Health Department Under-Reports Medical Cannabis Sales

Who's growing and selling the most and where? SFR obtains financial data for the first time

New Mexico’s Medical Cannabis Program is growing at an even more rapid pace than reported by the public health agency tasked with regulating the industry.

Financial reports from growers that were made public for the first time this spring show total receipts during the first three months of 2016 topped $10.2 million—more than a quarter-million dollars above the $9.9 million claimed by the New Mexico Health Department on May 26. That figure does not include revenue from the 12 new producers who are still in various stages of setting up their grow sites and dispensaries.

Patient registrations, which reportedly have been taking up to 90 days to process, are also on the rise. The number of people legally permitted to use cannabis for medical relief in the state has almost doubled since February 2015, from 13,000 to more than 25,000 today.

SFR pored over individual profit-and-loss statements for 22 of the 23 licensed producers operating in New Mexico. (Grass Roots in Albuquerque did not file a quarterly report.)  After crunching the numbers, we built this online database.

Tracking the cannabis growers' financial and production results is a big deal and something that wasn't possible before February when the agency amended its confidentiality rules, which had shielded information since the inception of the program. The rule change came after a public hearing and a lengthy legal battle with open government advocates, including this journalist.

An analysis of the producers’ financial paperwork shows the health department miscalculated first-quarter sales (or total receipts) by $256,112. SFR questioned the department’s number after determining Fruit of the Earth Organic’s $246,545 gross profit could not have been generated from $7,068 in sales listed on the group's financial summary sheet. By any accounting process, that just didn’t add up.

A spokesman for the health department says staff used the numbers provided by producers to add up the Q1 sales total, but It appears the regulators didn't double-check the numbers on Fruit of the Earth's cover sheet against the grower's underlying profit and loss statement before making the statewide 2016 First Quarter Report Summary public.

Justine Freeman, the deputy chief of staff at the State Auditor's Office says the health department needs to develop a method to catch errors and ensure the accuracy of their accounting before making reports public.

"Sound financial reporting is key to the public's understanding of how the medical cannabis program is working," Freeman tells SFR.

Top Sellers

Ultra Health's Duke Rodriguez is among those who have been pushing Health Department Secretary-designate Lynn Gallagher to remove the grower's plant limits. He tells SFR that if lawmakers or voters approve cannabis for social use by adults, he predicts annual dispensary revenues could top $525 million in the first year.

That estimate is based on close to $1 billion in sales in Colorado last year, adjusted for New Mexico's smaller population and lower income rates.

Rodriguez, who made a presentation to Legislative Finance Committee Director David Abbey and staff analyst Eric Chenier on Jan. 4, says if the state taxed legal sales, it would generate between $78 million and $131 million in new tax revenue depending on the tax rate adopted by lawmakers.

The new tax revenue, Rodriguez suggests, could be used to prop up the state's Medicaid fund and that money would then make the state eligible for close to another $325 million in federal matching funds.

"Money spent on health care would have a huge impact on the state's economy," says Rodriguez. "It would generate 15,000 new jobs and fill the equivalent of 125 football fields in office space.That would benefit not only hospitals, but real estate agents, landlords and bankers."

Like Freeman at the auditor's office, Rodriguez says he's concerned about the department's first-quarter reporting error.

"If you found the error during your simple macro analysis, you can only imagine what other errors may have been easily missed," says Rodriguez. "These are huge numbers which add up quickly, so it is easy to get the reporting materially off."

The first-quarter results, while not a trend, do provide important market insights. Production reports provided by the health department since 2013 have indicated that not all growers are producing large harvests. Indeed, SFR's analysis shows that almost 60 percent of the quarter's 1.2 ton yield was harvested by five growers: R Greenleaf Organics, The Verdes Foundation, Compassionate Distributors, Minerva Canna Group and Medzen.

Percentage of Total Crop Yield

Willie Ford's Reynold Greenleaf Associates, which manages R Greenleaf and Medzen dispensaries in Albuquerque, produced 28 percent of the total yield. Eric and Rachel Speegle's Verdes Foundation, which topped the sales charts with over $1.1 million in Q1, generated close to 10 percent of the harvest between January and March.

Statewide, producers reported a total net gain of $986,105 between January and March on gross profits of just over $6 million. Red Barn, a producer in Grants, did not report its gross profit or net income or loss. On average, producers netted almost $47,000. Mother Earth Herbs reported breaking even. Seven other producers claim they are losing money and reported an average loss of $41,045. R. Greenleaf reported the quarter's largest net income loss: $82,382.

Santa Fe growers New Mexicann Natural Medicine, Sacred Gardens, Ultra Health and Fruit of the Earth Organics generated $2.4 million in total sales during the quarter and provided patients almost 350 pounds of cannabis. The Santa Fe nonprofits also paid $203,455 in gross receipts taxes during the quarter. Overall, the tax department collected $768,605 in taxes from the growers in Q1.

New MexiCann's $656,000 gross profit generated a quarterly income gain of $61,000, while Zeke Shortes' Sacred Garden, which has the third highest overall cannabis staff payroll, reported a net income loss of $78,142 on its $492,536 gross profit. Lyra Barron's Fruit of the Earth Organics, with a net income gain of $116,332, bested all the other Santa Fe-based producers.

Producers, who are still working out bugs using the health department's new "seed to sale" tracking software, which requires them to enter product test results for plant potency and microbiological contaminants, reported spending nearly $80,000 on laboratory testing services in Q1. Two producers did not report their test numbers, and Vivian Moore's Mother Earth Herbs in Las Cruces is exempt from testing since her dispensary is located south of US Border Patrol checkpoints. The amount producers spend on testing is expected to increase in the second quarter, as testing is now mandatory for all harvest batches and cannabis-derived products.

Editor's note: We've made it easy for you to look at individual producers' Q1 results by posting each group's Q1 datacard online. Check out our analysis, or use Silk's "explore" button to do your own analysis and build your own charts and tables.

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