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Arizona medical marijuana vendors expect windfall with legalization of recreational cannabis

10/13/2020 — The following article was published by the Phoenix Business Journal on October 10, 2020:

Medical marijuana dispensaries and vendors are expecting big financial gains if voters approve Proposition 207 legalizing recreational cannabis in Arizona.

The industry already generates revenue of some $900 million a year in the state, and industry players expect that number would more than double if the proposition passes.

“How many times does your customer base double in one year?” said Demitri Downing, founder of the Marijuana Industry Trade Association of Arizona. “Welcome to the problem of the 2021 adult use cannabis industry.”

Those industry expectations to boost revenue are met with resistance from the governor’s office.

Gov. Doug Ducey issued a statement Oct. 8 expressing concern that legalizing recreational marijuana will have significant consequences for Arizona’s children, road safety, employers and the economy.

“Arizona has a bright future, but fully legalized marijuana doesn’t need to be part of it,” Ducey said in a statement. Also standing beside him is a whole host of elected officials, Arizona leaders, physician and hospital groups, law enforcement, faith groups, substance abuse prevention organizations, as well as some business leaders.

Industry growing quickly

Meanwhile, those in the medical marijuana business are pumping money into the initiative to add recreational use to their businesses.

The top three contributors are Tempe-based Harvest Health and Recreation (OTCMKTS: HRVSF), which contributed $1.6 million; while Wakefield, Mass.-based Coraleaf put in $200,000; and Phoenix-based Copperstate Farms LLC contributed $400,000.

Even if it doesn’t pass, John Hartsell, co-founder of DIZPOT LLC cannabis packaging firm, said he’s expecting to generate $10 million in revenue this year.

“We don’t like to count our eggs until they’re hatched, but we’re certainly looking forward to seeing 207 pass,” he said. “We anticipate that growth to be somewhere between three times and five times by just simply going from the medical marijuana market to the adult-use marketplace. In the case of Prop 207, it’s likely the $10 million projection will be more like $12 million to $13 million.”

He ordered 120,000 medical marijuana pharmacy bags promoting the passage of Prop 207 that he’s distributing to medical marijuana dispensaries.

With about two dozen employees, the company’s total contribution toward the passage of Prop 207 is around $12,000, including the bags, said Jeff Scrabeck, co-founder of DIZPOT.

“We’re just a small ancillary business here,” he said. “Some of the larger organizations have contributed considerably more.”

Pankaj Talwar, CEO of Copperstate Farms, said he’s contributing about $400,000 to the Smart and Safe Arizona Coalition to promote the passage of Prop 207 — which is the third largest contributor to the cause.

Talwar is wrapping up a $10 million renovation of its greenhouse in Snowflake, where plans call for hiring another 100 people in northern Arizona, which will bring total employees to 500 in Snowflake, up from 180 a year ago.

“Copperstate Farms has grown approximately 240% in top line revenues from 2019 to a current run rate basis of $80 million,” Talwar said.

The passage of Prop 207 would not create more cannabis usage, he said, but instead would take it from an unsafe, untaxed drug cartel distribution channel to a market that would generate sales taxes for Arizona.

Today, the medical marijuana market generates upward of $900 million in total sales, Talwar said. Adding recreational marijuana into the mix would boost that to around $1.5 billion, without increasing the number of cannabis consumers, Downing noted.

“We believe in two or three years that will be 2.5 to three times the size,” Talwar said. “We’re bringing people who buy from the black market today to bring it in a safe way — more holistically sound products that get taxed.”

But many Phoenix business owners and employers aren’t so high on Prop 207, with many industry organizations fighting the measure because of what they say are potential safety concerns within the workplace.

“Passing pot legalization via the ballot box is rife with potentially dangerous consequences,” said Garrick Taylor, senior vice president of government relations for the Arizona Chamber of Commerce & Industry, in an interview with the Business Journal earlier this year.

When recreational cannabis was on the ballot in 2016, the Arizona Chamber and other business groups fought hard to defeat the initiative, which did not pass.

Excise tax

Prop 207 would impose an excise tax on recreational marijuana, which is expected to generate $197 million in annual revenue to the state by 2025 when the market has matured, according to the Tax Foundation. That number is based on Colorado’s annual excise tax revenue in 2019.

Sara Gullickson, founder of Cannabis Business Advisors, said she’s expecting to see more entrepreneurs enter the market if Prop 207 passes, but doesn’t expect it would bring a huge windfall to her business.

She is expecting about $500,000 in 2020 revenue for the company she founded earlier this year.

“It’s an opportunity — just not a huge one,” she said.

Meanwhile, Matt Pinchera, president of Hana Meds, which has two cultivation facilities and two retail stores, is already gambling that Prop 207 will pass by expanding his cultivation capacity.

“We do think there’s going to be a spike in demand if Prop 207 does pass, so we are looking to increase our production capabilities,” he said.

With 100 employees, Pinchera said he’s not sure how many more he’ll need to hire.

“We’re adding people every month,” he said. “But when we expand our production we’re going to need to hire more people there as well.”

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