In marijuana case, operators who were denied dispensary licenses testify about the fallout 

Patient advisor Regan Fueget explains marijuana products on display to a customer at the+source dispensary in Henderson

Six marijuana company owners who did not receive dispensary licenses last December took to the witness stand Monday to testify against the Nevada Department of Taxation, claiming the distribution of the permits not only lacked transparency but also was unfair. 

Out of a pool of 461 applications, 61 conditional dispensary licenses were awarded to 17 cannabis businesses. Several of the witnesses testified that their companies are facing serious losses. 

Robert Groesbeck, co-CEO of Planet 13 Holdings Inc. and the former mayor of Henderson, said he filed a lawsuit against the department because his company had an operational dispensary for two years, with 850 customers a day, but he did not receive even one of the handful of additional licenses it had applied for. 

“As I sit here today, I am losing $1.5 [millions] or more a month on a mothballed facility. Those are very real damages,” said Groesbeck, referring to the revenue he believes he would have generated if he could have expanded the business.“This isn’t a projection. This is real dollars, real sales.”

Frank Hawkins, an owner of Nevada Wellness Center, has been in the courtroom almost every one of the 15 days of the hearing, which was initially predicted to be a short hearing in late May. He argued that the process was manipulated through parameters adopted by the state during the licensing process. 

“At the end of the day, we’re hoping that the process is thrown out and that the process has to be re-done,” said Hawkins.

During his testimony, he listed examples that were presented to Clark County District Court Judge Elizabeth Gonzalez by plaintiff attorneys in the prior weeks, especially those involving meals and trips arranged by the Nevada Department of Taxation deputy executive director Jorge Pupo. He also objected to a change in the application process that removed any evaluation of the location of the marijuana business. 

“Mr. Pupo said ‘but I didn’t score the applications,’ and I sat back there and I said to myself: maybe, he don’t understand,” said Hawkins. “Whether or not he scored the application, he put in motion which changed the application. He said he decided that there would be no location. He single-handedly did that.”

Hawkins also testified that the state used broad language in the application that allowed for companies without experience in operating a recreational marijuana facility to receive a higher score than those who had years of experience. He suggested this could be because certain applicants knew what evaluators would be looking for. 

Another reference he made was to Department of Taxation supervisor Karalin Cronkhite’s testimony about lighting and sink standards. 

“If people knew that and matched that out, then hmmm,” said Hawkins. He also expressed doubts about the quality of training for application evaluators, who were independent contractors hired through the staffing agency ManPower.

“The evaluators may not have been qualified. We don’t know because you haven’t brought any of them here,” said Hawkins. “That’s the responsibility of the state to train them. It’s clear they didn’t teach them how to train. They told them verbally. You tell me something one time, I don’t know, I may or may not get it.” 

Multiple plaintiff witnesses were asked whether they knew about SB32, a bill signed by Gov. Steve Sisolak in May to increase transparency in the marijuana licensing process. The new law requires the state to publicly reveal the names of applicants and the mechanisms used to score their applications.

Some plaintiff witnesses said the businesses that were awarded licenses should have the opportunity to be successful, but that they also deserve an equal chance at that. Attorneys for the state countered that the plaintiffs have the opportunity to buy a license on the open market.

Brett Scolari, general counsel for Tryke Companies, which operates four retail stores under the name Reef Dispensaries, applied for multiple licenses under different jurisdictions throughout the state as a strategy to get one or two new licenses. 

Scolari reiterated the lack of an even playing field, arguing that ethnic and gender diversity should not have been included in the parameters for approval. The 250-point scoring system for the applications allowed as many as 20 points for a company’s diversity — one of the major changes from the 2014 application cycle.

Hawkins, who said the diversity section of the application would have helped his majority minority-owned operation, added that he believed it was manipulated “as a tool for those who didn’t have diversity to garner points through their employees, they called officers and putting people on the board for whatever reason,” said Hawkins.

He brought up a previous testimony that alleged women or ethnic minorities were added to boards, or rank-and-file employees promoted to officers, to increase a company’s diversity scoring. 

“Certain people knew more information than others,” he said.

Hawkins acknowledged during questioning that if diversity wasn’t scored, Nevada Wellness Center’s ranking would not have moved much. 

Co-founder of Oasis Cannabis Ben Sillitoe and NuLeaf owner and CFO Sean Luse also testified against the state, claiming a lack of transparency and unequal access. Despite experience in the industry, they were not granted licenses. 

“I haven’t seen any evidence of bribery or corruption. I do think that what it sounds like that some people had more access and maybe personal relationships with important people in the Nevada Department of Taxation,” said Luse, who said a major concern came from the low number of players who were awarded the additional licenses. “There could be an oligopoly of a few operators who control double-digit licenses, and I think that has the potential to rip a whole market.”

Several applicants won a large number of licenses in the December round while other businesses won none. Essence won conditional licenses for eight new dispensaries, The+Source won seven, Thrive won six, Deep Roots Harvest won five and Health for Life won four, for example.

The stakes for the case are high. Nevada collected almost $70 million in revenue from marijuana wholesale and excise taxes during the first year of legal sales, and taxable sales in 2018 topped a half-billion dollars.

The hearing is set to resume Thursday morning with at least two more witnesses, and an additional expert witness is expected to testify in August. 

Dispensaries respond to critical audit, say they want more training on marijuana tracking software

Cannabis strains on display

The Nevada Dispensary Association is responding to a recent state audit that was critical of the seed-to-sale tracking system the marijuana industry uses, noting that auditors did not find cannabis was diverted to or from the black market and suggesting that confusion over new software led to reporting errors.

State auditors found frequent discrepancies between the amount of sales that are logged into the seed-to-sale tracking software METRC, and those reported on state tax returns. The association, which represents numerous marijuana businesses, did not comment last Thursday at a meeting when the audit was first discussed, but provided a statement to The Nevada Independent about the findings this week.

“Inaccurate entry, confusion over batching and tagging during the program’s rollout and destruction of unusable marijuana are likely responsible [for] a vast majority of the discrepancy between Department of Taxation sales data and METRC data,” association representatives wrote, emphasizing that auditors uncovered no instances of diversion to the illegal market in their review.

The audit suggested that with data incongruencies between the tax returns and the software, the state could have been losing out on $500,000 in tax revenue in a six-month period. Auditors noted that the Nevada Department of Taxation, which regulates the industry, did not provide supporting documentation that might have shed more light on why there were discrepancies.

“METRC is effective for preventing diversion, but I don’t know that it will ever be the best tool for calculating taxable sales,” Brett Scolari, general counsel for Reef Dispensary and an NDA board member, said in the statement.

As for a finding that high-potency products limited to medical marijuana patients were sold to recreational customers with relative frequency, the association said members “are vigilant to only sell tested, clearly labeled and legally appropriate products” to customers and posited that the report reflected a breakdown in how sales are tracked.

“It is possible that these were instances of failures to properly designate the sale as a medical sale rather than an intentional violation of the regulations,” the association said. “The Nevada Dispensary Association supports and will actively pursue improvements in this area, including additional training and a proposed amendment to Senate Bill 238 that would require designation of the sale as medical or non-medical at the point of sale.”

Riana Durrett, executive director of the association, testified on Friday that there has been confusion among people who work in the industry over how to work the METRC program, and she is calling on representatives from the company to provide more training and support. The state transitioned from using the software MJ Freeway to METRC in late 2017.

“Nevada Dispensary Association was able to work with METRC on one occasion, in order to host these trainings,” association representatives wrote, “but licensees would greatly benefit from more in-person training from METRC as well as working groups with METRC that could ensure METRC’s software is complying with Nevada specific regulations and requirements.”