Growing Pains

How money flows from a nonprofit cannabis producer in Santa Fe to a for-profit Arizona company

When Vincent Contrastino first started buying marijuana on the streets and getting stoned in Queens, New York, in the early 1970s, it was just for fun. As a teenager, he never expected that he’d later need cannabis to curb the noxious side effects of a potent three-drug cocktail for his daily battle against AIDS.

The negative side effects of the prescription are a constant source of irritation, but Contrastino says he's more irriated by the stress of five years that he served on the board of directors for a nonprofit cannabis producer in Santa Fe.

Nearly a year after he was booted from his volunteer post at New Mexico Top Organics, Contrastino, 58, and others are expressing concerns about a trend for licensed producers to contract with health management service firms intent on snagging a slice of the state's emerging cannabis industry.

"The original grassroots market has become too lucrative for moneyed interests to ignore," says Contrastino.

New Mexico cannabis producers are required to operate as nonprofits, but the model is more of a myth than a reality.

An SFR investigation shows that for at least one major cannabis producer, the nonprofit distinction is now in name only, as an out-of-state company has moved in to take over the business here—effectively circumventing New Mexico's competitive process to pick new producers.

While some producers have learned to navigate without help from outside firms, others are still experiencing growing pains. They say the agreements present the perfect solution to keep up with market demand and to prepare for what they hope is the eventuality of legalized cannabis here.

The scenario is already playing out. On Sept. 11, 2014, about four years after it earned one of the first nonprofit producer's license in the state and set up shop in Santa Fe, New Mexico Top Organics founders—Peter Ferrara, Mark Baker, and their wives, Christina Ferrara and Annie Campbell—signed over 100 percent of the nonprofit dispensary's revenue to Ultra Health, LLC, a for-profit management firm working in three states. At the helm of the Arizona-based business is Duke Rod­riguez, a former chief financial officer for Lovelace Medical Center, who helped transition the hospital from a nonprofit facility to a for-profit organization and who also served as Human Services Department cabinet secretary under then-Gov. Gary Johnson.

Dispensary and cultivation management contracts provided to SFR by the New Mexico Department of Health show that the parties agreed to a 30-year deal granting Ultra Health use of the nonprofit's license to staff, manage and operate dispensaries around the state in exchange for Ultra Health returning up to $12,500 per calendar year to the nonprofit entity for its "exclusive use and/or charitable purposes."

Ultra Health wouldn't say how the money was used last year, which individuals make that decision, or whether any other sums changed hands.

Rodriguez maintains the terms of the deal are "consistent with other models being used around the country." The Ferrara and Baker families declined to be interviewed for this story, but Rodriguez says they are not alone in the decision to leave the industry.

"I've seen it in large numbers of individuals gladly walking away because it didn't simply meet their lifestyle, whether it was personal, professional, economic, or whatever else. I respect boards that transitioned with an eye toward a better solution to take care of their patients," he says.

But Contrastino says he thinks the New Mexico Top Organics shared management arrangement "was just a way to sell the company."

"When they determined they couldn't sell their nonprofit producer's license, they figured another way to get out," says Contrastino. "Peter [Ferrara] told me a management company was going to come in, but it was none of my business."

When Contrastino pressed to see a copy of the agreements, he claims he was completely shut out.

"I just didn't like the idea of a big grow facility, and I was concerned about an infection wiping out the entire crop. I asked them to come back with more information but never saw any of the details," he says.

After the contracts were inked, the Ferarras and Bakers voted to remove themselves and Contrastino from the board of directors. Leonard Salgado, Ultra Health operations manager and a longtime business colleague of Rodriguez, and four others replaced them. Contrastino, who filled the state requirement that a patient serve on the board, says now, "I was just a piece put in place so they could get their license. My role on the board was just a façade."

Today, he is relieved that he's no longer involved.

"It really was driving me crazy," says Contrastino. "Whatever they were doing wasn't supposed to be happening. I contacted the health department, but they just let it happen."

Contrastino says he's tired of hearing cannabis producers grumble about investments in "their businesses."

"No one can own a nonprofit," he says. "These guys were already making money selling the medication, earning salaries, and getting paid interest on the loans they made to the nonprofit."

Larry Love, the host of the Medical Marijuana Radio Show podcast, agrees with Contrastino. He says that he doesn't think most management deals are good for patients. Love favors the program's patient-centric focus, "because it gives patients and health care workers a say in how they operate."

"The health department isn't doing its job regulating these companies, and some of them have run amuck," Love tells SFR. "Many other people waited five or six years for the opportunity to put in an application and go through the official vetting process and be chosen on their merits."

Sales rocketed past
$42 million
for 21 months between
Jan. 1, 2014, and
Oct. 31, 2015.
Harvest yields topped
4.2 tons in that same time period, and the number of active patients jumped from 8,200
to almost 23,000.

Love argues that if small dispensaries like New Mexico Top Organics are undercapitalized, their licenses should revert to the health department and be reassigned to nonprofits willing to operate in underserved areas. The department received more than 80 applications for new licenses and only granted 12 of them last year. Some of the rejected proposals were for rural areas that still have few or no options for legal cannabis.

But Rodriguez says his company has invested millions to expand Ultra Health's distribution network, revitalized an abandoned greenhouse in Bernalillo, hired dozens of new employees and opened four new dispensaries.

He tells SFR it was "a business decision" not to compete for one of the new licenses awarded last year.

Business appears to be booming. Late last month, Ultra Health opened its fifth state location in the back of a self-described hippie smoke shop in Albuquerque's Nob Hill neighborhood. In February, the company announced plans to construct two medical cannabis facilities and a cultivation and production facility for the Paiute Tribe in Las Vegas, Nev. The firm says it also hopes to announce deals with New Mexico tribes in the future and just last week sent out a press release about a research project in partnership with an Israeli company.

Flawed Concept

Even though the state health department won't talk about its criteria for approving management deals like the one that turned New Mexico Top Organics into Ultra Health, plenty of critics will.

Steve Erickson, a retired certified public accountant who help found one of the state's largest audit firms, claims some producers establish for-profit management entities, essentially "to get around the law."

Erickson contends that nonprofit officers and directors could have a conflict of interest in any transaction in which the director personally profits or has a personal interest.

"The question here is the fact that the nonprofits are being controlled by individuals that have a conflict of interest. In my opinion, all the board members have a fiduciary responsibility to the organization, and as such all transactions should be conducted at arm's length, and conflicts of interests should be mitigated," says Erickson. "The only reason there is a business in the first place is because there is a law that allows nonprofit producers to grow and dispense."

Before her sudden death in February, Health Department Secretary Retta Ward repeatedly declined to discuss the department's rationale for the nonprofit requirement. But drug policy advocates who lobbied for the program remember the nonprofit model was suggested after California Gov. Jerry Brown, who was then the state's attorney general, released guidelines there to rein in scores of for-profit dispensaries that had cropped up and become neighborhood nuisances.

Dr. Alfredo Vigil, who was Gov. Bill Richardson's health secretary at the time New Mexico established its program rules, says they were developed by lawyers in the governor's office and by contract attorneys who wanted the program limited to medical cannabis, with a focus on registered patients.

"My speculation is that it was a way to keep it a community-based activity. Once you allow it to be for-profit, then you get into doing this for money, and that begins to break up the focus on humanitarian efforts," Vigil tells SFR.

Despite that focus, industry stakeholders say the nonprofit model comes with flaws, because it limits access to capital and bank loans, which are needed for expansion and product innovation.

"It's the worst of both worlds," says Albuquerque attorney Colin Hunter. "There's all kinds of contradictions in how these things work."

Hunter says he wants New Mexico to follow Colorado, which he says has "a good example of a market-driven model, since it lowers cannabis prices and improves quality for patients."

But Colorado laws allow legal recreational use of cannabis for all adults. That's not the case in New Mexico, at least not yet.

William Ford, who founded both the nonprofit producer R. Greenleaf Organics and the for-profit consulting firm Reynolds Greenleaf Associates, says it appears some people are biding their time until cannabis is fully legalized.

While Ford defends his management of several other nonprofits as an efficiency, he says he believes Ultra Health's management agreement with New Mexico Top Organics "is for all intents and purposes a de facto for-profit license situation" and that "the 100 percent revenue requirement should have been rejected by the state."

"It's despicable when management companies are structured to move large amounts of cash out of a nonprofit," says Ford, adding, "I think they're predatory, in a sense. I think Ultra Health and others are coming into New Mexico to gather some real estate in this industry in preparation for legalization rather than focusing on patients."

Ford claims he waited to incorporate his consulting firm until he could show evidence of a beneficial relationship for multiple nonprofit groups. Today, Ford says RGA collects a 45 percent management fee from gross revenues to help run Medzen, G and G Genetics and Elemental, an edibles and cannabis-derived products firm in development.

"The nonprofits save money on salaries by splitting the management salaries and buying supplies in bulk," says Ford. "It's simply more efficient."

To avoid conflicts of interest, Ford tells SFR that he recuses himself from some board votes and has a separate chief executive officer at R. Greenleaf Organics who does all the financial negotiations for the nonprofit.

While all producers have to submit an annual audit to the health department, Ford claims those documents don't show revenues compared to expenses, costs to patients or even a flowchart of the financial structure. But he says they should.

"They should show that an organization is operating as a nonprofit, and if it doesn't, your license should be in question," he says.

Financial Barriers

As the industry matures, Ultra Health's Rodriguez says he expects that the nonprofits will be legally allowed to convert to for-profit entities. His prediction may happen sooner than later. In March of 2015, members of the Cannabis Producers of New Mexico sued the health department to amend the rules and allow them to reorganize.

"The nonprofit rule is a barrier to raising the capital necessary to form or expand a medical cannabis producer business," says the group's attorney, Jason Marks.

Marks points to a report prepared by University of New Mexico economist David S Dixon, which shows the department's nonprofit restriction increases costs and prices to patients by adding to the cost of capital and limiting the types of entities that could otherwise compete in the marketplace.

He also argues that regulators exceeded their statutory authority when they made the rule, because lawmakers didn't specifically include the nonprofit requirement in their legislation.

Jennifer Hall, a private attorney at Miller Stratvert, who represents the health department in the case, contends the 2007 law "never intended to create a free market for medical cannabis."

Documents provided to SFR show producers tried to negotiate a face-to-face deal with Health Secretary Ward last summer to settle the issue.

First, Ward signaled she would lift the nonprofit requirement if the group agreed to drop its lawsuit, but by the end of August, Marks was telling producers that the health department appeared "overly interested in the views of the anti-MJ drug warriors" and seemed to "disregard pro-medicine views of producers, patients, and advocates."

Hall fired back that the state intends to "keep the focus of the program on patients and their medical needs" and "limit profiteering by producers that could affect the cost and accessibility of medical cannabis to patients."

With negotiations at a standstill, the lawsuit—which also argues for eliminating a 70 percent THC cap in cannabis-derived products, the withdrawal of certain plant testing requirements and other patient licensing issues—is pending in state district court.

Len Goodman, who founded New MexiCann Natural Medicine in 2009 in Santa Fe, says he hopes the producers prevail. A one-time reorganization, he says, would "go a long way to alleviate" banking and credit obstacles.

"With the passage of time and the maturity of the Medical Cannabis Program, many licensed producers have grown to a scale that makes this scenario unmanageable," Goodman says. "These are no longer small mom-and-pop business operations, and yet, from a financing perspective, we must operate as just that."

Profitable Empires

Ultra Health might not be done expanding its market share in the state. Before the company closed its deal with New Mexico Top Organics, its executives made similar management proposals to several other New Mexico producers, including Sacred Garden in Santa Fe.

"We didn't like their approach," says co-founder Zeke Shortes.

Sacred Garden also considered setting up a management company with Toronto-based Nutritional High's chief executive officer, David Posner, in 2014. That deal would have provided a $1.7 million capital infusion to expand Sacred Gardens' facilities, but it was called off after a local investor stepped up with a loan.

"It was a much better fit for Sacred Garden. Unfortunately, it is still much more expensive than traditional funding from an FDIC-insured bank," Shortes says.

Shortes, who became president of the Cannabis Producers of New Mexico this year, is upset that regulators require New Mexico producers to operate as nonprofits in the first place. The Internal Revenue Service doesn't recognize that classification because of its view that the plant is a prohibited drug, and thus the cannabis nonprofits are not subject to the same kind of public reports, including public access to tax reports called 990s, that can instill confidence in how well an organization is performing.

Shortes refutes contentions that he's "building a profitable empire" and welcomes a discussion with patients, "once my wife and I stop supporting the business with our own retirement savings."

He says despite the financial obstacles, he hasn't raised prices at Sacred Garden once in six years.

"Let's stop complaining about this charade and work to get state and federal government on the same page, so prices can drop and patients can save more money," Shortes adds.

Not all producers are frustrated with the nonprofit model.

Fruit of the Earth Organics founders Lyra and Juan Barron run a debt-free family operation and insist they're not interested in shared management companies or outside capital.

Lyra says the nonprofit requirement keeps the focus on patient service rather than profit goals, "which is really a greed factor."

"We have a totally different model than everybody else. I want to maintain the integrity of what we're doing and maintain a sustainable harvest," she says. "We grow everything outdoors. It's completely organic and sustainable, so we don't need to spend millions of dollars building out big warehouses. Having an obscene carbon footprint is not where our direction lies at all."

While Barron says that Ultra Health never approached Fruit of the Earth Organics, she claims that other groups have contacted her with offers to infuse cash into the company.

"We are, frankly, not interested," she says. "We just grow steadily with our own capital."

The for-profit management approach and flow of "outside money" has her concerned.

"It's like a gold rush, and rather disheartening and disappointing, but then that's the trend everywhere," she says. "What a crazy world, where helping an epidemic of people trying to recover from sicknesses predominantly caused by environmental and food toxicity is used to create another profit industry."

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