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With dispensary and cultivation applications pending, hundreds of Arkansas entrepreneurs are sitting on go for a medical cannabis gold rush. How will it pan out?

click to enlarge STORM NOLAN: The head of the Arkansas Medical Cannabis Industry Association predicts 500 growing and dispensary jobs.
  • STORM NOLAN: The head of the Arkansas Medical Cannabis Industry Association predicts 500 growing and dispensary jobs.

There are several decades of data to suggest that the coming of medical cannabis to Arkansas will bring relief from pain and freedom from over-reliance on dangerous opiates to residents suffering from some of the most debilitating and life-threatening diseases known to medicine. It's anybody's guess, however, how the dollars-and-cents side of things will gel up, as dispensary and cultivation licenses are awarded and ancillary businesses like delivery services and testing labs boot. Like it or not, medicine is a business, and that includes medical cannabis.

What is known is that a lot of people are looking to get involved. Though the application process had been open since June 30, most of those seeking a license to operate one of the state's 32 dispensaries and five grow centers waited until the Sept. 18 deadline to apply. When they did, the paperwork came at the state in an avalanche: 322 applications, most of them highly detailed and routinely over 1,000 pages long. Some prospective retailers and growers waited overnight outside the offices of the Alcoholic Beverage Control Board in lawn chairs, camped out like they were waiting for concert tickets, so they could be the first to drop off their papers on deadline day. Each dispensary applicant paid $7,500 just to apply. Potential cultivators paid $15,000. Of those fees, half the money will be refunded if the application is rejected. The state now suggests it may be spring before it can work through the often-gargantuan applications and decide who gets a spot in the vanguard of the state's green gold rush.

All applicants can do is wait and hope. Seeking to get their business plans as concrete as possible so as to wow the state's minty new Medical Marijuana Commission, the applicants already have big-ticket items like real estate and key personnel locked down and waiting out in the state. Many we talked to are sitting on piles of cash, waiting for a phone call from the MMC, which may or may not come, so they can pull the trigger on equipment purchases and new hires

Those who have studied medical cannabis rollouts in other states — as well as the often treacherous labyrinth of banking and taxation pitfalls that come with growing and selling a substance still considered an illegal narcotic by the federal government — caution that the start-up years may not bring the flood of new jobs and quick fortunes many may have envisioned. That doesn't seem to be stopping entrepreneurs from trying to get in on the ground floor, however.

***

Storm Nolan is the president of the Arkansas Cannabis Industry Association, which was established in March. It's one of two medical cannabis trade groups in the state; the other is the Arkansas Medical Marijuana Association. On Dec. 6-7, the ACIA will host the region's first cannabis-related trade show, bringing speakers on medical cannabis and over 50 businesses that serve all areas of the industry to Little Rock's Statehouse Convention Center.

Nolan said his group has fielded "a deluge" of questions from both patients and would-be entrepreneurs so far, especially since the application period ended. Until the Medical Marijuana Commission makes its decisions, however, answers are scarce. "Now it's kind of hurry up and wait," Nolan said. "Everyone who applied for those is just kind of sitting around with the real estate tied down, and are just anxious to hear back early next year about how the commissioners graded everybody."

Nolan said his group estimates there will be 500 new jobs in the state directly related to the cultivation and dispensaries pretty much as soon as licenses are awarded. It's a number he expects to grow exponentially from there, in addition to hires for related businesses like delivery companies, potency testing labs, cannabis-focused law and accounting firms, security firms and the like. "For Arkansas, that's going to grow into a fair little industry," Nolan said.

One of the primary goals of his organization, Nolan said, is educating those looking to get involved. That has included educating Arkansans on a major potential stumbling block: the Internal Revenue Service's Section 280e. Enacted in 1982 to help convict high-volume cocaine dealers in federal court, 280e, in a nutshell, says that those directly involved in the creation and selling of narcotics, including marijuana, even if it's legal in their state, may only deduct from their federal taxes the "cost of goods sold" — solely those expenses directly incurred while creating the product. Cultivators, Nolan said, won't be hit as hard by 280e, because they'll be able to deduct expenses like water, seed, fertilizer and the like. But dispensary owners can deduct almost nothing when tax time rolls around, including most of the cost of staff, brick-and-mortar storefronts, warehouse space, all the way down to printer paper, paperclips and pens.

"For dispensaries, much less percentage of their expenses can be attributed to cost of goods sold," Nolan said. "That's where it really hits. Even if on paper you're showing $100,000 profit, that doesn't mean you still don't have a tax bill on top of that." Though 280e doesn't apply to ancillary businesses like delivery services or doctors who certify that patients have a condition that allows them to purchase medical cannabis, this very expensive regulatory quirk has caused many dispensary and dispensary related businesses to fail in other states, the owners socked with a huge tax bill they can't pay.

"People will get excited about owning a dispensary and starting a dispensary," Nolan said, "then 280e is just one of those kind of coming-to-reality moments. You realize that, sure, there's probably going to be a lot of revenue there. But when you cover all your expenses and then on top of that have additional income taxes that you can't deduct, it just makes being profitable that much harder."

One of those hoping to avoid the pitfalls involved in getting in on the ground floor of medical cannabis in Arkansas is Corey Hunt. The co-founder of a group called Natural State Healthcare, which has applied for a dispensary license, Hunt came to Arkansas from Oklahoma in 2007 to help expand his family's cell phone repair business in the state. He started looking into cannabis as medicine in 2013, when his girlfriend's mother died of breast cancer. Eventually, he took a trip to Colorado and met with patients being helped by cannabis treatments.

"I met a little 4-year-old kid who was taking cannabis oil, and it was treating his cancer. I started meeting other patients — patients with PTSD, little kids who were having hundreds of seizures a day and then they didn't have seizures any more after taking cannabis oil. I said, 'Something has to be done about this.' "

Soon after returning from Colorado, Hunt started a website and Facebook group called "Illegally Healed." The Illegally Healed Facebook group is now the biggest cannabis patient-focused group on the social media site, with over 400,000 likes. There and at Hunt's website, he publishes interviews and short video content about medical cannabis. This month, Hunt also launched a new print magazine called Ounce, which will focus on medical cannabis in Arkansas.

As established in his group's mammoth dispensary application, which Hunt said it's been working on since December, the Natural State Healthcare plan is to set up shop in the small Crawford County town of Mulberry, where it will construct a 10,000-square-foot facility that will hire 10-15 people immediately if the license is awarded. Hunt hopes his unique business model gives him a leg up on the competition for one of the 32 licenses.

"[Dispensaries] can process the cannabis flower — the buds and leaves — into oil, and then they can take that oil and make usable products," he said. "They can then sell those usable products. That's where the upsell is. That's where the money is. The money is in the extract. They can then sell vape pens, topicals, edibles, to patients, caregivers or — here's the kicker — other dispensaries. So what Arkansas has done is to set up 32 wholesalers. In our operation, we're setting up a 10,000-square-foot facility to take care of patients in the Ozarks, in Mulberry. We're going to take care of a lot of patients, but the bulk of our product is going to be going out the back door, not the front door, legally, to the other dispensaries."

On the patient care side, Hunt's group hopes to set up a "clinical" dispensary, with eight different methods of administering medical cannabis to those who can't or don't want to smoke cannabis. It's a program that Hunt said is unlike any other in the cannabis industry, and one that he hopes can be franchised to other states if the group's application is successful.

For Hunt, part of preparing for the possibility of getting one of the coveted dispensary licenses has been bringing the town of Mulberry around to the idea of cannabis as medicine and helping the town see Natural State Healthcare as a valuable addition to the town. To that end, Hunt said he's worked with the local police and city government since February, and has held a number of patient forums there, bringing in experts to talk about the health and safety benefits of cannabis. They have been met with what he called "tremendous support," Hunt said, though some were initially reluctant. That includes, Hunt said, a local pastor who came to hear about the Natural State Healthcare plan after his congregation asked whether they should oppose the effort. "He came to our meeting, heard us out, heard what we wanted to do," Hunt said. "He approached me afterwards and he said, 'I was here to tell you guys not to come here, but I'm going back to my congregation and telling them what this is really about.' "

Mulberry Mayor Gary Baxter said that Natural State Healthcare's winning a license would be a definite shot in the arm for the community and the area. Construction of a facility there will raise the tax base and hiring will help the local economy. "This fits right in with Mulberry having a healthy community and wanting to be promoted as a healthy community," he said. "When people are prescribed this medication — medical marijuana — it will give people a quality of life that they didn't have because of the state identified ailments. We're all about helping people." While Baxter said there are still some holdouts in town who oppose the plan, most understand that medical marijuana is medicine and take a compassionate line. Asked whether the town has extended any tax breaks to entice Natural State Healthcare to locate there, Baxter said incentives were neither asked for nor offered by the city. "We try to promote Mulberry as a great place," Baxter said, "and these businesses that come in, like Natural State Healthcare, they see it as such an advantage of being here that they don't ask or even want any type of tax incentives. They really, truly want to be a community partner. That's the type of people we want. We want partnerships."

***

David Couch, who helped spearhead the effort to win the ballot initiative that brought medical cannabis to Arkansas, said he believes the state's fledgling cannabis regulators are, so far, doing "certainly way better than any other state that's ever rolled out any sort of marijuana program."

Also a co-founder of the Arkansas Medical Marijuana Association, a trade industry group that counts talk show host Montel Williams and former Arkansas Attorney General Dustin McDaniel as members of its board, Couch said the state has done a good job of making sure the Arkansas cannabis industry will be primarily run by Arkansans. It's a goal helped along by a stipulation Couch wrote into the law that requires 60 percent of the leaders of each company to be Arkansas residents. Couch also notes that dispensaries and grow centers will help some of the most desperate areas of the state, with applicants who propose bringing their facilities to economically depressed areas getting two extra points when commissioners score their applications. There are, for example, eight applications that hope to situate vast cultivation operations in Couch's hometown of Newport.

"Jefferson County, Jackson County, some of the counties in the lower part of Arkansas primarily, are economically depressed," Couch said. "In a highly competitive process like this is going to be, the winners might be separated by a point or two. Those two points may make a difference."

click to enlarge PHARMACIST BRANDON THORNTON: Cannabis testing lab CEO says a national bank severed ties with his company, Steep Hill, so he knows banking is an issue.
  • PHARMACIST BRANDON THORNTON: Cannabis testing lab CEO says a national bank severed ties with his company, Steep Hill, so he knows banking is an issue.

Couch said he didn't set up the law to be a sales tax boon for the state of Arkansas, but said the state is already reaping rewards just from application fees. He said the plan was to make the program "revenue neutral" so opponents of the referendum wouldn't be able to attack it as a burden on taxpayers. "In fact, it's going to generate [revenue] probably, maybe $5 [million] to $10 million in extra sales tax revenue over the cost of the program," he said. "But you look right now: Assume there are 50,000 card holders in the state of Arkansas, which I think is a fair assumption. At $50 a card, that's $2.5 million. You've got five cultivation facilities that have fees of $100,000 apiece. That's a half-million bucks."

Though the regulation of ancillary business isn't spelled out in the statute, Couch said he believes those businesses will be "purely market-driven" and will self-regulate, with the best business model coming out on top. "Who has the best testing lab, who has the best delivery service, who has the best production facility?" he said. "That'll drive that. That'll be pure capitalism. Even Republicans gotta love that."

While initially a skeptic about medical cannabis, Republican Rep. Doug House (R-Little Rock) has been working to find a solution for the often-complex problem of banking for the coming cannabis industry in the state. Because cannabis is still considered illegal by the federal government, many banks won't allow marijuana-related businesses to hold accounts. In many states that have adopted medical cannabis, the lack of banking partners has led to dispensary and cultivation center owners forced to carry hard cash around in duffel bags and stash it in secret hiding places. House sees that possibility in Arkansas as a threat to public safety, which is a big part of why he's been working on solutions. "I've gone from dread and terror of money being carried into malls and courthouses and grocery stores and things like that, to desperation, to hope," House said.

He's finally reaching a level of confidence that a solution will be found. He's currently brokering relations with a local bank, which he refused to name at its request, and knows of another group that's working with a credit union. "They are putting together their policies, procedures, people, plans and so on to go into this business," House said. "Their business model in both instances is to contact the people that have submitted license applications. When the applications are approved, that's who they'll go talk to. They'll talk to those folks privately. They're using nondisclosure agreements — you don't tell anybody where you bank, we won't tell anybody you're our customer — and they have asked me in both instances to keep their identity confidential. I'll honor that pledge."

House, who has researched the issue extensively, said there are around 380 banking institutions nationwide that do business with cannabis-related companies. Accounts aren't cheap, though. "There's lots of record keeping, lots of background checks, audits," House said. "Banks will be expected to know their customers' operations inside and out. That's a time-intensive, manpower-intensive task. A checking account could very well cost $4,000 to $6,000 a month, and I'm told that some banks charge 2 percent just to count cash. Hopefully they can work it out where people can start paying with bank drafts or credit cards."

House has also explored the possibility of what he called "Plan B" should efforts to find common ground with commercial banks in the state fall through: what's known as The Ohio Plan. Pioneered in that state, the plan allows cannabis-related industries and customers to deposit money with the state. "It will be credited to your account, and then you can authorize drafts against that with a dispensary," he said. The Department of Finance and Administration "tells me they do have the software that would support that, but they'd rather not get into the business of banking if they can avoid it."

House said that remains to be seen whether the Trump administration will continue the hands-off approach the Obama administration established when it comes to states with medical marijuana. "We don't know what [Attorney General Jeff] Sessions is going to do, or we don't know what the president is going to tell him to do," House said. "I'm hoping he'll say, 'Leave it to the states and they'll enact legislation to do that.' But so far they haven't."

As for whether medical cannabis will pan out as a tax revenue boost to the state, House is skeptical. "It'll take us probably three, maybe four years to recoup the amount of taxpayer dollars we've had to expend just getting it set up and running — the enforcement part of it and all that. I think the crossover point is four or five years away." New Mexico, which House said is comparable in size and scope to Arkansas, took three and a half to four years to get into the black from setting up its MMJ program. But, House said, he's been "terrible at predicting numbers" when it comes to medical cannabis. "I thought maybe 30 people would apply for cultivation centers, and it was 100," he said. "I thought maybe 100 firms would apply for the dispensaries and it was 200. I thought they would be ready to issue licenses by Christmas."

Brandon Thornton, a pharmacist who serves as CEO of the Arkansas branch of the California medical-marijuana testing firm Steep Hill Labs, knows how quickly the banking rug can be pulled out from under a cannabis-related firm. "We've already had issues with banking here," he said. "We had a banking relationship that we were told to leave. So we're definitely running into financial issues, but mainly because it was a national bank. They just didn't feel comfortable. And I get it. I totally get it." Thorton identified the bank as BancorpSouth. He said he understands why banks don't want to feel like they have "a target on their backs" when it comes to the feds.

"We've talked to some banks, and I feel like the banks are being pretty choosy on who they want to work with," he said. "I know a lot of dispensaries and cultivators who applied [for accounts] were really vetted. The bank people really wanted to see their business plans and really wanted to know who was involved and that they had the assets to do it."

With operations in six states and additional research facilities in Israel and Jamaica, Steep Hill, founded in 2008 in Berkeley, tests for both contamination and active compounds in cannabis samples that lend different medical aspects to various strains. When the Arkansas arm of Steep Hill is up and running, Thornton said, it'll employ about 10 people.

click to enlarge LEARNED THE BUSINESS ELSEWHERE: Jason Martin of Arkansas consulting firm Natural State of Kind says he got a "master's degree" in the medical cannabis industry in other states where the business was more established.
  • LEARNED THE BUSINESS ELSEWHERE: Jason Martin of Arkansas consulting firm Natural State of Kind says he got a "master's degree" in the medical cannabis industry in other states where the business was more established.

"Arkansas requires us to go get samples from growers, so logistically it's going to be hiring people to go out and actually get those samples," he said. "But then also we'll have a lab director, chemists, people that are proficient in reading the test results that come off the machinery. As far as a financial commitment, it's probably close to a million dollars in equipment."

Thornton said that the state has done a good job so far in setting up the requirements for testing, growing and selling medical marijuana. Other states sometimes stumble there. "It's kind of tricky with cannabis. In any other industry, the federal government would have some oversight," he said. "The FDA or the EPA would have rules when it comes to how to test, what to test for. But because there's no federal oversight for cannabis, it's up to the states to regulate that."

Thornton said Arkansas is helping lead the way for medical cannabis in the South and in red states. He believes that will lead to "huge opportunities" in coming years. "The conditions here in Arkansas for growing are going to be pretty similar to the conditions in the rest of the South. Maybe when some other states start opening up and voting in medical cannabis, Arkansas is going to be in a really good spot as far as what we know and what we've learned."

Another veteran of the medical marijuana industry hoping to gain a foothold in Arkansas is Jason Martin, co-founder of the medical cannabis consulting company Natural State of Kind. As the name suggests, Natural State of Kind started in Arkansas, in the months before the first effort at passing medical marijuana in the state failed. When the initiated act failed, Martin said, his group decided to go where medical marijuana had been made legal, start a company and learn everything they could about the industry. While initially disappointing, the failure of Arkansas voters to pass medical marijuana on the first go-round was actually a blessing in disguise for Martin and his partners, allowing them to get what he called "a master's degree" in the industry by taking their freshman knocks in more established states.

"We started doing all the trade shows, all the seminars, all the stuff across the country, large conferences, stuff like that back at that point in time," he said. "Five years ago, this was a very, very different business than it is today. Five years ago, most of the people in the business at that time were people who were in the business prior to legalization. Now, it's very different. You have people from all walks of life, from corporate America, who are wanting into this industry because of the green rush." The company now has operations in Nevada, Oregon, Washington and Colorado and has industrial hemp farms in Kentucky and North Carolina. The company has submitted applications for both a dispensary license and a cultivation license. If approved, Natural State will grow cannabis in warehouse space in Newport and operate a dispensary in Conway. It's also applied to grow industrial hemp in the state. If its dispensary and cultivation center licenses are approved, Martin said, the company plans to be a "one-stop shop," growing, processing, extracting, manufacturing and packaging under one banner.

Though many people looking to get into medical cannabis see the industry as a kind of gold rush, Martin said there's myriad ways to fail, most of which new operators don't see coming until trouble finds them. "Initially," he said, "anybody and everybody goes into the business and thinks they're going to get rich quick," he said. "It's simply not the case. We've been doing this since 2012, and it's probably one of the highest fail rates of any industry because of all the legalities that go along with it ... This is not an easy business to make money in right out of the gate."

Martin said the state's work to set up its medical cannabis system is one of the most transparent processes he's seen. But the delay in processing the applications has many on edge. Martin said he and his partners worked on their applications, both of which topped 700 pages, for all of 2017, taking their focus off other businesses in order to meet the September deadline. Now it will likely be spring — maybe later — before the applications are reviewed and the license winners are announced.

"There's really no end set when that delay is going to be over," he said. "Is it going to be first quarter, second quarter, third quarter of next year? All these [potential license holders] have money set aside. If you have liquid assets and they're sitting aside for a project, they're kind of frozen right now. To the billionaires that put money into this, it probably doesn't affect them very much. But if you went down, opened up a bank account and stuck $500,000 into it, that $500,000 is really just sitting there. When does that end?"

Martin said it's his belief that the federal government will do something to alleviate the issues with medical marijuana taxation and banking in the short term, possibly as soon as the next 24 months. The income being generated in states like Washington and Colorado is simply too great for the government to keep ignoring the issue. As for those looking to get involved in medical cannabis industry in the state, Martin cautions that there is a worse fate than living by dog years: living by cannabis business years. "It's easily 10 to 1," Martin said with a chuckle. "One year in a regular business is 10 years in a cannabis business. It moves at the speed of light. It's kind of like being in the tech industry: If you're not always learning, always studying and always following up on the leaders, you're going to get passed by very, very quickly."


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