Should Cannabis Operators Survive DPS Scrutiny?

Several companies seeking to participate in Texas’ medical cannabis program have controversial histories.

Texas Insider Report: AUSTIN, Texas – The Texas Department of Public Safety is scrutinizing cannabis companies that are trying to gain valuable access to Texas’ medical cannabis program. 

Many of those companies have encountered financial, legal, and regulatory challenges that could give Texas officials pause.

DPS operates the Compassionate Use Registry of Texas (CURT) – a secure online registry of qualified physicians who can prescribe low tetrahydrocannabinol (THC) to patients with certain medical conditions through the Texas Compassionate Use Program (TCUP).

TCUP dispensing organizations are licensed by DPS and undergo regular physical inspections to ensure their compliance with state statute and administrative rules. 

Following a directive from the Texas Legislature, DPS is working to identify new companies for licenses to dispense medical cannabis through the program. Earlier this year, DPS announced that a dozen companies have received conditional licenses, meaning they will undergo further scrutiny from DPS to determine whether they can cultivate, distribute, manufacture, or sell cannabis products.

Now, DPS is conducting due diligence on the operators who want to be part of the Texas program.

Based on the history of some of these companies in other states, there is much for DPS to scrutinize.

“Financial suitability” is one of the metrics in the DPS due diligence process, which is likely to put scrutiny on companies that have been in costly disputes with the federal government over how much they owe in taxes. The IRS says that major multistate cannabis operators owe $1.6 billion in unpaid taxes, according to published reports.

Florida-based Trulieve, which has been conditionally approved for TCUP by DPS, owes more than $600 million. Illinois-based Verano Holding Corp., which has been conditionally approved for TCUP by DPS, owes $378 million, according to a June article from MJBiz Daily. Verano was initially awarded a license in Alabama’s program, receiving the top score from the Alabama Medical Cannabis Commission, but the Commission later voided the license.

Earlier this month, US Sen. James Lankford (R-OK) and House Budget Chairman Jodey Arrington (R-TX) sent a letter to Treasury Secretary Scott Bessent raising questions about the tax implications of the Department of Justice’s (DOJ) recent decision to reschedule marijuana from Schedule I to Schedule III, and seeking clarity on how the U.S. Treasury Department intends to handle potential retroactive tax relief for marijuana businesses. 

Questions about the financial suitability of other companies also linger. For example, Illinois-based PharmaCann, which has been conditionally approved by DPS, is in severe financial distress. The company has closed cultivation sites in three different states over the past year, laying off hundreds of workers. The company has also defaulted on millions of dollars in rent payments in multiple states, pointing to questions about whether it is financially healthy enough to serve patients in Texas.

PharmaCann’s Texas entity was defunct when DPS awarded it a conditional license.

Dilatso LLC, an affiliate of Arizona-based Nature’s Medicine, has also faced fiscal challenges likely to get a long look from DPS. According to Bloomberg Law, Jigarkumar Patel, the CEO of Nature’s Medicine, “allegedly solicited an individual to invest more than $25 million in shares of the cannabis company, $20 million of which the investor lost due to fraudulent misrepresentations and omissions, according to a shareholder complaint.” 

As DPS reviews these companies and others, it will also get a chance to probe a series of regulatory problems the operators have encountered. Among those regulatory issues:

The Cannabis Control Commission in Massachusetts leveled a $350,000 fine against Trulieve for violating several safety standards. The fine came after a 27-year-old employee died in a Trulieve facility in the state. Trulieve has since left the Massachusetts market.

Verano has had to pay multiple fines in New Jersey. For example, the New Jersey Cannabis Regulatory Commission fined Verano $90,000 for prioritizing other customers over those who had obtained medical access to cannabis products.

Jason Vedadi co-founded Harvest Health & Recreation and was a top executive there when two affiliates of the company relinquished their licenses to avoid a prolonged legal battle with Pennsylvania regulators, according to the Philadelphia Inquirer. Vedadi is now CEO of Story Cannabis, which applied for a Texas license.

Fortunately, DPS is closely scrutinizing TCUP applicants before granting full licenses to participate in Texas’ program.

According to a news release that DPS issued in April, it is reviewing “disciplinary actions, financial suitability, litigation history and any other information as required by the department.”