Last November, on the day that 6.5 million Floridians voted to dramatically expand the state’s nascent medical marijuana program, the president of San Felasco Nurseries reported in federal financial filings that the Gainesville growery had just brought in a new partner.
For $6.375 million, a single unnamed investor purchased an undisclosed number of Class A shares in the business, one of only seven in the state permitted to grow and sell medical cannabis. That same day, a firm affiliated with Surterra Therapeutics, a license-holder in Southwest Florida, made the first of three late-year equity sales totaling $10.3 million.
The public filings — reflecting only a portion of the money flowing into Florida’s legal cannabis cultivators — offer a window into the rush preceding the coming boom, with predictions that the state’s patient registry will rise from 7,000 today to as many as 500,000. Just about all of the state’s operators either have recently raised money or are in the midst of a capital push, giving investors a chance to get in on the ground floor of an industry with budding potential.
But the timing is awkward.
As the money comes in, state lawmakers are crafting the parameters for Florida’s growing market, including the framework for future competition in cultivation, processing and distribution. There are no guarantees as to exactly what slice of the market investors are buying into, and the transactions — done with little transparency — are fueling skepticism about the capacity and wherewithal of the companies that could be left to carry Florida’s cannabis caseload for the foreseeable future.
“They are shopping ownership of the license,” said Louis Rotundo, a former lobbyist for the Florida Medical Cannabis Association now representing interested cannabis operators. “That tells me two things: They never should have been picked, and they’re not qualified applicants. If they had enough money they wouldn’t be shopping their licenses.”
Medical needs aside, the profit potential of Florida’s medical cannabis market is among the largest drivers of the interest and intrigue surrounding efforts to craft new law to regulate Amendment 2, which lets patients with debilitating medical conditions such as cancer, HIV/AIDS, epilepsy and post-traumatic stress disorder use cannabis.
Last year, U.S. consumers spent $6.7 billion on legal marijuana products, up a third from 2015, according to Arc view Market Research, an analytics arm of a firm that facilitates investment in legal marijuana markets. Arc view projects Florida’s market should hit $1.3 billion by 2021.
But most of the profits lie on the back end of the expansion. Right now, because of tight restrictions that will remain in place at least until the summer, marijuana consumption throughout the state isn’t enough to push dispensing organizations into the black. Florida’s cultivators say they’re losing money. At least a few are seeking debt investment.
“Do we expect to be profitable? Yes, absolutely. But I don’t know when that will be,” said Don Clifford, CEO of Polk County operator Grow Healthy. “Just to recover our costs is going to take significant time.”
In its only public disclosure, affiliate Grow Healthy Holdings acknowledged bringing in 11 equity investors for $4.7 million nearly two years ago, before the company won a lawsuit that forced the state to issue a cultivating and dispensing license. Clifford said Grow Healthy has invested “tens of millions of dollars” into the business, which expects to begin growing marijuana this month in a section of a 200,000-square-foot cultivation facility converted out of a former Sealy Mattress factory.
“All the money we’ve brought in and continue to bring in goes toward the development of our new facility, preparing for dispensaries, those kinds of things,” said Clifford. “No one has sold out any of their shares or anything at this point.”
Similarly, Jake Bergmann, a private equity fund manager who founded Surterra Holdings, said the company is seeking “high net-worth” investors in order to raise the money needed to expand production and cultivation facilities and open retail outlets. The company, associated with Surterra Therapeutics, has raised about $30 million in equity, according to Bergmann.
“Our investors are really buying into that big vision of being disruptive in the pharmaceutical space. That’s the pitch,” said Bergmann, who dismissed Rotundo’s suggestion that operators shouldn’t be allowed to raise capital. “We’re investing for the future right now and looking ahead.”
New investors in state operators must pass background screenings, according to the Florida Department of Health, and approval is required for any “major deviation” in ownership. But so far, despite the rush of new money, the state says the only operator to seek approval for a change in ownership is Miami-Dade’s Costa Nursery Farms, which sold a minority stake late last year to the Massachussetts-based Palliatech.
The state redacted details explaining the companies’ acquisition and service agreements. In a letter to the state, Costa’s general counsel said the transaction aimed to raise capital and “assist in attracting further financing.”
“The transaction will ultimately benefit consumers and the public by providing greater quantities and varieties of products to meet increasing demand, greater stability and dependability of supply, better quality products, lower cost of capital, and economies of scale (for example by bulk purchases from suppliers),” wrote attorney Arianna Cabrera.
Five of the seven license-holders responded to interview requests, with only CHT Medical and San Felasco declining to comment. All insisted that they’re capable now of providing product to meet the demands of the state’s patients as they grow in number, and they’re in no danger of leaving the market under-served.
They say they’ve made no promises to investors about how the state’s cannabis industry will look following this year’s legislative session.
But several in the market who have heard pitches from multiple operators say a premise behind the large valuations that at least one company has sought — in excess of $100 million — is the idea that current operators will retain a substantial grip on the industry after it expands, given their head start. One investor who asked to remain anonymous said some companies remain financially strapped, an important piece of information when considering whether to increase cultivating and distributing licenses in order to meet market demands.
“What are you paying for? A Monopoly. There’s no other reason in the world you’d ever put in the money at those dollars,” another said.
The state required its operators to post $5 million bonds in 2015 and prove they had the wherewithal to last for two years, but the size of the market has consistently been below projected numbers.
“They spent millions just securing the licenses. Now they have to actually execute,” said Peter Sessa, chief operating officer of the Florida Cannabis Coalition, an industry business group. “I can absolutely understand why they need more money.”
Skepticism about the companies’ profit motives and ability to grow the product necessary to accommodate the expanding market have played a prominent role in the push to expand Florida’s licensed cultivators. Republican Sen. Jeff Brandes, who wants to lift all caps on licenses, has referred to the companies as “cartels.” Florida for Care, the political organization that backed Amendment 2, says the state can’t meet demand without increasing the number of cultivation, production and distribution licenses.
Lawmakers queried by the Herald/Times Tallahassee Bureau, though, don’t seem particularly concerned about ongoing investment. House Majority Leader Ray Rodrigues, R-Estero, who has filed a bill that would add an additional six licenses once the number of medical cannabis patients hits 150,000, said he hasn’t inquired about ownership. Likewise, Sen. Dana Young, the Republican chairwoman of the chamber’s Health Policy Committee slogging through five separate bills, said she hasn’t looked into it.
“That’s certainly information that the Department of Health would have,” she said.
But while the state says it does track who owns what percentage of its dispensing organizations, that information isn’t necessarily all-encompassing or accessible to the public. For instance, Surterra Holdings wasn’t required to submit approval for ownership changes, according to the state, because it’s not the official license-holder of Surterra Therapeutics.
Even if it were, only a “major deviation” in ownership would have to be approved, according to Health Department spokeswoman Mara Gambineri, who couldn’t define what that meant in terms of shares or control.
“Because each licensee is bound by their individual application and each ownership or investment structure differs, there’s not a hard and fast answer,” she wrote in an email.
Gambineri also said the office doesn’t have financial details about investment transactions. But she said the Health Department closely monitors anyone who gets involved in the industry. As for raising capital, she said there’s nothing unusual about what seems to be taking place right now in the market.
“If a company has high valuations and [is] taking on credible investors, that typically speaks to the health of a business,” she said, “not to its detriment.”