Thursday, May 24, 2018
Politics

How profitable will medical-marijuana shops be? Very, says confidential pitch for investors

TALLAHASSEE — As differences over pot shop restrictions burned a medical marijuana bill to ashes in Tallahassee, one of Florida's largest legal cannabis operators courted millions of dollars from new investors and touted a lucrative plan to open dozens of storefronts around the state.

A private equity firm's confidential pitch deck obtained by the Miami Herald shows that only days ago Surterra Florida was seeking investors to buy a $10 million minority stake while also arguing against limits on the number of retail outlets any licensed operator can open. Some potential investors were lured with projections that show Surterra grossing $138 million in sales by 2021 thanks largely to the operation of 55 retail outlets — nearly four times the cap desired by the Florida Senate.

The numbers may not be exact, as both Surterra and The Costera Group warned that neither company verified or authorized the projections. But the sensitive documents shed rare light on an industry shrouded in secrecy and show how much money is riding on how — and whether — the state regulates the number of medical marijuana retail outlets following the passage of Amendment 2.

Created May 2, The Costera Group documents show that the firm was seeking investors at a minimum buy-in of $500,000 to finance a deal for as much as 23.5 percent of Surterra Florida, the operator of one of seven cannabis cultivation and distribution teams already licensed by the state. Costera, co-founded by former Goldman Sachs partner Richard Kimball, was attempting to purchase shares being unloaded by existing minority shareholders.

New investors were told their net returns were expected to be more than eight times their initial investment thanks in part to expectations that the state will limit the number of competitors in the near future. With the number of legal patients growing along with the list of qualifying conditions, and so few companies producing marijuana medicine in Florida, the presentation states, demand is expected to outpace supply.

Some slides identified as "confidential property of Surterra Holdings" state that much of Surterra's long-term profits rely on the establishment of oil- and vapor-hawking pot shops, which are projected to serve 1,500 customers a year and gross an average of $2.2 million per store by 2021. Millions more are expected to come from wholesaling product to other licensed cultivators unable to meet the demands of their customer base.

The documents include financial projections down to the dollar, and production estimates down to the gram. Kimball and Surterra's chief development officer were together at a medical marijuana investor convention in Austin, Texas, early this month talking to potential investors.

As they made their pitch in Texas, Florida lawmakers were beginning to haggle over whether to place caps on operators' retail outlets. The Florida Senate ultimately advocated for 15 retail outlets per license-holder. The House ended on 100, leading to the death of a medical marijuana bill and now talk of a potential special session.

"They're continuing to protect an oligopoly, which makes no sense," Gerald Greenspoon, co-founder of the law firm Greenspoon Marder and chairman of the nonprofit medical cannabis advocacy group OSCR, said of the House's position on retail stores. "Greed has taken over. It's not right."

But Surterra CEO Jake Bergmann says the debate over retail outlets is misplaced. He acknowledged that Surterra's own projections show retail "wellness centers" reaping between $1.5 million and $2.5 million annually, but said his company believes door-to-door deliveries will continue to be a large portion of the business and actually has higher profit margins on wholesale deals due to overhead and steep federal taxes on marijuana retail sales.

"I'm indifferent as to whether they're our retail stores or someone else's," he said, adding: "I really do view the retail caps discussion as a red herring. To be truthful, retail is an old and dying business model."

Initially, when contacted by a reporter Friday, Bergmann said Surterra had only held preliminary discussions with The Costera Group and distanced his company from representations in the documents, some of which suggest that Surterra includes recreational users among its clients and intends to target "mommy bloggers" as customers. On Monday, after looking further into the issue, he said it appeared a senior executive had provided Surterra figures directly to the firm, which then modified some details and distributed the documents without approval.

"Even though it does have our branding, what you're looking at reflects the Costera investment thesis," he said, stressing that the company has no interest in recreational products and believes in open competition. "They have their own assumptions that drive the numbers."

Reached Friday morning, Kimball declined to answer questions about the documents. He told a reporter that publishing details would kill his deal. The next day, Costera Group attorney Charles Feldmann sent an email cautioning that his office had not distributed any final prospectus on a pending purchase of Surterra shares.

"I can emphatically state that it is impossible to determine if the details contained (in the leaked pitch deck) are accurate," he wrote.

Still, for an industry that goes to lengths to keep its internal data secret, the financial projections distributed to investors provide a unique glimpse into how much money is riding on the implementation of the expanded program contemplated by the constitutional amendment that passed in November. Florida lawmakers were expected to pass a regulating bill before ending their annual business earlier this month, but now they'll have to convene a special session if they want to shape the program themselves.

House Speaker Richard Corcoran has called for a special session. Senate President Joe Negron has said he's considering one. Barring a special session, creating the parameters of a new, expanded system will be left up to the Florida Department of Health.

Bergmann says he'll continue to advocate for open competition and policies that benefit patients' access. He believes his company will profit with or without competition due to its superior products and business structure.

"Let free market reign," he said.

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