Following the passage of Arizona’s adult-use cannabis legalization initiative on Election Day, the state’s industry stakeholders are preparing for a spring rollout of the state’s recreational market, which must launch by April under state law.
The state’s 130 licensed medical cannabis operators are all eligible for adult-use licenses, and the Arizona Department of Health Services, which currently oversees the medical cannabis market and will be responsible for regulating the adult-use industry, will issue an additional 26 licenses to social equity applicants.
“The initiative was written in a really good way to require the government to roll it out in an expedited manner,” Demitri Downing, executive director of the Marijuana Industry Trade Association (MITA), tells Cannabis Business Times and Cannabis Dispensary. “Between January and March, the state will be designing the program, and they’re required to have everything up and running and rolled out by April 5. … Arizona will be full adult-use by 4/20 of next year.”
Arizona’s Voter Protection Act bars the state legislature from changing the voter-approved initiative, Downing adds, and existing medical cannabis businesses will be able to transition to adult-use operations in their current facilities.
While local municipalities do have the right to ban adult-use sales within their jurisdictions, Downing says local moratoriums only apply to the 26 new licenses earmarked for social equity applicants.
“It’s kind of a silly notion because there are only going to be 26 more out there to be placed in different jurisdictions,” he says. “Any city that does ban adult-use dispensaries—it’s kind of a meaningless, symbolic act at best.”
The initiative not only legalizes the sale, possession and consumption of cannabis for adult use, adds Pankaj Talwar, CEO of medical cannabis operator Copperstate Farms, but it also includes an expungement provision that will clear the past convictions of anyone who was penalized for cannabis-related crimes that are legal under the new law.
“It will free up the police to focus on dangerous and violent crimes because the possession and consumption [of cannabis] is no longer going to be illegal,” Talwar says. “[Cannabis-related crimes] will now be removed from the criminal records of those individuals, and maybe it will give them lease to find access to jobs and more financial security.”
The initiative also levies a 5.6% sales tax and a 16% excise tax on adult-use cannabis to fund state agencies for expenses related to implementing the program, and any remaining funds will be divided among community college districts, police and fire departments, the Highway User Fund and a newly created Justice Investment Fund, which would help support grants and programs related to public health, expungement, nonprofit services and social equity efforts.
“This tax is going to be really beneficial to the broader Arizona community,” Talwar says. “It’s going to fund community colleges, expand public health services and … help improve Arizona’s infrastructure. … Because the tax that’s being applied is at a far less onerous level than in a state like California—where, in some cases, the taxes are 30% to 40% of the final cost—[Arizona’s market is actually] competing with the black market.”
Ensuring a Successful Transition
Downing expects the Arizona Department of Health Services to issue well-thought-out requirements for the state’s adult-use cannabis program, and he advises medical cannabis operators making the switch to the broader market, as well as new social equity applicants, to follow the regulations closely.
“[Businesses should] stay in close contact with the regulators so that they understand the exact provisions that they need to follow to make the transition,” he says. “There’s no reason why the state isn’t going to be a strong partner in transitioning the medical program into a dual medical and adult-use program.”
Copperstate Farms Managing Director Fife Symington says his company was optimistic that adult-use legalization would pass Nov. 3, and the team started planning the transition to recreational sales in January by raising capital and expanding cultivation operations to its entire 40-acre greenhouse facility in Snowflake.
“We were really only farming about half of it,” Symington says. “We just recently finished a state-of-the-art retrofit, so we’re essentially doubling our capacity out of Snowflake to meet what we anticipate will be a big surge in demand once recreational use kicks in in April. We’ve also added a lot of automated processing equipment and we’re basically just preparing ourselves to deal with more volume, ramping up from an employee standpoint, bringing on all the people we’ll need to farm the rest of the acreage and process all the crops that we’ll be growing in the greenhouses.”
The company plans to renovate and expand its cultivation facility again in 2021, Talwar adds, to ensure it can meet adult-use demand.
In addition, Copperstate Farms currently operates two medical cannabis dispensaries in the Phoenix area under the Sol Flower brand, which launched in August 2019. The company’s board and management team launched a strategy earlier this year to expand its retail footprint to prepare for adult-use legalization, and part of that strategy—the acquisition of two former Level Up dispensaries from MedMen—was finalized last week when the deal closed on Nov. 4.
Now, Copperstate Farms plans to renovate one of the former Level Up locations, which is situated near the Phoenix airport, into a 5,000-square-foot flagship store for its Sol Flower brand.
“We’re continuing our acquisitions, targeting and looking at other optimal partners that we want to acquire over the next six to 10 months to further consummate that strategy,” Symington says.
The company also plans to refine its branding as it transitions to adult-use sales in order to attract new customers who may not be as familiar with cannabis as Arizona’s medical cannabis patients, Talwar adds.
“Whether it’s through our Good Things Coming edibles brand, our Copperstate cartridges or the launch of our new concentrate brand, we really want to dial up our new branding and marketing efforts so that we can appeal to not just the cannabis connoisseur, which is what the medical market is, … [but also] to the cannabis-curious,” he says
The adult-use licensing process for both the existing medical cannabis operators, as well as the new social equity applicants, will be laid out in rules that will be established by the Arizona Department of Health Services by the April deadline, Symington says.
“I think DHS has really done a good job setting up a regulatory framework [for the medical cannabis program], and it should be a fairly easy transition,” he says.
Arizona’s medical cannabis program will provide the foundation for the adult-use program, adds Copperstate Farms General Counsel Ryan Hurley, which will result in a speedy adult-use rollout.
“The law was drafted so that we could try to make a quick transition, so we can work on getting rid of the black market as soon as possible,” Hurley says. “We should be able to launch adult-use sales at existing medical cannabis dispensaries no later than early summer 2021—the April, May, June timeframe, we should start seeing adult-use sales. That would be one of the fastest rollouts of any program in the nation, and that was certainly by design. I think one of the reasons that’s possible is because we have a well-regulated medical program here, and it’s going to be the same regulators that are regulating the [adult-use] program.”
Hurley anticipates that Arizona’s adult-use cannabis regulations will be largely similar to the rules that govern the medical program, although he says the Department of Health Services likely will limit the dosage of adult-use edible products, as well as implement advertising restrictions to prevent underage consumption.
“In addition, I would say how the Department of Health Services treats the new social equity licenses will be really interesting to watch,” Hurley says. “That’s very new ground here in Arizona. We don’t have anything like that that I know of, so how that rolls out and what those rules look like should be very interesting.”
Competitive Advantages in a New Market
The Copperstate Farms team is optimistic that the company’s 40-acre greenhouse will provide high-quality, sun-grown cannabis at scale at a low cost for consumers, which will allow Copperstate to become what Talwar calls “the Trader Joe’s of marijuana.”
Copperstate Farms currently cultivates nearly 60 different cannabis varieties, which Symington says offers a wide variety of products for patients—and soon, adult-use consumers—to choose from.
Vertical integration allows the company to control product quality from seed to sale, and Talwar says its retail experience is second to none in Arizona’s medical cannabis market.
“We know how to operate an extremely efficient transaction time with high degrees of customer service,” he says.
The Copperstate Farms team has also learned many lessons from Arizona’s medical cannabis market that they hope will serve them well as the company transitions to serving a broader customer base.
“Because we were a medical market, the quality we did was paramount,” Talwar says. “We thought of it very medicinally. These are patients who have all of the acceptable conditions, which allow them to get a patient card, so [we ensure] that what we grow is free of all pesticides and chemicals, and … we did a rigorous amount of testing, above and beyond what’s required, because we want to give information to our patients.”
The company leverages testing to understand which cannabinoids are present in each of its products, Talwar adds, which helps patients make educated decisions on which products might work best for them.
“We treated this in a very pharmaceutical lens, and that will serve us well because it’s allowing us to roll into this new regulatory environment that Arizona’s requiring, and it will put us ahead of some of our competitors who might have a less rigorous approach than we’ve taken,” Talwar says.
The Dawn of a New Era
Ultimately, Hurley anticipates a frequent doubling of cannabis sales once Arizona’s adult-use market is in full swing, and he says sales will only continue to increase once tourism returns to the state after the COVID-19 pandemic dies down.
“We won’t see that effect for a little while until COVID is under control, but Arizona gets a ton of tourism each year for a lot of different events, so we think that will be a big market,” Hurley says. “I think that’s something to watch, and Arizona will be one of the bigger legal marijuana markets out there.”
The Copperstate Farms team is also looking forward to an end to the War on Drugs in Arizona, which has long classified the possession of any amount of cannabis as a felony.
“One of the reasons I got involved in this and have been working on it for 10 years is that locking people in jail for using marijuana is a counterproductive policy, and prohibition has failed us—it’s time to let it go,” Hurley says. “I’m excited that people will no longer be going to jail, and I’m really excited about the expungement provision to allow people to clear their records, which is something entirely new in Arizona, as well.”
Talwar adds, “We really are so excited that we have recreational use in Arizona now, and I think Arizona has a very bright future ahead of it.”