Arizona 'very much on the map' as marijuana companies expand, consolidate

Item 9 Labs CEO Sara Gullickson talks about her cannabis company's expansion and growth in the industry. Arizona Republic

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With a booming medical-marijuana program and business-friendly regulations for dispensaries and farms, Arizona is a can't-miss market for large cannabis companies that are growing across the 33 states with legalized medical or recreational use.

Arizona allows medical marijuana use with the recommendation of a doctor, and voters narrowly rejected recreational use in 2016.

Arizona's 183,000 qualified patients not only increased by 21 percent in the last year, but the state's requirement that marijuana farms be vertically integrated with a retail dispensary make it a lucrative market.

Some states, such as California, allow vertical integration, but don't require it. Other states, such as Washington, prohibit the practice.

National companies also are rushing to set up shop in Arizona and other markets that appear likely to legalize adult-use or recreational marijuana in 2020.

Although many of the state’s 130 licensed dispensaries continue to operate independently, publicly traded companies with retail stores and farms in multiple states are increasing their market share here.

Dozens of publicly traded cannabis companies have sprouted around the United States and Canada with increased legalization of the drug. The companies can be small startups looking to expand and large multistate operators.

Dozens of publicly traded cannabis companies have sprouted around the United States and Canada with increased legalization of the drug. The companies can be small startups looking to expand and large multistate operators.

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11 states, District of Columbia allow recreational use

With the recent vote in Michigan to allow recreational use, the country now has 11 states and the District of Columbia where that is allowed, and 33 states where either medical or recreational use, or both, are allowed.

“Every time another state legalizes it, it helps the people in Arizona trying to legalize adult use,” Yi said. “Now 12 states have legalized, and the sky hasn’t fallen. It’s marijuana for God’s sake. It’s not the devil’s leaf. I think we’ve long passed the reefer madness stage.”

Nationwide sales of medical and recreational marijuana in state-regulated markets are projected to be $8 billion to $10 billion this year, and near $22 billion in 2022, according to industry publication Marijuana Business Daily.

The publication’s annual statistical review of the industry notes that mergers, including multistate operations, are saving money on production costs and putting pressure on smaller dispensary owners and operators.

Still room for small dispensaries

Officials at some of the multistate, publicly traded companies that have recently moved into Arizona say they won’t displace all of the smaller, mom-and-pop-sized dispensaries.

“People say, 'Is marijuana retail going to look more like Walmart or Nordstrom’s?'” Yi said. “I say, 'Do you see Walmart and Nordstrom’s? They both exist. Whole Foods and Ralph’s both exist. This space is big enough.”

And brick-and-mortar stores will endure in the industry, unlike other forms of retail that are losing market share to online sales. Yi said.

“People are not going to buy marijuana on Amazon,” Yi said. “People who used cannabis 20 years ago are getting back into this, and they want to go in a store and ask a person, 'How much of this do I take?' All of this happens in a store.”

Officials from other multistate companies agree that some small companies will endure even as other companies consolidate.

“There are a lot of really good craft companies,” said Sara Gullickson, CEO of Item 9 Labs Corp., a publicly traded cannabis company headquartered in Scottsdale. “But not a lot of people can grow like we can here.”

The Scottsdale company's stock is traded on the over-the-counter market,which means it is not traded on major exchanges like the New York Stock Exchange or the Nasdaq. Item 9 tells investors it plans to operate in six to 10 markets in 2019.

Gullickson said that scaling up and operating in multiple states allows companies like Item 9 to offer better benefits to workers, such as a 401(k) retirement plan and health benefits.

“The business model will start to make sense with more facilities online,” she said, adding that many Arizona companies are spreading outside of the state. “I see about 75 percent of the operators will have operations in other states in the next few years.”

Arizona remains attractive to investors, though, because other new state laws allowing marijuana use such as Maryland, Ohio, and Pennsylvania do not require a single company to own everything from the farm to the retail shop like Arizona does, she said.

“I think Phoenix is underplayed, I really do,” Gullickson said. “We are one of the fastest growing cities in the country. Our program (for medical marijuana) definitely has its flaws, but it is an old program in the land of cannabis. Our patient base is very healthy … and the licenses from the business model standpoint are very high-valued. Arizona is attractive to out-of-state groups because you get full vertical integration.”

Other expanding companies based in Arizona include Harvest Health and Recreation Inc., which formed in 2011 but went public in the fall on the over-the-counter market.

The company operates in 11 states with more planned, and recently announced a $100 million joint venture to invest in real estate for cannabis businesses across the country.

Another out-of-state company investing here is Chicago-based Cresco Labs, which already had one Arizona location. In October Cresco bought the company that was managing Encanto Green Cross Dispensary and running its farm in Salome. Cresco shares are also traded over the counter.

Expansion underway

The legal weed industry is among the fastest-growing in the United States, according to a Marijuana Business Daily report. Veuer's Sam Berman has the full story. Buzz60

Gullickson spoke from inside Item 9's sprawling indoor growing facility on the outskirts of Casa Grande.

Nearby, workers are completing a 10,000-square-foot expansion that will double the facility's size.

The company has about 50 employees and growing.

Item 9 recently acquired Gullickson’s national consulting company and will run Nevada operations that she was starting on her own. The company named Gullickson, an Arizona State University graduate, as CEO in the deal.

The Nov. 26 deal was worth $1.5 million in cash and 3 million shares of stock, which was worth $7.8 million the day the deal closed.

The Item 9 cultivation site is near a dairy farm, offering a few advantages.

First, there is no size limitation like those that some cities in Arizona place on marijuana cultivation. The farm can grow substantially if Arizona legalizes adult-use or recreational marijuana in 2020.

Although many property owners and adjacent businesses worry about the odor from marijuana farms, Industry 9 doesn’t need to think about that. The only smell anywhere near the facility comes from waste from the dairy operation.

“It is a perfect marriage in the sense that it was zoned for ag, and there are cows still on the farm,” Gullickson said.

She said that although she’s made a living consulting for people who want to start marijuana retail operations or farms, she spends much of her time talking people out of doing that.

“This business is not for the faint of heart,” she said. “It is a very difficult business. You are growing a plant that could die, could get pests, could get mold. There’s not one proven method, there are different requirements in different markets. I’m realistic with clients about not getting into the industry.”

Original Article by AZ Central

Victor MadrilComment