Las Vegas Sun

July 21, 2018

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Legal weed celebrates first year in Nevada

Sales have reached $305 million so far, but the new industry’s success has not been without growing pains

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Wade Vandervort

A Homie’s Choice marijuana plant from Desert Grown Farms is seen here, June 8, 2018.

Click to enlarge photo

Various cannabis products from Essence Dispensary are seen on display here, Friday, June 15, 2018.

Who regulates cannabis?

The Nevada Department of Taxation has been responsible for state tax collection, licensing and regulation development and enforcement of both medical and recreational cannabis since January 2017, per Ballot Question 2.

The Nevada Division of Public and Behavioral Health, which regulated medical marijuana when the first dispensary in Nevada opened in July 2015 to the end of 2016, is now only in charge of registering and issuing medical cards to patients.

Though recreational buyers are charged 10 percent more for the same product at dispensaries as registered medical patients, Nevada’s medical cardholders decreased from a peak of 27,000 in May 2016 to less than 20,000 per most recent tallies.

State Sen. Tick Seger-blom, who championed state legalization of the plant as a state senator, said the drop in medical patients is likely spurred by the anonymity of buying the plant recreationally. Medical cardholders must be registered with state authorities, while recreational buyers are not required to submit any personal information to the state.

“It’s more of a convenience factor than anything,” Segerblom said. “We still have thousands of people who buy recreational but are using [marijuana] for medical purposes.”

Susan Bunce shed a white lab coat as she walked out of a marijuana laboratory’s testing area into a nearby conference room. She took a seat, placed her arms on the table and smiled softly.

“You won’t see another industry like this,” she said.

Bunce, 49, a business and marketing professional by trade who co-owns and operates DB Labs in the central Las Vegas Valley, is one of hundreds of marijuana industry entrepreneurs in Nevada to see their wealth and well-being skyrocket with the industry’s success during the first year of recreational sales. Like so many other pot entrepreneurs in the Silver State, Bunce never imagined working in the legal marijuana industry. Now, managing a testing laboratory with more than a dozen chemists is her full-time job, and she’s on her way to making more money than ever.

Preliminary economic analyses of the Silver State’s fastest-growing industry estimate that legal recreational cannabis raked in about $305 million in sales from July 2017 to March and could contribute more than $70 million in tax revenue to state coffers in the industry’s first year, exceeding both state and independent projections by 40 percent.

More than 7,000 new jobs were generated by the marijuana industry, according to the most recent numbers available from the Nevada Dispensary Association in January, and more than $300 million was invested in real estate development statewide by pot companies. Those figures will almost certainly increase when a new report on the industry is released later this summer, said economic analyst John Restrepo.

Restrepo’s firm, RCG Economics, has conducted analyses for the dispensary association and pro-pot organizations, even before legal recreational weed was approved by voters in the 2016 election. A 2016 RCG study estimated a 15 percent state wholesale tax on marijuana shipments from cultivation and production facilities to dispensaries would generate $20 million in the first year of recreational sales in Nevada. If tax collections continue on the upward trajectory seen during the first nine months of available figures, actual totals would land at more than $22 million.

“The numbers are looking very strong,” Restrepo said. “The industry has gone through the roof in terms of sales.”

Perhaps the most visible sign of the industry’s success, licensed dispensaries in the Las Vegas Valley are changing hands for millions of dollars. Because the state capped the number of dispensary licenses per regulations outlined in Ballot Question 2, cannabis dispensaries have sold for as much as $10 million. Earlier this year, LA-based MedMen purchased the Valley dispensary formerly known as Panacea, as well as two others, for a combined price of more than $25 million.

MedMen spokesman Daniel Yi said the recent purchases were part of the company’s rush to join Nevada’s “exclusive” market. That message has been echoed by other dispensary owners across the U.S. and internationally.

As Nevada celebrates one year of recreational marijuana, access to the plant in the near future will be even easier for buyers across the state. Per Ballot Question 2, the Department of Taxation will open applications to issue potentially dozens of licenses for dispensaries, cultivation centers and production facilities by the end of the industry’s second full year of recreational sales in July 2019. The new marijuana licenses are available only to current license holders already running their own facilities.

The 2019 state legislature will decide if and when members of the general public will be able to obtain licenses to sell cannabis, similar to liquor stores. While owners of testing laboratories won’t immediately be offered additional licenses, Bunce said adding more dispensaries, cultivation and production facilities to the state would be a much-needed boost for the labs, which charge between $300 and $500 to test marijuana flower, edibles or

concentrates to state-mandated regulations. Ballot Question 2 writers, with the help of state officials, purposely delayed the growth of Nevada’s industry, opting for a more specialized and regulated pot industry than the open markets of Colorado and Oregon. In those states, dozens of weed facilities open, close and change hands each month, undermining regulation and consistency in their industries, Yi said.

“Las Vegas is a pertinent market where brands can showcase themselves to a much wider audience,” he said.

By the numbers

• 61: Open marijuana dispensaries

• 115: Operating cultivation facilities

• 80: Operating production facilities

• 0: Banks in Nevada that openly accept marijuana clients because of the plant's federal classification as a Schedule I drug

• 9: Testing laboratories

• $30.47 million: Total tax collected from a 10 percent excise charge on consumer purchases of recreational marijuana from Nevada dispensaries*

• $18.5 million: Total state tax collected from a 15 percent charge on wholesale distributing from Nevada cultivation and production facilities to dispensaries*

• $870,000: State tax collected on marijuana industry application fees*

• $1.43 million: State tax collected on marijuana industry licensing fees*

• 21.5%: Approximate combined state and local tax on sales of medical marijuana (local tax varies by county and municipality)

• 31.5%: Approximate combined state and local tax on sales of recreational marijuana (local tax varies by county and municipality)

• $65 million-$75 million: Likely outcome for actual one-year state tax revenue from recreational pot, based on monthly averages of nine months of available data.

• 8,555: Active marijuana employee agent cards in Nevada*

• 49.7% of recreational pot purchases were for marijuana flower*

• 24.6% of recreational pot purchases were for marijuana concentrates*

• 12.6% of recreational pot purchases were for edibles*

*Data through March

Marijuana laws and law enforcement trends

After 15 years of service in the U.S. military, which included deployments to Kosovo, Afghanistan and Iraq, Navy veteran Jeff Krajnak returned to Las Vegas a hero in 2013 and was honorably discharged. Prescribed 11 pills to cope with severe post-traumatic stress from his war zone experiences, Krajnak (pronounced CRY-NOCK) turned to medical marijuana and legally obtained a state-issued medical card, smoking the plant each night before bed.

With cannabis, Krajnak, now 45, ditched all but two of the “zombie medicine” pills he was taking, saying the weed took away much of his anxiety.

“My doctor recommended marijuana, and it changed my life,” he said. “I felt human again.”

But Krajnak’s marijuana success story took an unfathomable turn for the worse. Driving to a tee-ball game this past year with his 6-year-old son, Krajnak ran a red light at the corner of Boulder Highway and U.S. Highway 95, T-boning the sedan of Peter Napoli, police said. Napoli, 53, was killed in the crash.

That afternoon, after police interrogated Krajnak at Sunrise Hospital and drew his blood, they let him go home. Witnesses gave conflicting statements on which driver was at fault, and police determined at the time he had not run a red light after all.

Krajnak, who had no previous criminal record, was at home playing video games a month later when several SWAT officers knocked on the door of his Henderson residence, arrested him and booked him for driving under the influence in the crash that killed Napoli. The results of his blood test showed more than twice the legal amount of active THC and more than eight times the legal amount of marijuana metabolites present in his system.

Krajnak pleaded no contest last month to charges of reckless driving and misdemeanor DUI. He faces up to six years in prison when he’s sentenced in September.

Krajnak said he hadn’t smoked marijuana for more than 20 hours before the fateful crash and wants his example to serve as a wake-up call for marijuana users to educate themselves on the law.

“I think there needs to be more awareness,” he said. “Every time I go through town, there’s billboards for marijuana, but there’s nothing saying a user can [get a] DUI in this state even if they’re not impaired.

“I wish I had known that.”

A Metro Police spokesman said DUI busts like Krajnak’s are not unusual.

An active THC limit of two nanograms per milliliter and a metabolite count of five nanograms per milliliter has resulted in a greater number of Las Vegas drivers who aren’t likely impaired at the time of their arrests but test above the legal limit, Officer Larry Hadfield said.

Comparatively speaking, legal marijuana states Colorado and Washington have a five-nanogram-per-milliliter limit for active THC count. In California and Oregon, no blood test exists because of limited research on the still-federally illegal plant. Instead, police officers use their own discretion along with routine field sobriety tests to determine a driver’s level of impairment.

Sgt. Randy Dockery spent six years in Metro’s narcotics enforcement division, focusing exclusively on busting marijuana grow houses in the Valley before briefly exiting the department. He returned as a leader of one of three narcotics teams last year and now oversees enforcement of all illegal drugs. Like marijuana DUIs, Dockery said illegal sales and marketing of the plant have also skyrocketed since last July.

He estimated growth in the Valley’s illegal pot market has tripled since legalization, with vendors entering through California for “pop-up party” sales at rented warehouses or banquet venues. That’s a change from previous years, where large-scale pot dealers would peddle their illegal product mostly at popular festivals—such as the High Times Cannabis Cup and Las Vegas HempFest—staged in Southern Nevada.

“It’s not illegal for adults to buy marijuana, just to sell it without a license,” Dockery explained. “And a lot of times, people don’t know any better. Especially tourists.”

The new pop-up market model can consist of more than 20 pot and paraphernalia vendors who pose as legal sellers through ads on social media, Dockery said. He estimated that two to five such events still occur in the Valley each week, earning the highest-selling vendors up to $15,000 a day before they “disappear” out of state for weeks at a time.

Dockery’s unit has found more than 100 pounds of marijuana flower and concentrates left behind at pop-up events, largely because of a surplus of illegal pot in the “flooded” black markets in California, where illegal weed has been grown in abundance for decades. As illegal pot dealers skirt Nevada taxes and state testing costs for their product, they’re able to undercut the legal market here by up to 50 percent, he said.

“We’ve opened Pandora’s Box, and it has gotten out of control,” he said. “It was a mess in other states, and our results have been no different.”

THC in the body

The amount of psychoactive THC in a person’s blood varies based on how often that person uses marijuana products, how deeply they inhale while smoking and how long they take to exhale the smoke from their body, according to a 2017 report from the National Highway Traffic Safety Administration. THC is fat-soluble, meaning unlike alcohol, it doesn’t leave the body at a quick, steady rate, said Margaret Haney, a neurobiologist at Columbia University. A daily pot smoker builds up so much THC in their body fat that it could take weeks to fully clear that person’s system, said Marilyn Huestis, former Chief of Chemistry and Drug Metabolism at the National Institute on Drug Abuse. Occasional users could be able to clear most THC content from their blood stream within 24 hours.

Quality monitoring

Pro-pot politicians and advocates of the plant have long referred to Nevada’s industry as “the gold standard” for quality marijuana. That’s because stringent state testing regulations require all marijuana sold in Nevada’s 61 open dispensaries to first pass laboratory tests for 24 pesticides, five microbials—including yeast and mold—common myctotoxins and heavy metals.

About 85 to 90 percent of marijuana flower passes state requirements on the first test, according to three Valley laboratory owners who opened their facilities to Las Vegas Weekly this month. Excessive mold and yeast lead to the majority of failed cannabis tests.

Marijuana concentrates and edibles have a near-perfect success rate, said Todd Denkin, owner of DigiPath Labs in the central valley. The small number of failed tests were all for gram-negative bacteria that comes from sneezing and unwashed hands.

“Unless something goes horribly wrong in the kitchen, it’s highly unlikely for an edible to fail,” Denkin said. “The failed tests were from things that should be absolutely preventable with good hygiene.”

Opened in May 2015, DigiPath operated for more than two years at a loss in Nevada’s medical marijuana program. But like Susan Bunce and DB Labs, Denkin’s company has seen its bottom line improve since recreational cannabis launched last year. With more than $1 million in lab equipment and a staff of about 15 chemists and microbiologists, DigiPath has served more than 85 percent of the state’s 115 marijuana cultivators, a “significant increase” in clientele from before recreational marijuana hit dispensary shelves last summer.

Ben Chew, a Ph.D chemist working as the district manager of DB Labs, helps oversee one of DigiPath’s main Las Vegas competitors. To test for the four most commonly found heavy metals in Nevada soil—arsenic, cadmium, lead and mercury—Chew uses a $250,000 machine that combines argon gas and plasma. It forms an incubator with a temperature inside “as hot as the surface of the sun,” he said. That heat ionizes the metals into their atomic form, allowing the machine to measure heavy metal concentrations by their atomic weights.

“Nevada’s water is not the cleanest,” Chew said. “The metals can get in the soil when the water is not purified properly.”

Stringent testing standards have also been challenging for the labs themselves. The Nevada Department of Taxation has temporarily suspended the licenses of four of the state’s nine testing facilities since Question 2 on the 2016 election ballot gave it regulating authority over the marijuana industry. All suspensions—which took place between July 1, 2017, and March 1, sometimes lasting several weeks or months—have since ended with the facilities reopening. Interviewed lab owners said their suspensions, while costly, helped them better understand “complicated” state regulations.

Las Vegas-based G3 Labs had its license suspended for more than 150 days after state inspectors discovered incorrect labeling and testing methods. The lengthy shutdown caused G3 to lose all of its clients and many of its 12 employees. Months later, the Las Vegas lab is just now recouping most of its business.

“The state regulates us, but they’ve also been asking us how to make the regulations,” said G3’s owner, who asked to remain anonymous. “It’s a complicated process, and it’s truly an industry in its infancy.”

Denkin’s lab also had its license suspended in January for performing tests “not authorized by the state.” He said the experience helped improve communication between the lab and state officials, and added DigiLabs now operates as if it was going to be inspected by taxation department officials every day.

“We all want to be on the same page and we all want what’s best for the industry,” Denkin said. “Ultimately, if you buy cannabis in Nevada, it’s tested and it’s clean.”

High-level tech ahead

One of the Valley’s newest cultivation breakthroughs comes in a comparatively small package. The 16,500-square-foot MMJ America cultivation facility, located in the central Las Vegas Valley and set to open in August, pales in comparison size-wise to some of its larger local competitors. But with a unique LED setup that illuminates plants from multiple angles, cannabis buds are nurtured to grow outward instead of straight upward.

The system, inspired by Nevada startup TriGrow, originated from technology used for vegetable growing, said David Kessler, the company’s vice president of horticulture. TriGrow inspired Colorado-based MMJ America to try it for the company’s first Nevada cultivation facility.

“Our deal was, we wanted to best use our facility to produce as much high-quality marijuana as possible,” MMJ America owner Marques Moore said. “We now think more in cubic feet, because we’re stacking more racks vertically.”

MMJ America’s new Las Vegas facility will also feature technology monitoring growth and nutritional health of the plants via a wired connection from the soil to a digital system. Self-powered fertilizing and irrigation systems—also found in most other local weed grows—will reduce the man-power needed to evenly water and tend to the plants.

The facility has just two separate rooms for cannabis growth. The “veg room,” where plants grow from their infancy as clippings for a few weeks, and a “grow room,” where the rest of their budding will take place. MMJ America also plans to open a smaller, yet similarly structured cultivation facility in Pahrump.

While just about all indoor grow facilities require at least eight weeks to harvest from the time a marijuana clone is first planted, Moore said MMJ America’s facility will allow growers to complete the process in as few as six weeks.

“We keep the plants relatively small; they’re just bushier, thanks to the side LED lighting panels,” he said.

Building a cannabis empire

Perhaps the largest power shift in the Las Vegas marijuana landscape has already started. In the past three months, LA-based MedMen opened a mega-cultivation facility in Northern Nevada and announced plans for three Las Vegas dispensaries by the end of summer. One of those dispensaries—MedMen North Vegas on Arctic Spring Ave.—is already operating. The company paid $10 million to buy that dispensary, formerly known as Panacea, and transform it into an “Apple Store of weed.”

“We want to open stores in significant areas, like Las Vegas,” MedMen spokesman Daniel Yi said. “Nevada is important for cannabis, because governments at both the local and state levels have really embraced this industry. They’ve been more proactive and progressive than a lot of the rest of the country.”

One of the largest financially backed marijuana companies in the world, MedMen was valuated at $1.6 billion at the beginning of June, when it went public on the Toronto-based Canadian Securities Exchange. It is the largest U.S. cannabis company to be publicly traded in Canada. The decision to go public, albeit not in the U.S., where authorities outlaw marijuana business on the federal level, will help the company gain more financial backing for further expansion in Nevada and elsewhere, Yi said.

MedMen CEO Adam Bierman has said the company is focusing exclusively on markets where stronger state regulations allow MedMen “to be in the most pertinent markets to showcase our brand to a much wider audience.” For now, that includes Nevada, California, New York and, soon, Florida. Yi said MedMen is avoiding “saturated” states like Colorado and Oregon, where a large number of dispensaries has made standing out more difficult.

In cities like LA, where dispensary licenses are capped by local ordinance, the company has bought the legal number of its own dispensaries and “manages” stores for other owners under the MedMen name, Yi said. Doing so allows MedMen to continue to grow.

Andrew Jolley, president of the Nevada Dispensary Association, praised the expansion of the company in the Silver State, saying MedMen’s new operations demonstrate that cannabis is “creating for Nevada and our community.”

This story originally appeared in the Las Vegas Weekly.