Even In Reliably Red Texas, Cannabis Entrepreneurs Expect Some Green Soon

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As state after state loosens laws on the sale of marijuana, a whole industry has sprung up to serve the fast-growing market for cannabis and related products.

Even in Texas, which hasn’t legalized marijuana,  some entrepreneurs are planting their flags early, wagering that the Lone Star State will one day have its own “green rush.”

For legal reasons, they operate mainly on the periphery of the industry. But there’s plenty of business to be had — selling everything from cannabis oil tinctures to the flooring used in greenhouses that grow marijuana.

Along with the typical challenges of any business, companies that work in the cannabis industry in Texas must navigate conflicting state and federal laws, risk backlash from banks and state agencies, and overcome the stigma of selling a product that some consider dangerous or taboo.

But being a part of a young and thriving industry also comes with a shot of adrenaline, said Peter Ricca, executive chairman of Ricca Chemical. In the late 1970s, Ricca’s father founded  the Arlington company, which makes industrial testing kits used for quality control by Fortune 500 food and beverage companies. About two years ago, it began getting phone calls from West Coast cannabis companies looking for products they could use for extracting cannabis oil and testing the quality of their products.

Now the company sells testing kits for the cannabis industry and blends terpenes — organic compounds found in plants like basil, lemons and rose petals — that can be added to cannabis products to create unique flavors and aromas.

“If you buy into this and say cannabis is a miracle drug, it’s exciting as all hell because you sense you’re changing the world,” Ricca said.

And, he said, by developing its brand and selling in other states, the company will have an edge when Texas changes its laws.

The market for cannabis is growing as more states legalize the use of medical marijuana and open up the market to recreational use. Twenty-nine states and D.C. have legalized the sale of medical marijuana, and some, including California and Colorado, allow the sale of marijuana to adults at retail shops, according to the National Conference of State Legislatures.

Even in Texas, a reliably red state, public opinion is changing. Eighty-three percent of Texans support the legalization of marijuana for some uses, such as medical use, according to a 2017 poll by University of Texas/Texas Tribune. More than half of Texans polled in 2017 said they’d allow possession of marijuana for any type of use.

But prominent Texas politicians have voiced strong objections, with U.S. Rep. Pete Sessions, a Republican who represents Dallas, describing marijuana as a gateway drug and calling those who grow it “merchants of addiction.”

And in January, U.S. Attorney General Jeff Sessions opened the door to new enforcement by rolling back an Obama-era policy that kept federal authorities from targeting the marijuana industry in states where sales are legal. The federal government classifies cannabis as a Schedule I drug, putting it in the same category as heroin and ecstasy.

The growers

In 2015, Texas Gov. Greg Abbott signed a law that permits some Texas companies to grow cannabis, but only for a narrow use. The law created a license for companies to grow, process and distribute a type of cannabis oil to Texans with intractable epilepsy.

So far, only three companies have received licenses under the Texas Compassionate Use Act. They grow cannabis that’s low in tetrahydrocannabinol, or THC, the compound associated with the plant’s high, but rich in cannabidiol, or CBD, a compound used as a treatment for epilepsy and other medical conditions.

But regulations don’t make it easy or inexpensive to cultivate cannabis in Texas.

Long before planting a seed, the companies had to make a pricey bet. They put together thick applications for state officials, demonstrating they had the capital to finance a business and comply with strict safety and security requirements.

Once approved, each company had to pay the state nearly a half-million dollars for a license. The license will have to be renewed every two years at a cost of hundreds of thousands of dollars.

Compassionate Cultivation’s application for the state license was more than 300 pages, CEO Morris Denton said. It opened the state’s first dispensary in February and has had 40 customers so far, with some making multiple purchases, he said.

In its corrugated steel building about 12 miles southwest of Austin, row after row of marijuana plants stretch to the ceiling. The plants hang upside down and dry out next door in a chilly room that’s a wine cellar equivalent for cannabis before churning through an extraction machine and becoming a specific kind of cannabis oil.

Across the state, Miami-based Knox Medical, licensed as Cansortium Texas, is cultivating cannabis in modular units in the small town of Schulenberg, about 100 miles west of Houston and 100 miles east of San Antonio. The company sells drops of cannabis oil and plans to roll out suppositories, said Jose Hidalgo, the company’s founder and CEO.

A third company with a license, Surterra Texas, is starting up its business in the Austin area.

For now, at least, the companies have a small market. The cannabis products they make can’t cross state lines. Only Texans with intractable epilepsy — a population estimated between 102,000 and 136,000, according to the Epilepsy Foundation of Texas — are allowed to legally purchase their products. That shrinks further after subtracting Texans who don’t have the two legally required doctors’ recommendations and those who object to using cannabis as medicine.

But Denton and Hidalgo take the long view.

Knox Medical began in Florida, which initially had a law similar to Texas’ but has added more eligible medical conditions over time. Hidalgo said he expects Texas to follow the same path. Knox Medical sells in Florida, Pennsylvania, Texas and Puerto Rico.

Before starting the company, Denton said, he and his four Austin business partners thought long and hard about the downsides of starting a cannabis business in Texas, from political uncertainties to personal risks. He said he worried about how the career choice might make life harder for his spouse and two teenagers.

“We spent the better part of a year trying to talk ourselves out of doing it,” he said.

But he said he couldn’t resist the business opportunity and the chance to be part of an industry that he believes will transform Texas’ politics, economy and view of medicine. He said phone calls and emails from people with intractable epilepsy and their families cemented his decision.

“I don’t spend my days worrying about things I can’t control,” he said. “I can’t control what our federal administration does or doesn’t do. I can’t control what Jeff Sessions may or may not do. The only thing that I can control is the performance of this business.”

Once the company got the state’s approval, Denton had new challenges: raising money to fund the business and finding a bank. The company raised more than $6 million from 13 high net-worth individuals who live in Texas. He said the company struggled to find a bank, since most are insured through the federal government, but found a Texas bank “that was willing to take the leap with us.”

Another major challenge, Denton said, is educating physicians. He visits neurologists around the state. When Austin hosted a conference for the Texas Neurological Society, he sent luxury buses to drive about 30 doctors and their spouses out to the facility for a tour.

“The best way I know how to address whatever questions they have is show them what we do,” he said.

Other uses

When Dallas-based Roots Juices began stocking its shelves with cannabis oil, its smoothie and juice shops in Oak Lawn and Lakewood attracted a loyal clientele and also some unwanted attention from law enforcement.

In October, health department officials seized about $5,000 or $6,000 of products from the juice shop. Owner Brent Rodgers watched as state officials carted it away in cardboard boxes wrapped in yellow caution tape.

“You would have thought I was running a meth lab,” he said. “I thought it was kind of silly.”

State health officials haven’t yet decided what to do with the products, said spokesman Chris Van Deusen. He said the state detained them because cannabidiol, also known as CBD, hasn’t been approved by the Food and Drug Administration as a food or food additive.

The shops stopped making drinks with the cannabis oil, but Rodgers shrugged off the run-in with state officials and restocked shelves. He said it’s just part of being on the leading edge of a new market.

Rodgers said he’s had to overcome other obstacles, such as finding another point-of-sale system for credit card payments after the one the shops used flagged his sale of CBD oil and sent him a letter saying it violated their bank’s policies.

Roots Juices sells a range of cannabis oil products, including brownies and muffins made by the shop and prepackaged drops, capsules and salves from Colorado, Oregon and California. They range in price from $3.50 for a muffin to $260 for a bottle of cannabis oil. The products have an even smaller trace of the psychoactive compound of THC than those sold by Texas cultivators, so they are classified as hemp.

Sales of the cannabis oil products have become about half of the shops’ business since sales began last summer, Rodgers said. White- and gray-haired customers looking for relief from arthritis and joint pain started coming to the shops, which usually cater to health-conscious 20- and 30-somethings. He said customers have driven from as far as Weatherford, Waxahachie and Oklahoma City.

“When I came to Dallas [in 2012], no one was juicing,” he said. “Now there’s a juice bar on every corner. … It was a lot of work to educate people on the benefits of juicing. Now I am finding the same thing. I’m educating people about the benefits of CBD.”

The suppliers

GrowLife, a Seattle-area company that makes potting plants, lighting and other supplies to grow marijuana and other plants indoors, opened a facility in Grand Prairie in January. The company will manufacture FreeFit Floors, flooring that reflects light and saves energy. Its flooring has become popular among cannabis companies.

It plans to expand to 50 employees over the next 18 months, GrowLife chief executive Marco Hegyi said.

The state’s central location and low cost made it an ideal logistics hub, said Keith Pocock, general manager of operations for GrowLife Innovations. He said the company will use the facility to test new products, too, such as a ready-made grow kit that resembles a camping tent and comes with supplies like lighting and fans.

There’s one catch, though, he said: The company will have to test its new products by growing salad greens or herbs instead of marijuana.

In Arlington, Ricca Chemical mixes clear liquids in giant flasks in a room that’s a cross between a chemistry lab and an industrial kitchen. It sells terpenes that it filters of impurities, blends together and bottles to create unique flavors and aromas. Companies add them to cannabis products stripped of their natural flavors during the oil extraction process or use them to enhance flavors and stand out from other brands.

Linda Hurley, the company’s senior vice president of sales and marketing, said she gets interesting reactions from friends and family when she talks about her latest work project and her business trips to marijuana trade shows. But she sees Ricca Chemical’s new division, Cannabis Solutions, as just another way the 43-year-old chemical company can break into an emerging market.

Cannabis Solutions sells 21 strains that range in flavor from dead leaf to strawberry cheesecake. It also works with companies that want their own unique flavors. Since it can’t test on cannabis products in Arlington, Hurley said the company goes back and forth with its clients, shipping multiple versions until the flavor profile they’d like is just right.

About 15 percent of business comes from the cannabis industry, Ricca said. He said terpenes brought in $4 million of revenue in its first 15 months of sales.

Companies have bought the terpenes to use in vape pens and e-cigarettes, gummy bears and gourmet cannabis cooking oils.

Patrick Moran sees the cannabis business as a natural extension of Texas’ history of wildcatters and cowboys. Moran, who lives in McKinney, helped start the Texas Cannabis Industry Association in 2014. The trade group advocates for policy change and acts as a voice for the small but growing number of cannabis-related companies in the state. It’s made up of about a dozen companies and has 32 supporting members, he said.

Moran started Aquiflow, which advises cannabis companies in California and Canada on products from soil and lighting to plotting systems. His application for a license under the Texas Compassionate Use Act is pending, so for now, he’s turned his facility in Gunter — a town of 1,500 about 60 miles north of Dallas in Grayson County — into a laboratory to test different technologies. He’s using basil and tomatoes.

“We dug in because I’m not giving up Texas,” he said. “This is the right thing. It may not be easy, but it’s the right thing and the right side of history.”