarded licenses to the top 5 cultivation facilities the same day. At a meeting two days later, the Commission amended its rules to keep all unsuccessful applicants “active” for two years. By not formally issuing denials, the Commission prevented unsuccessful applicants from appealing a denial in circuit court, limiting the appeal process to filing protest letters with ABC Enforcement headed by Boyce Hamlet, a Governor Hutchinson appointee. The Commission’s rule change was later approved by the Arkansas Legislative Council. Twelve protest letters are currently with ABC Enforcement. The only way for unsuccessful applicants to receive their $7,500 reimbursement now is to formally withdraw from future consideration for licenses. On July 16, in an editorial titled “Forward Motion,” Arkansas Business congratulated the top 5 winners.

 


State senate campaign contributions hint at a winners network

The senate campaign of Rep. Bob Ballinger, the law firm partner of Commissioner Travis Story, was financed nearly 50% ($13,000) by marijuana applicants in its first month. Rep. Bob Ballinger was running against incumbent Sen. Bryan King, a vocal opponent of Governor Hutchison who had helped unravel the political corruption scandal in Arkansas. The 6-known marijuana-applicants that have donated to Bob Ballinger’s 2018 campaign are owners of #4 Osage Creek, owners of #3 NSWE, a business partner with owners of #2 Bold Team and #5 DMCC who also applied for marijuana in Arkansas, and the 3 financiers of Issue 6. John “Chase” Dugger of JCD Consulting – a lobbyist for Preferred Family Healthcare and #4 Osage Creek, and neighbor to #2 Bold Team associates in the hometown of senate president Jonathan Dismang – is the largest payee of both the Bob Ballinger and Rick Hill senate campaigns with over $80,000 in combined payments. The 3- known marijuana-applicants to donate to Rick Hill’s senate campaign is a director at #2 Bold Team, owners of #8 2600 Holdings, as well as an associate of Naturalis Health and Jackson T. Stevens III. Ballinger won his primary and Hill won his special election, with Hill outraising his opponent 20-fold and wining 81% of the vote. A local blogger report from August 2018 correlated Commissioner Story’s top scores with applicants that contributed to Ballinger’s senate campaign.

 


Dispensary selection process outsourced

With mounting public pressure, 4 out of 5 Commissioners voted to hire an independent contractor to evaluate the 203 qualifying dispensary applications. 2 bidders responded to a “scope of work” issued to 30 pre-approved healthcare-related contractors, and Public Consulting Group (PCG) out of Boston won with the low bid of $99,472, just under $100,000 that would have triggered approval from the legislative council. The other bidder submitted a price of over $350,000. PCG has secured a dozen state contracts in Arkansas since 2012, totaling $5.6 million, and as of 2017, was represented by two lobbyists in Arkansas, Capital Advisors Group and Michael Shannon. State procurement officials expected to complete the contract with PCG the week of August 20, 2018. By September 14, this contract had not been finalized. The contract gives PCG 30 days to complete dispensary evaluations. David Couch, spearheading a 2020 adult-use ballot initiative and partnered with Arkansas applicant Boll Weevil that sued the state in March, said “It’s a such a good deal it makes you ask: ‘So what’s the catch?’ But you look at the PCG and they look legitimate.” Compared to Florida’s projected cost of $18,400 per application evaluation – via the Office of Medical Marijuana Use’s approved budget request for an additional $13 million – PCG would be earning $490 per application evaluation in Arkansas, or 1/38th the cost.

As reported by THV11 and Talk Business in mid and late September, dispensary license announcements are expected in November around Thanksgiving, post elections. DFA spokesperson Scott Hardin explained that many dispensary applicants have already begun construction and are just waiting on the piece of paper to open, and that “Arkansans could really see a dispensary open and selling product by January.”

 


C) Outlook

Recently, 500 pages of information were unsealed by a federal judge in the trial convicting former Sen. Jon Woods of kickbacks. Text messages from December 2016 between FBI Special Agent Robert Cessario and Shane Wilkinson, the defense lawyer for cooperator (guilty plea) and former Rep. Micah Neal, show that both men “laughed at loud” at Travis Story’s appointment to the Commission. Wilkinson conveyed that “it sounds like they all believe they (licenses) are automatic money machines… rumored to be worth 5 million a year profit.”

There are no updates with potential ABC Enforcement investigations of the 12 protest letters. Naturalis Health (Jackson Stephens III) has unexpectedly withdrawn its interest in continued legal action.

Note: Bold Team first cultivator to be approved (several-month head start). Then Doctors RX first dispensary approved. Both are part of same network involving Dismang and Gilliam.

Note: Chairman of Democratic Party of Arkansas an owner of DMCC through his mother. He was appointed a member by proxy in March 2018 by his mother. See context in Arkansas Democratic Gazette “Medical marijuana regulators question if firm’s tie to state party chief violates rules”

 

 


Virginia Marijuana

 


A) Market Statistics:

  • Adult-use marijuana projected annual retail market: $1.5 billion
  • Business legalization date: March 29, 2016
  • Number of applications submitted: 54
  • First conditional permits approved: September 25, 2018
  • Retail sales to date: N/A
  • Patients certified to date: Treated as confidential by the Board of Pharmacy (136 physicians have signed up to issue written certifications)
  • Legal businesses: 5 vertically-integrated regional monopolies
  • Pre-investment valuations: Est. $25 million avg. for each
  • Current marijuana license value distributed by state: $125 million

 


B) Market Developments:

Virginia legalized 5 vertically-integrated regional monopoly businesses in March 2016. The Board of Pharmacy selected members to a regulatory advisory panel to develop the market’s emergency regulations. By not moving toward a proposed regulations stage before releasing its request for applications, the Board avoided public comments until after applications were submitted in June 2018. Application owners and scores were exempted from FOIA law in 2017, and the application evaluation committee and process was kept anonymous and conducted behind closed doors.

On February 26, 2015, Governor Terry McAuliffe signed SB 1235 into law, providing an affirmative defense for intractable epilepsy patients possessing a physician-issued written certification for CBD and THC-A oil. This law did not legalize production or sales in the state. On August 7, 2015, Surterra Holdings, an applicant in Florida at the time, retained 4 Richmond based lobbyists with McGuireWoods on the matter of “Formation of task force to study enacted legislation in health care sector.”

In 2016, on March 29, SB 701 authorized the creation of 5 “pharmaceutical processor” permits for vertically-integrated businesses to produce and sell CBD and THC-A oil. By law, no person convicted of a marijuana or marijuana paraphernalia misdemeanor in Virginia could be employed or act as an agent of a pharmaceutical processor. The law authorized the Virginia Board of Pharmacy (VBOP) to develop temporary “emergency regulations” that would become effective once the provisions of this law were reenacted during the 2017 legislative session.

 


Surterra also part of rulemaking

In May 2016, the VBOP Regulation Committee voted to form a Regulatory Advisory Panel to develop emergency regulations for pharmaceutical processors and for the VBOP Chairman Ryan Logan to select members to the panel. Surterra Holdings was the only marijuana operator selected to the 14-member panel. Other prospective business interests on the panel included Alexander Pytlarz with The Compounding Center who also chairs the Compounding Committee of the Virginia Pharmacists Association, R. Baylor Rice who owns South River Compounding Pharmacy, and neurologist Paul Lyons, MD.

Between July 1 and July 26, 2016, an ownership rule was added to the VBOP regulations such that no person convicted of a marijuana or marijuana paraphernalia misdemeanor in Virginia “shall have any form of ownership,” be employed or act as an agent of a marijuana business.

On September 7, 2016, the VBOP Full Board voted 8-0 (with 2 abstentions) to adopt the emergency regulations, making minor amendments. These emergency regulations were then published to the Regulatory Town Hall on October 19, 2016, with 3 subsequent amended versions uploaded to the site: one in November 2016 and two in April 2017. It is unclear whether these subsequent versions were also approved by the VBOP Board. SB 1027 on March 16, 2017 reenacted the provisions of the 2016 law, enabling the emergency regulations to advance through the regulatory process, starting with stage 1 known as the Notice of Intended Regulatory Action (NOIRA).

In developing a NOIRA background document used to begin promulgating permanent rules, VBOP was asked whether a Regulatory Advisory Panel or Negotiated Panel would be used in the development of permanent regulations. VBOP did not address this question.

 


Application process and scores exempted from FOIA law

Pre-filed on December 27, 2016 and introduced by Sen. John “Chap” Petersen during the 2017 session, SB 922 amended   54.1-108 (Disclosure of official records) with the effect of exempting Board of Pharmacy marijuana applications and scoring records from FOIA law. Of note, in a June 2018 FOIA request for a nonsensitive portion of submitted applications to identify owners, VBOP rejected the FOIA request citing 54.1-108. Additionally, members of the Virginia FOIA Council (a state agency) did not read the ensuing dispute letter or vote on the formal written opinion issued by council staff, per the council’s standard procedures.

On August 7, 2017, the VBOP emergency regulations were published to the Virginia Register. These emergency regulations expire on February 6, 2019. Emergency regulations are not subject to public commenting. This August 7 publication triggered a 30-day public comment period because of the NOIRA. No comments were submitted – at least through the Regulatory Town Hall – which is very unusual for marijuana-related regulatory processes. VBOP did not move to adopt proposed regulations at this time. It is unknown whether VBOP received and reviewed comments; I do not believe they are required to until they go through the process of adopting proposed regulations.

In a September 8, 2017 presentation delivered to the Virginia Pharmacists Association, VBOP Executive Director Caroline Juran and Deputy Executive Director Beth O’Halloran disclosed that VBOP was currently implementing infrastructure for the oversight of the medical marijuana program, which included reporting to the Prescription Monitoring Program and forming a committee to review applications and award permits.

Into 2018, during the VBOP Full Board meeting on March 29, the Board voted unanimously to form an ad hoc committee to review marijuana applications. The pharmaceutical processor ad hoc committee was not mentioned in prior VBOP meeting agendas, nor were any other marijuana-related endeavors from 2017 to that point in 2018. At this meeting, Ms. Juran informed that a procurement officer insisted the names of the ad hoc committee members remain confidential during the review process. Assistant Attorney General James Rutkowski advised on procurement ethics rules, which included prohibitions on providing non-public information to a bidder and accepting gifts from a bidder. This permitting process was not actually governed by procurement law because VBOP would not technically be contracting for goods or services.

 


New laws expand future marijuana market size

Known as the “Let Doctors Decide” bills advocated by the National Organization for the Reform of Marijuana Laws (NORML) and signed into law by Governor Ralph Northam, SB 726 and HB 1251 expanded patient access by enabling physicians to recommend marijuana for any diagnosed condition, so long as the physician determines the treatment of this condition would benefit from medical marijuana use. Business interests and the state had disagreed over allowing marijuana delivery or not; these bills reintroduced legal delivery.

SB 330, introduced by Sen. Siobhan Dunnavant, required marijuana dispensing be reported to the Prescription Monitoring Program and that “applicants” for marijuana businesses submit fingerprinting to the FBI through the Virginia State Police.

 


RFA released despite emergency regulations and rule changing

On April 16, VBOP released its Request for Applications (RFA). It included a non-refundable application fee of $10,000. The RFA granted VBOP the right to disqualify any applicant that failed to comply with all requirements for a marijuana business and for whom there was evidence of a disqualifying criminal conviction per the emergency regulations. The application was due by June 8, giving an application window of 7 weeks. VBOP typically gives between 3-6 months (12-24 weeks) for other application types.

 


These “temporary” emergency regulations had a “permanent” effect on who was eligible to apply.

These emergency regulations also suppressed competition:

  1. “Temperature and Humidity” definition requires standardized production methods that would give a competitive advantage to Surterra – who added these methods to the regulations while a member of the regulatory advisory panel – and would be a disadvantage to other operators with different production methods.
  2. “No person who has been convicted of a felony or of any offense in violation of Article 1 (18.2-247 et seq.) or Article 1.1 (18.2-265.1) of Chapter 7 of Title 18.2 shall have any form of ownership, be employed by or act as an agent of a pharmaceutical processor.” As mentioned earlier, this includes marijuana and marijuana paraphernalia misdemeanors.
  3. “The board shall consider… in evaluating pharmaceutical processor permit applications the extent to which the applicant or any of the applicant’s pharmaceutical owners have a financial interest in another license, permit, registrant or applicant.” The word “consider” is unusually flexible language relative to other legal marijuana markets.
  4. Two rules that facilitate ownership change, which is in itself unusual relative to other markets that use merit-based processes to select the most qualified operators to produce medicine. This is extra problematic without prohibitions on ownership in more than one pharmaceutical processor.
  5. There is also what was not included in the regulations: No minimum ownership requirements for residents of Virginia. No minimum ownership requirements for disadvantaged populations. No economic or community development incentives.

With the passing of the new marijuana bills in 2018, the VBOP Regulation Committee made changes to the emergency rules on April 24, 2018, during the open application window. These included, among other changes, replacing references to owners, employees and agents with “applicant” in the context of VBOP conducting background checks. There is no definition of “applicant” in the RFA, the emergency rules or the law.

 


53 applications submitted

The state collected between $510,000 and $530,000 in nonrefundable application fees with four applications disqualified for unknown reasons, two of which were later reinstated by the Attorney General’s office. Surterra’s CEO’s was quoted by the Richmond-Times Dispatch saying: “I’m surprised that many people were able to organize in that period of time.” Applicants could apply in up to five health service areas. The Washington Post reports that 32 companies applied. Two days before applications were due, on June 6, 2018, NORML published “Virginia: Crime Data Shows Surge in Marijuana Arrests” referring to a Virginia Commonwealth University report in which African-Americans in Virginia are arrested for marijuana at a rate that is more than 3x the rate of Whites.

At the June 21, 2018 VBOP Full Board meeting, the Board adopted the revised emergency regulations presented by the Regulation Committee. Executive Director Caroline Juran asked the Board about having a one-day retreat in the Fall to receive education on production and use of CBD and THC-A oil and pharmaceutical processor oversight, noting that Governor Ralph Northam would potentially appoint 5-6 new Board members prior to the September 25, 2018 Full Board meeting.

 


Public comment period occurs after applications already submitted

These revised emergency regulations were posted to the Regulatory Town Hall on July 9, 2018, beginning another NOIRA regulatory process stage. The 30-day public comment period, starting on July 23 and ending on August 22, received 20 comments through the Regulatory Town Hall plus others shown in the September 25 Full Board agenda.

On August 8, 2018, WBYC reported that VBOP pushed back the timeline for pharmaceutical processor permitting to the Fall of 2018. Per the Washington Post, the 32 companies that applied with 54 applications far exceeded VBOP’s expected response to the RFA.

 


Applications evaluated behind closed doors

The agenda for the September 4, 2018 VBOP ad hoc committee meeting noted that the committee would determine near the beginning of the meeting whether evaluations would occur in open or closed session, and showed a motion to convene a closed session to consult with legal counsel pertaining to actual or probable litigation. As reported by the Richmond-Times Dispatch, the evaluation of applications did take place in closed session. VBOP Executive Director Juran added that the Board received legal advice from the Office of the Attorney General before deciding whether the review should be public or private. The agenda for the meeting the next day noted that the committee intended to cancel this meeting if work was completed on September 4. The September 5 meeting was indeed cancelled.

The September 4 VBOP ad hoc committee draft/unapproved minutes show that the evaluation of applicants lasted less than 7 hours. It is unclear whether applicants were evaluated before and outside of this meeting. The members of the ad hoc committee were also revealed. They are 1) Rafael Saenz, the Chairman of VBOP 2) Cynthia Warriner, the Vice Chairman of the Board of VBOP 3) Scott Parsons, who appears to be the Executive Director at the Virginia Small Business Financing Authority (there are 2 other Scott Parsons with Virginia state jobs) 4) (Michael) Scott Maye, who appears to be the Chemistry Program Manager at the Virginia Department of Forensic Science and 5) Emily Wingfield, Deputy Clerk at the State Corporation Commission.

Also shown are staff present at the closed-doors meeting, including VBOP Executive Director Caroline Juran, VBOP Deputy Director James Johnson, Sr. Assistant Attorney General Allyson Tysinger, Assistant Attorney General James Rutkowski, Senior Policy Analyst Elaine Yeatts, Licensing Specialist Sean Nealon, and Executive Assistant Sheralee Copeland.

 


C) Outlook:

Surterra, now in Florida and Texas, has given $50,000 to Governor McAuliffe and Northam campaigns. The Center for Responsive Politics shows that between 2017 and 2018, Surterra spent $120,000 with McGuireWoods. As early as April 2018, it had posted several management jobs for its pharmaceutical processor operations in Northern Virginia and Richmond, in Health Service Areas (HSA) 2 and 4 respectively. Some of these job posts had closed by July 2018. Surterra has done extensive PR in Virginia. On August 6, 2018, Bloomberg reported that billionaire William “Beau” Wrigley of the Chicago-based Wrigley Company led Surterra’s recent $65 million investment round. Based in West Palm Beach, Wrigley is now Chairman of Surterra Holdings.

On August 20, 2018, the Washington Post published “Dozens of companies compete for a piece of Virginia’s limited medical marijuana market,” reporting that Andrew Smith, who was Governor McAuliffe’s campaign finance director and later a McGuireWoods vice president, is now a Surterra senior vice president. Surterra plans to invest $10 to $20 million in the first year in Virginia. On August 7, 2018, Delaware-registered Surterra Holdings registered in Virginia.

The Washington Post also reported that Chicago-based PharmaCann, which operates in IL, NY, MA, MD, PA, OH and MI is one of the 32 applicants in Virginia. Wicklow Capital, the Chicago based family office of mega-millionaire Dan Tierney who founded high-frequency trading company GETCO, is the lead-investor in PharmaCann. Wicklow Capital holds majority positions in two out of ten (initially two out of five) New York medical marijuana licenses, PharmaCann and Bloomfield Industries, the latter acquired through MedMen. Bloomfield was acquired from a Staten Island-based group reported by Politico in 2016 to have FBI-alleged ties to the Gambino crime family. PharmaCann retained Richmond-based lobby firm Lamar Consulting in May 2018.

In HSA 5, prominent Virginia Beach-based US Southeast real estate developer and mega millionaire Steven Sandler is with Bloom Medicinals, which won 5 dispensaries in Ohio through 127 OH, LLC in which Sandler is the largest owner (50%). Bloom is also operating in MD and IL.

Both Sandler and another Virginia Beach-based real estate developer Edward Salvator Garcia who chairs ESG Companies which has built over 20,000 residences showed up as marijuana applicants in Arkansas through a FOIA request in that state. It is unknown whether Sandler and Garcia applied in Virginia.

Other recognized applicants in Virginia include Columbia Care, which based on five registered entities with the Virginia State Corporation Commission applied in all five regions, and gave $10,000 to the Governor Northam Inaugural Committee in January 2018 and retained lobby firm Two Capitols Consulting in May and June 2018. They also include Curaleaf (PalliaTech VA, LLC) which operates in 11 states, and Green Thumb Industries (CSE:GTII) through GTI Virginia LLC and possibly Green Thumbs Capital, LLC.

NORML’s legislative lobbying priorities in 2019 include officially legalizing THC (THC-A which is currently legal becomes THC through heating) and 5 to 7 new pharmaceutical processor permits. In the Richmond Times-Dispatch article “State panel handing out Virginia’s first medical marijuana licenses will conduct work in secret,” Jenn Michelle Pedini, formerly the Executive Director of Virginia NORML and now the Development Director at NORML nationally, said: “It is in the best interests of patients, of consumers, for there to be transparency throughout this process. Patients deserve to know who is making their medicine, if that company has been operational in other states, if they have been compliant, if they have had to stop production or have been cited for other issues.”

Update: On September 25, the Board of Pharmacy announced winners PharmaCann in HSA I (Charlottesville), Dalitso in Manassas specifically in HSA II (Northern Virginia), Dharma Pharmaceuticals in HSA III (Bristol), Green Leaf Medical in HSA IV (Richmond) and Columbia Care in HSA V (Hampton Roads). As a reminder, the ownership behind these companies is exempt from FOIA disclosure law.

 

 


Louisiana Marijuana

Public-private partnership model case study

 


A) Market Statistics:

  • Adult-use marijuana projected annual retail market: $1 billion (New Orleans)
  • Business legalization date: May 19, 2016
  • Number of applications submitted: 51
  • First license winner announced: June 15, 2017
  • Retail sales to date: N/A (November 2018)
  • Patients certified to date: Data not recorded (47 registered physicians currently)
  • Legal businesses: 2 producers and 9 retail pharmacies
  • Producer pre-investment valuations: $5 million and $10 million (both distressed situations)
  • Pharmacy pre-investment valuations: $10 million avg.
  • Current marijuana license value distributed by state: $110 million

 


B) Market Developments:

In a public-private partnership legalization model unique to the US, a production and R&D duopoly was awarded to Louisiana State University and HBCU Southern University in 2015. Pharmaceutical lobbying amended Louisiana’s marijuana law to require certain patients to use Epidiolex and other FDA-approved drugs, exclusively or at least through fail first protocol, before accessing Louisiana-produced marijuana. Currently, LSU is an effective monopoly and is planning to charge pharmaceutical-level pricing for uninsurable marijuana.

Louisiana first legalized medical marijuana back in 1978, but the Department of Health and Human Resources did not follow through with assigned rulemaking. In 2014, Sen. Freddy Mills, a pharmacist, sponsored a bill to establish a production and sales framework that was vehemently opposed by the Louisiana Sheriff’s Association and that failed 6-2 in the Senate Health and Welfare Committee.

Over the following months, before her passing, Dr. Alison Neustrom, the daughter of Lafayette Parish Sheriff Mike Neustrom, testified about the benefits of marijuana treating side effects associated with her pancreatic cancer chemotherapy.

 


HBCU Southern University given a license last minute

A new bill was introduced in 2015, authorizing 10 dispensaries and the right of first refusal for 1 production facility to Louisiana State University’s Ag School. After objection by the state’s Legislative Black Caucus, HBCU Southern University’s Ag School was added alongside LSU. This bill was signed into law on June 29, 2015 by Governor Bobby Jindal, however it was merely symbolic in that doctors were required to “prescribe” instead of “recommend” federally illegal medical marijuana, which they would not do; “Prescriptions” are federally regulated, and prescribing marijuana exposes medical professionals to criminal liability and losing their DEA controlled substance registration.

In February 2016, Adam Orens and Marijuana Policy Group (MPG) produced a comparative analysis of the potential Louisiana marijuana market. Under the present law – based on marijuana access exclusively for patients clinically diagnosed with glaucoma, cancer chemotherapy symptoms and spastic quadriplegia – MPG projected $12.3 to $14.8 million in annual retail revenue. With the addition primarily of chronic pain to the list of qualifying conditions, MPG projected between $200 and $334 million in annual retail revenue.

In 2016, a law was passed replacing all “prescription”-related language with “recommendation” enabling the development of a Louisiana marijuana market, at least in Section 1 of the law. Section 2 of the law retained all of the prescription language. In the event the DEA reschedules marijuana to Schedule 2 of the Controlled Substances Act federally – which was widely believed to happen in the Summer of 2016 – Section 1 would become null and void, and physicians would be required to prescribe marijuana. It is unclear what the effects of rescheduling marijuana would have on the viability of the Louisiana market. Instead of rescheduling marijuana, the DEA issued a registration process for new commercial R&D producers. For nearly 50 years, the US, through NIDA, relied on a single grower – the University of Mississippi – to produce marijuana used in federally-funded research.

 


Pharmaceutical lobbying forces use of FDA-approved marijuana for certain patients

Other provisions were added to Louisiana’s 2016 marijuana law. The list of qualifying conditions was expanded to encompass cancer, HIV, AIDS, cachexia or wasting syndrome, seizure disorders, epilepsy, spasticity, Chron’s disease, muscular dystrophy, and multiple sclerosis. If the FDA approves the use of marijuana for any of these conditions, the condition is no longer covered by the law. UK-based natural cannabinoid pharmaceutical company GW Pharmaceuticals valued at $5 billion produces Epidiolex, approved by the FDA in June 2018 for treating seizures associated with Lennox-Gastaut and Dravet syndromes in children aged 2 and under. GW Pharmacy will charge $32,500 annually per patient for Epidiolex. GW Pharmaceuticals’ Sativex, developed for spasticity from multiple sclerosis, is at FDA Phase 3 in the US. In February 2017, Leafly reported that GW Pharmaceuticals and its US subsidiary, Greenwich Biosciences, were moving cannabis bills in at least two states that would give the company a “temporary monopoly” on legal CBD products. Greenwich Biosciences retained the services of registered lobbyists in at least nine state capitals. Greenwich Biosciences is a registered lobbyist client in Louisiana since 2016.

Also in Louisiana’s marijuana law, if the FDA approves the use of a different form or derivative of marijuana for any qualifying medical condition, the patient must first be treated using step therapy or fail first protocols. FDA-approved synthetic-cannabinoid medication includes Dronabinol used for the treatment of symptoms associated with AIDS and cancer chemotherapy through brand forms Marinol, produced by AbbVie Inc. valued at $150 billion, and Syndros, produced by Insys Therapeutics which also sells Subsys sublingual Fentanyl and donated $500,000 to oppose a ballot initiative for adult-use marijuana legalization in Arizona in 2017. It also includes generic and brand forms of synthetic-cannabinoid Nabilone, approved for use in the treatment of chemotherapy-induced nausea and vomiting.

 


1) Louisiana State University

LSU Ag Center released its Solicitation for Offers (SFO) on February 8, 2017, due on March 31, 2017. The LSU SFO required principals of responding entities to demonstrate at least $5 million in combined net worth. Demonstrating the ability to fund the operation was demanded but not required. The respondent, through its CEO and principals, had to possess 3 years of consecutive years of experience “sufficiently alike” marijuana operations at the time of submission. The SFO had no submission fee. Winners were required to contract with the East Baton Rouge Sheriff’s Office for 24/7 facility security and with the Louisiana State Police to escort all transportation of marijuana.

An addendum to the SFO included Louisiana Board of Pharmacy-prepared marijuana market estimates which include THC and CBD dosing recommendations. This estimate showed over 800,000 qualifying patients in Louisiana, 20,000 to 26,000 of which were projected to participate in the market. LSU’s project concept business plan, introduced at a public presentation in October 2016 with 500 individuals signed-up to attend, projected around 3,000 patients by 2022, with 45mg of marijuana oil per patient recommended daily at an “approximate startup cost of $2.95 per dose” based on “industry standards.”

7 groups responded to the LSU SFO, including out-of-state groups Columbia Care, Citiva Medical and GB Sciences.

 


LSU selects financially-troubled company that failed minimum qualifications

Las Vegas-based respondent GB Sciences, Inc. (OTC:GBLX) and CB Medical (partnered with American Cannabis Company OTC:AMMJ) were selected as finalists. GB Sciences entered the marijuana industry on March 18, 2014 by acquiring the technology for indoor-cultivation chambers to grow single marijuana plants called GrowBlox. At the time of SFO submissions, GB Sciences had accumulated a deficit of $28 million from marijuana-related operations and generated $300,000 in total revenue (in 2015) over 3 years in marijuana.

On June 14, 2017, LSU Procurement sent a Notice of Intent to GB Sciences local partner William “Bill” Settoon Jr, informing that GB Sciences Inc. was “tentatively” selected as the winner; it needed to meet 1 of 14 minimum required qualifications in the SFO before moving into contract negotiations. LSU disqualified Columbia Care and Southern Roots Therapeutics for failing to meet a minimum requirement in April 2017. Southern Roots Therapeutics had submitted an offer with $8 million raised from Tuatara Capital.

After a “stormy” committee meeting given concerns primarily with GB Sciences’ financials, the LSU Board of Supervisors resolved to allow President F. King Alexander and Chair Scott Ballard to execute a contract with GB Sciences Inc. Worth $30 million in the US OTC at the time, GB Sciences Inc. did not gain value upon the announcement. The LSU Board of Supervisors met again on September 11 to finalize the contract, but “that didn’t happen,” per The Advocate, which further wrote: “Members instead discussed the second letter from (second-place finisher) CB Medical questioning GB Sciences’ financial viability.” On September 14, LSU contracted with “GB Sciences Louisiana, LLC,” which it described as “wholly-owned subsidiary of GB Sciences, Inc.” This contract guaranteed LSU $3.4 million from GB over 5 years, with options for two 5-year renewal periods. Strangely, GB Sciences Louisiana, LLC was registered in Louisiana in February 2017, but was not the entity used to respond to the SFO; GB Sciences Inc. was registered in Delaware at the time of the SFO and did not register to do business in Louisiana, failing to meet another minimum required qualification in the SFO.

GB Sciences Inc. initially planned to issue stock to raise capital to build the LSU production facility. Five months after signing its contract, in February 2018, GB Sciences Louisiana secured a $10 million commitment from the Lafayette-based Hohorst family at a $10 million pre-money valuation, 8.6 million of which has been exercised to date. The Hohorsts had initially won the Southern University bid with Med Louisiana. This contract was then awarded to another group. Med Louisiana then reorganized into Wellcana Group to invest in LSU. Per its 2018 SEC annual report, GB Sciences Inc. paid Austin-based Quantum Shop LLC $1.7 million “primarily related” to building out LSU’s production facility. Quantum Shop LLC is a museum exhibit company with no history of marijuana facility construction owned by Jeffery Poss, the son of GB Sciences Inc. CEO John Poss.

 


2) Southern University

Southern University (SU) took a different approach to its marijuana opportunity. With a university system-wide endowment of around $10 million, compared to LSU’s $850 million, marijuana was viewed as a savior for this Historically Black College and University, especially in the context of state-level budget cuts for higher education. Unlike LSU, SU wanted to integrate marijuana academically and in an interdisciplinary way.

In 2016, members of the SU Board of Supervisors’ marijuana research committee visited Colorado production facilities with law firm Vicente Sederberg, which more than likely introduced SU to Adam Orens both MPG and Denver Relief Consulting, the latter of which is an owner in multi-state license winner Cresco Labs. SU hired Adam Orens to develop its Request for Applications (RFA) through the SU System Foundation, the latter of which was the subject of infighting among Board members. The RFA was released on May 8, 2017, and due June 30, 2017. There was a $25,000 application fee and a $100,000 bid bond.

7 companies submitted applications, including New Orleans-based AquaPharm working with Vicente Sederberg. 3 applicants with LSU also applied to SU: Columbia Care, Citiva, and Southern Roots Therapeutics (SRT). Advanced Biomedics (AB), Med Louisiana (Med LA) and SRT were chosen as finalists, and on September 8, 2017, the selection committee recommended to the Board that Med Louisiana be approved as the vendor. Med Louisiana had 0% Blackownership and offered the least amount of guaranteed revenue to the university. Concerned with both of these factors and wanting to select the winner itself, the Board voted to give the 3 finalists a chance at updating its best and final offer, to be presented to the Board 2 weeks later. SRT updated its guaranteed revenue to SU to $6 million to match AB. On September 22, the Board chose Advanced Biomedics, led by Chad Bodin and investor Carrol Castille, which claimed to have $14 million in cash ready to invest in marijuana. These two wealthy (and white) men owned nearly 90% of AB.

On October 20, 2017, Med LA filed a public records request with SU, requesting copies of the other two finalists’ applications and emails, text messages and phone call records by and between SU Board members, the university and employees at its procurement department. SU delayed responding to this public records request. Med LA then filed suit in Baton Rouge, asking the district court to force these records from SU or for SU to reimburse Med LA. The court hearing was delayed. Wellcana Group was then formed on January 10, 2018, and as mentioned earlier, invested into LSU marijuana in February. 

 


Advanced Biomedics owners sue each other

In February 2018, no contract had been signed between SU and AB, and AB’s founder Chad Bodin started looking for investors outside of Carrol Castille. Castille had created “AB Holdings” to invest in AB. In March 2018, SU agreed to a contract with Bodin and AB. Castille then sued Bodin in April, alleging that Bodin had secretly and fraudulently negotiated a contract with SU, breaking the rules of AB’s Operating Agreement. SU gave Bodin and Castille an ultimatum on April 27: it had until May 4 to execute the contract tendered or SU would negotiate with another group. Bodin then sued Castille, claiming Castille never put up the $12 million he promised in order to become a member of AB. Meanwhile, days before the May 4 ultimatum, Bodin agreed to $20 million in financing for effectively 80% of AB from Baton Rouge-based investors through James Financial, affiliated with Ladenburg Thalmann which underwrote the marijuana industry’s first IPO on the NYSE, a REIT called Innovative Industrial Properties (NYSE:IIPR) which lists PharmaCann in NY and MA, Holistic Industries in MD and MA, and Vireo Health in MN, NY and PA in its sale-leaseback investment portfolio.

On May 3, in a court filing draft published anonymously to Scribd.com, Carrol Castille threatened to sue SU. Castille worked with Breaux Bridge-based Herert, Abels & Angelle which includes attorney Randy Angelle who is close to Sen. Freddy Mills, and Fox Rothschild LLP’s cannabis law practice group. Castille sought monetary damages from SU if SU weren’t stopped by an injunction from contracting with a different vendor and forced to negotiate with “the only member that has authority to act on behalf of AB: AB Holdings.” The Advocate reported on May 4, at 4:00 pm, that SU extended the ultimatum deadline to May 10. By 4:30 pm, James Financial delivered executed deal documents to SU that it had signed earlier that day with Bodin and AB. On May 7, AB introduced James Financial to SU administrators. On May 8, AB informed James Financial that its dispute with Castille was resolved and that it no longer needed James Financial’s $20 million investment.

James Financial filed suit on May 24 against AB and Bodin for damages and breach of contract. The next day, the Board of Supervisors approved an amended contract with AB. The 5-year term agreed to in March – with options for two additional 5-year terms per Board approval – was changed to 15 years and only terminable for cause. AB planned to build new construction to be completed “within 5 years.” This 15-year contract guarantees $18 million to Southern, nearly 2x its total endowment. Castille and attorney Randy Angelle were present at this meeting without Bodin. Southern would receive a $1 million signing bonus from AB upon AB passing criminal background checks with the Louisiana Department of Agriculture and Forestry.

 


3) Marijuana Pharmacies

In an under-the-radar process unreported by media, the Board of Pharmacy released solicitations for applications for 9 regional marijuana pharmacies on August 31, 2017, due quickly on September 29, 2017. There were 44 applicants. As explained by the Board of Pharmacy on its website, the Board’s Application Review Committee announced rankings then advised each applicant that approving 1 applicant for each region would require the “denial” of all other applicants, considered an “adverse licensing action” required to be reported to the National Practitioner Data Bank (NPDB). 23 applicants subsequently withdrew their applications. 9 permits were awarded on April 17 and 18, 2018, and included Black-owned New Orleans regional winner H&W Drugs Store, owned by Ruston Henry. In May, applicant Rx GreenHouse – owned by Sajal Roy, CEO of Louisiana and Maryland-based pharmacies and the owner of a marijuana dispensary in Maryland – sued the Board of Pharmacy after it awarded H&W Drugs Store; Rx Greenhouse had been ranked 1st in New Orleans, and H&W was ranked 4th. Louisiana’s marijuana pharmacies are being valued between $5 million and $20 million; ownership transfers of less than 50% do not have to be approved by the Board of Pharmacy, only disclosed.

 


C) Outlook:

AB has not yet submitted background checks with LDAF, and SU therefore has not yet received its $1 million signing bonus. In fact, Castille, who formally became the majority owner of AB without making any investment into the company, is yet to contribute a dollar toward SU and the development of its marijuana operations. Meanwhile, LSU / GB Sciences is an effective production monopoly in Louisiana, and is planning to make its first sales to marijuana pharmacies in November 2018. LSU / GB is planning pharmaceutical-level pricing – in the vicinity of $30,000 per patient per year at 25x the cost it had projected in its project concept in October 2016 – for non-FDA-approved and uninsurable medicine. It is unclear whether LSU has approved this pricing, which it is required to do in its contract with GB per section 14.5. 

Most patients will face the choice of either debilitating costs with LSU or remaining in the criminalized market in a state with some of the harshest penalties for marijuana possession in the country. The Times Picayune recently published “Black people in Louisiana nearly 3 times more likely to be arrested for pot possession,” citing a Southern Poverty Law Center report on racial profiling.

LSU / GB, the Louisiana Department of Ag and Forestry, the Louisiana Board of Pharmacy and the private marijuana pharmacies – without SU – are working together to expand the market legislatively and through rule making. In May 2018, intractable (chronic) pain was legislatively added to the list of qualifying medical conditions, massively boosting the potential patient pool and market size. In September 2018, the Board of Medical Examiners voted to remove the limit on 100 patients recommended per physician, as well as eliminate the 90-day physician visitation requirement.

 

 

Source: Marijuana Corruption https://www.scribd.com/document/423169354/Rigging-the-75-Billion-Legal-Marijuana-Industry

 

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