Morris Denton, CEO of Texas Original Compassionate Cultivation, has been leading his company and state to the promised land of wide-spread medical cannabis acceptance since the beginning of its tentative experiment with a legal industry, which started with the Texas Compassionate Use Act in 2015 and culminated with the awarding in 2017 of three vertical licenses, one of which was won by Manchaca-based Texas Original. Legally required to operate vertically from seed to sale, Texas Original reaches into every corner of the vast state to service patients. As Denton recently shared in an update to CBE’s original company profile in 2018, as much as things have changed for the better both for the company, which continues to expand, and for Texas, which adds new patients every month, some things remain frustratingly the same in a state most people thought would be much farther along in realizing its immense potential as a legal cannabis powerhouse. It was always going to be a long haul as far as Denton was concerned, but the plan from the get-go was to win and lead. “It was to pursue a license to compete in the Compassionate Use program application process, period,” he said of the company’s genesis. “That was the whole reason for creating the business at that point in time, to pursue an application license that we would hopefully win, and we did.”
But was there some reason why he wanted be a first mover in the cannabis industry? “I think that when you look at the evolution of cannabis markets throughout the U.S., each state obviously is its own kind of unique animal,” he said. “Those that are able to get in and establish a leadership position have in my opinion a disproportionate opportunity to drive the industry forward based on how they want to see that industry evolve. Also, once you get in and you get an established leadership position, it becomes difficult to get unentrenched, if that makes sense. You know the old Martin Luther King, Jr. quote – and he was talking about the human race – but he said, for the man that falls behind in a race must run faster than the person ahead of him or remain forever behind. And so, if you can get in and get a solid leadership position with a significant footprint and significant resources, you become exceptionally difficult to be caught from behind. And leadership basically means everything in high-growth markets and especially the cannabis industry.
“So yes, we wanted to get in, and we wanted to be one of the early guys,” he added. “We knew that it represented not just a great opportunity, but it was also going to require a tremendous amount of work and commitment because of the nature of what we anticipated was going to be a fairly long road within the Texas legislative process. Because our legislature only meets every other year and this is an industry that requires legislative authority to expand, we knew that it was going to be a bit of a hard slog or a bit of time. Obviously, we were hoping that it would have moved a little bit quicker than it actually has, but I think we’re teed-up for some interesting expansion opportunities in the upcoming session, which begins in January.”
Are there particular bills or initiatives he would like to see passed? “It’s less about bills and more about what we want to see as an outcome,” explained Denton. “We’re focused on results, and we understand and appreciate that the only bills that are going to have an opportunity for significant impact – at least if the Texas Legislative map retains its same or similar color, meaning it’s more of a red state than a blue state – are ones that are authored by a Republican legislator. We know that the Democrats are very much in support of what we’re trying to do, and that it’s Republicans that we need to win over. Even more crucially than that, it’s really just about the lieutenant governor. We’ve got every Republican legislator, by and large, supportive of a medical program in the state, and so we focus our efforts on the Republican side. If we can get a Republican that can offer a bill and see it through, that’s what we’re going to focus our time on.”
Denton is not kidding about increasing Republican support. At about the same time as our call took place, Texas Agriculture Commissioner Sid Miller, not exactly a lefty, penned an editorial in support of expanding the Compassionate Use program, writing, in part, “As I look back, I believe that cannabis prohibition came from a place of fear, not from medical science or the analysis of social harm. Sadly, the roots of this came from a history of racism, classism, and a large central government with an authoritarian desire to control others. It is as anti-American in its origins as could be imaginable.”
Denton wants to turn opinions like that into specific results. “The outcomes that we’re looking for are number one, to remove the cap on the allowable amount of THC,” he said. “Currently, it’s limited to one percent per, which is just an arbitrary piece of legislation. I don’t know why they put it in there, but I think it was intended to prevent people from being able to get access to extraordinarily potent amounts of THC. In other words, to govern the amount that an individual could consume on any given day. But in reality, it does nothing to address the fact that we still have patients who are receiving prescriptions from doctors because they have severe PTSD or because they have severe epilepsy, or MS, or they’re in significant pain because of cancer, and they’re being prescribed 100 milligrams of THC a day. So, the limitation basically makes them consume 99 percent of something that has no meaningful and purposeful impact on their well-being. It only creates expense for us and for the patients, and it creates unnecessary side-effects for the patient. So, number one is to remove the THC.
“Number two, he added, “is to add in chronic pain as one of the qualifying conditions. There are
30,000 plus patients or so that have been enrolled in the Compassionate Use program since 2017, and the vast majority are suffering from pain as a result of some other condition. So, even though they’re being qualified because they have MS or spasticity or cancer or PTSD, or what have you, and they’re using cannabis to treat their pain as a symptom of the other condition. We know unequivocally that chronic pain as a condition and as a symptom is very well diagnosed, and that cannabis is a very efficacious treatment for pain, and so we would like to see chronic pain being added. If it’s not chronic pain being added, then let’s allow cannabis to be used as an alternative to opioids for people suffering from chronic pain. So that’s our second outcome.
“The third is we want to be able to store inventory throughout the state where it makes sense for us as a business,” he concluded. “Right now, we’re not allowed to store inventory anywhere except for our one location in Austin. And yet, we’re required to ensure reasonable statewide access throughout the entire state. And so, when you have thousands of patients in Houston, thousands of patients in Dallas, Fort Worth and San Antonio, and yet we’re not allowed to store inventory in those metropolitan areas, that essentially means that we were making daily deliveries from our location to our pickup locations and all those markets.”
I asked Denton how that works. “Not very well,” he said. “Basically, every morning we have delivery drivers that show up at our facility in Austin, load up the car and drive to the different cities. And then they basically set up a retail location in those cities where people come in and purchase their product. The state is essentially telling us, ‘Look, you can have a retail location, but your shelves and your storage area has to be empty every morning; you can do whatever you want during the day, but at the end of the day everything’s got to go back off.’ It is absolutely ridiculous, especially in a state the size of Texas, for us to not be able to store inventory. We’ve estimated that we’re going to drive 500,000 miles on our fleet of vehicles this year. And if you look at the 62 and a half cents reimbursement rate that the IRS says you can get if you’re driving for business, that alone is $315,000. So, we’re basically spending 315 grand this year. It’s like our gas tax. In order for us to get medicine into the hands of our patient, that’s the cost of business. That is completely unnecessary. It would be so much less money if we had the ability to store inventory in major metropolitan markets like every other business in Texas has the ability to do.”
If he could run like a normal business, would that translate into picking up more patients? “Well, first of all, there’s no question that accessibility for the patients is being significantly hampered by the regulations, which make it very inefficient from a time perspective for us to be able to get the medicine into their hands,” he said. “A lot of patients will call in and be like, ‘We’ve got to wait a week because that’s the next time you’re going to be in my area?’ We should be able to say, ‘You’re in the program? Great, you can go pick it up tomorrow. Here’s our location that’s closest to you. We’ve got plenty of medicine in stock. Didn’t get there today? You can get it tomorrow.’ Instead, it’s like, ‘Well, no, we’ve got to schedule you.’ So obviously the regulations are having a negative impact on patient accessibility.”
Would a change in that regulation also translate into lower costs for patients? ‘Yes,’ said Denton, “but it’s important for you to understand that we’re not operating a profitable business right now. Because the regulations are so severe, it’s impossible to operate a profitable business. If you look at it, we’ve got 500 patients all along the U.S.-Mexico border, and if you’re driving to El Paso from Austin, it’s a nine-hour drive each way. If you’re driving up into the panhandle, it’s twelve hours. If you’re going to northeast Texas, it’s a minimum of six. So, there is no way that we can service all these patients. We’re taking it on the chin from an expense perspective because if we tried to pass on the expense to the patients, it would be out-of-control expensive for them. We’re trying to do the right thing by our patients by pricing it in a manner that we think is consistent with what’s happening in other markets, and working with the state to try to inform them on the wisdom of allowing us to store inventory and reducing some of the onerous restrictions that make it very difficult for us to operate.”
Denton added when asked that he did not know if the state calculates the per-capita spend of cannabis patients, “but I can tell you that for us it’s right around 200 bucks a month.”
Texas Original & The Four Drivers
I asked Denton about the extent to which Delta-8 products have taken hold in Texas. “Delta-8 is everywhere,” he said. “You can walk into a gas station in Texas and purchase high Delta-8 THC products; you can walk into a store and purchase Delta-8-sprayed flower for smoking. In fact, what Texas has done is they have created a recreational Delta-8 market that has no regulator and no restrictions on it.”
What did he want to see happen? “I think that the state needs to take a long, hard look at what it’s trying to do through its regulatory authorities on cannabis in total, which would include the hemp program,” said Denton. “When I see the widespread adoption and embrace by consumers of Delta-8, that’s an obvious indicator that there is tremendous demand in the state of Texas for safe product. When you don’t have a regulator paying attention to that industry because that regulator thinks that it is illegal, they’re basically hands-off. You’re enabling a caveat emptor situation that can be pretty dangerous. So, what I think needs to happen is that it needs to be regulated, and how and where it’s regulated is up to the state, but it needs to be regulated.”
I wondered how hands-on Denton is with lawmakers in terms of lobbying. “I’m very hands on,” he said. “I work with some people that help me but when it comes down to it, I’m the one that’s in the meetings with the legislators and having the conversations.
In the 2018 CBE article, Denton said his time was primarily focused on three areas: one third of his time was spent at Texas Original facilities making sure the team and employees have what they need to be successful; a third was spent in outreach to subscribers and patients to facilitate product development and patient needs with compassionate use programs; and a third was spent educating lobbyists and legislators. Has that changed much?
“It’s probably not a third, a third, a third anymore,” he said. “I would say that I’m focusing my time in a few different areas. The legislative and lobbying activities still takes up a significant amount of my time at this point, but it’s probably closer to 20 to 25 percent, which is a lot for me a lot of time. We’re in the middle of building out a new facility in Bastrop, which is where I’m coming from right now, and that’s taking up a fair amount of my time. Managing the overall business takes up a fair amount of my time, and then working with our finance team to make sure that we’re properly capitalized and we’ve got a good view on what we’re trying to do.
“We look at four strategic drivers for us as a business,” he added. “The first is creating a world-class production engine, and because we’re vertically integrated, that means we’ve got to have everything from cultivation to finished products in one location. That’s cultivation, harvesting, processing, refining, manufacturing, packaging, testing, fulfillment, distribution, delivery, and dispensing. So, we’ve got to have a big production engine that can create high quality products at scale. That’s the big driver for us. The second is that we need to have a great go-to-market gameplan and strategy. In other words, how can we get the products from that production engine into the hands of our patients in the timeliest and most cost-effective manner possible. The third is that we’ve got to have world-class resources to run those organizations. And then the fourth is that we’ve got to have capital to do it. Those are the four key drivers of our business, and that’s what we focus on, and I spend a lot of my time just tweaking and dialing in things across that spectrum. And then you add on the lobbying and legislative stuff in addition to that, and that’s kind of my job.”
That kind of encapsulated the rub of the situation, didn’t it? How does Texas Original sustain its long-term playbook and get to the promised land when the first three bullet-points he mentioned, which all sound expensive, are pulling from the fourth bullet-point?
“Well, we talk a lot in our board meetings about the proverbial promised land and what it’s going to take for us to get there, and what that might look like,’ said Denton. “And you’re right, to run a vertically integrated business in any state is expensive. To do it in a state the size of Texas, its geographic size and the population, just adds complexity and expense to that. We’ve done it by leading the industry in ensuring that where we are making bets from a capital allocation perspective, that we’re seeing the fruits of those investments. In other words, when we open up a retail location, which we did recently in Houston, do the metrics support what our assumptions are going into it, and is that allowing us to reframe how we look at how we service the Houston market? And then, can we roll that out into the other large markets and receive similar benefits?
“We’re constantly looking at where we’re allocating capital and what are the returns on those allocations, but we’re fortunate to have a group of investors that are bought into the vision and are supportive of the strategy,” he added. “And our patients, because they know and we’ve talked about it, no one is delusional in Texas that this is a quick path to the pot of gold at the end of the rainbow. This is a hard slog, but if we execute on the game plan and we get the right kind of legislative decisions at the right point, then this could be a very healthy, very sound, and very strong business.”
What does that vision look like at the end of the day, and how many patients does he think will be in the system on a regular basis? “We’ve got our internal models, but those internal models shift a little bit when we open up different types of distribution capabilities,” he said. “Because if you’re changing how you’re going to market and you can lower your expense profile, that has a dramatic impact on lowering your overall burn. Then it also depends on how big your production engine is and how much capital you’ve got into that. Probably out of the 30,000 or so [people] that have come into the program since day one, I think it’s safe to say that we service 80 to 90 percent of them. And out of the 1500 to 2000 or so new patients that come into the program each month, I think that we’re capturing 80 to 90 percent of those as well. So, we are a very active and engaged company in the Texas market, and we know that the only way we can get this market to expand is by turning the patients that come into the program into success stories. Because if the legislature knows, number one, that we’re taking care of the industry, and we’re doing a good job without any negative headlines, and we’re following the rules as laid out – which we do – then they’re looking at us and they’re saying, ‘Okay, those guys are doing it the right way.’ Then, if we have patients that are receiving significant benefit, that their lives are being transformed because of medical cannabis, now you’ve got a real business in a real industry that’s serving a good purpose in the state. That’s how you get the legislature to say yes to things. That’s exactly how you do it.
“Our M.O. from day one has been to say, ‘Look, we’re going to take responsibility for leading this market.’ We’re going to take responsibility for ensuring that the people of Texas will have high-quality medicine made in a professional environment that’s tested, that’s consistent, and they know what they’re getting is priced in an effective manner. And if we do that, and we run the business well from the state’s perspective, then that becomes something that the state can be proud of and get behind. The challenge is when people bring in their decades-old held belief that this is something that it isn’t, that cannabis is Reefer Madness or whatever; these long-held beliefs that have been grooved-in over time. We’re all prisoners of our own experiences, and there are people that have been educated and it’s been reinforced over their lifetime that this is bad. But it’s not, and you just have to educate them on that. Unfortunately, some of those long-held beliefs only serve as ballast that prevents the state from moving forward to the benefit of it, and so what we try to do is we just try to educate and inform our legislators, who are very good people that want to do what’s right by the state. Sometimes it takes a little bit of time for them to shift their perspectives on things.
“If there’s a stigma, if there’s a skepticism, the only way I know how to address that is head on,” he emphasized. “Okay, great, come out and see what we do, get educated on how we make our product, take a look at our facility, come talk to our patients, talk to the prescribers, talk to our medical advisory board. These are highly qualified, well-educated doctors that are very reverent towards the Hippocratic Oath, and they’re huge believers in the impact of medical cannabis. So, back to your point, when Texas makes its decision that it wants to lead in an industry, it very seldom does not accomplish that goal. You can look at so many different industries where Texas has said, you know what, we want to be leaders on a national basis in technology, energy, healthcare. I mean, you can go on and on. When Texas says we want to lead, they’re going to put the effort behind it. That will happen in the cannabis industry, and when it does, Texas will be transformative on the industry.”
Will more licenses be given out at some point? “I would imagine that there will be, but right now the market is still too small,” said Denton. “Even though there are 30,000 or so patients, the number of active patients each month is probably 5000, which is not enough to support one let alone the three that are there. In order for there to be more licenses, they’re going to have to expand and improve the program, otherwise the only thing that they’re doing is frankly going to kill the industry at this point. They’d kill the Compassionate Use program if they did more licenses because none of us would be able to survive.”
Has Texas’s progress been slower than he imagined it would be when he started? “It has,” said Denton. “In the 2021 session, Representative Klick put an expansion bill through the House that would have taken THC to 5 percent, and would have included chronic pain. Had we gotten that bill – which came unanimously out of the House but then stalled in the Senate and then got reduced down to the bill that got passed, which was 1 percent THC, and they stripped out chronic pain but left in all forms of cancer and PTSD – had we gotten that original bill, I think we’d be in a different situation than we are today, and that’s what we’re hopeful we’re moving towards in this next session.”
Preparing for a Big Texas Future
Texas Original currently has a couple dozen SKUs in less than a handful of categories, but there is no need to expand them at this point in time “We’ve got three main categories of products,” said
Denton. “Tinctures, lozenges, and gummies. And then we’ve got different formulations and ratios, and different flavors, different sizes, but we’re less SKU-oriented than a lot of other companies. I see a lot of companies report out, ‘We’ve got 150 SKUs, and we’ve got 75 SKUs.’ I’m a bit more old-school. I remember when Steve Jobs came back and took over Apple after he had been cast out into the shadows by his board and all that other stuff, and when he came back he looked at their product offerings, and he’s like, ‘Oh, my God, we’ve got so many products that are out there, we really only need four products. So, he reorganized the entire Apple product portfolio around serving four distinct clustering. So, from my perspective, SKU-proliferation is a danger. It’s not something that you really want to lean into, at least in a market like Texas.”
As someone who creates wellness products, and knowing they now make a slew of products with all different types of cannabinoids and activators, is that a place Texas Original wants to go? “Absolutely,” said Denton. “If we were able to remove the limitation on THC that would unlock all kinds of what we call delivery vehicles, which are essentially product formats we could put in place that would be informed by our Medical Advisory Board. We’ve got a medical advisory board that consists of eight or nine board-certified doctors that come from different areas of practice. We’ve got people steeped in pediatric neurology to folks that are educated in adult chronic pain and all points in between. So, whenever we come out with a product, it’s been vetted by our medical advisory board because this is a medical market.
“In an effort to continue to be a medical market,” he continued, “you’ve got to focus on making sure that the medical community is supportive of your products, because otherwise the pendulum can swing a little too far over towards the rec market, which, look, it may eventually get there in Texas, but for now it’s still a medical market, and we’ve got to be sensitive to the needs of the medical community and to the patients. We would love the ability to be able to sit down with our medical advisory board with a group of patients and talk about the different delivery forms and formats for those products and the cannabinoids and the terpenes, and the different formulations, and how they want to consume it, and what’s the best delivery vehicle. Absolutely. I mean, you don’t want your product optionality to be limited by regulatory restrictions. You want to be able to create the products that are best-suited to serve a specific patient need or customer need. And because it’s a medical market, again, that 1 percent limitation very clearly runs against the grain of what’s important for the medical community. And yet, there it is.”
In June, Innovative Industrial Properties (IIP) announced that it had closed “on the acquisition of a property in Texas, and entered into a long-term lease with a subsidiary of Texas Original,” in a sale-leaseback arrangement. I asked Denton how the deal worked into his long-term plans.
“Well, go back to what you had asked me earlier, that it’s got to be capital-intense and expensive to run a vertically integrated company in Texas,” he replied. “When the state’s taking as long as it’s taking, how are you able to do that, and I gave you the answer about patient investors and all that, but because of the challenge that cannabis companies have in access to capital, there’s really only a few ways that you can do it: one is through equity, one is through debt, and then another is through creative financing where you have an asset, like we did with our facility in Bastrop that you can leverage from a capital perspective. We had been looking at doing a sale-leaseback for several years in fact, but we couldn’t do it because of the ongoing operational expense of the lease back and the burden that would place from a debt-service or at least perspective on the business, until we got to the point where we are today. And we knew it was a viable direction for us of non-dilutive capital because what we have done so far is all equity and all of the players on our cap table were very happy to see us do non-dilutive financing like we did with IIPR.”
What about when Texas Original is opening new stores and expanding its footprint, how is it financing that development? “Look, I’m an old man and I’ve been around a long time, and I’ve got a lot of experience across a bunch of different industries,” said Denton. “I’ve never operated in a more complicated and complex and challenging environment than in the cannabis industry. And as a startup, which even though we’re five years old we’re still technically a startup, you have to be scrappy, and you have to be creative, and you have to be thorough, and you have to be quick, and you got to make every quarter sweat. You understand what I’m saying by that? You’ve got to make every dollar that you spend feel like five or 10, and so, when you’re looking at these retail locations that we’re opening up, we’re not doing it like a big MSO might, where they’re going to say, ‘Hey, look, here’s a half million to $750k that we’re going to put into each store before we open the doors.’ We’re looking at what’s the lowest cost possible for us to create a winning formula and an incredible experience for our customers, and how do we do that in an economic footprint that allows us to recapture whatever the investment is not over a period of years, but over a period of a couple of months. So, we’re very selective about where we’re placing these retail locations, and we’re very selective in what kind of leases we’re getting into, and what the build-outs are in order for us to get in there.”
I noted that sitting in California, and the idea of running a statewide operation with a patient base of just 30,000 was very difficult to imagine. And yet with the promise Texas holds, it was equally impossible to imagine that Texas Original does not get frequent inquiries from MSOs and others interested in the state.
“We get calls, we get emails,” said Denton. “We get asked a lot of questions, and all sorts of opportunities to partner up with some of them on different strategic opportunities, whether that’s legislative stuff or other things. We’ll take the calls. We’ll talk to them. We’re interested in hearing what they’re doing and what’s going on. We’ve got our own objectives and agenda and game plan for what we want to do in Texas, but it’s a big state and a big industry.”
The legislative session will be a major focus for the immediate future. It will be Denton’s fourth rodeo. “Our legislature meets every other year in odd years, so we meet in January of 2023, when we start, and it ends in May,” he said. “It runs 140 days, and it’s 140 days of…well, one of the best analogies that I’ve heard is from one of our lobbyists, and he goes, ‘Going through the legislative process is kind of like riding an electric toaster through a car wash. You know you’re going to get shocked; you just don’t know how bad.’”
Our time about up, I asked Denton if he needed anything that he cared to mention. “I’d like the Biden administration to deliver on its campaign promises and start making meaningful progress on a federal level,” he said.
I also still wondered what the ideal Texas he has in mind looks like cannabis-wise. Is it a patient base of a half a million people? What does it look like?
“Well, I’ll just say that we started out with a goal to run a business that could enable Texas to become a full medical market,” he said. “Where there’s no restriction on conditions, where you basically let the doctor decide if a patient is eligible, where there’s a full suite of products that are available based upon the doctor’s discretion and the patient choice around what’s in the best interests of that specific patient and their needs. And then, when you look at that as a percentage of the population, you could argue that that could be somewhere between three and eight percent or something like 30 million people.”
And if the state goes adult use at some point, does Texas Original ride that wave? “We will follow the regulations and will lead the industry, and when I say lead, I mean across the board from a quality perspective, from an efficacy perspective, from a testing perspective, from a standards perspective, from a customer experience perspective, we’ll follow the regulations, but we will lead the industry,” he replied.
That’s correct, in Texas, vertical means you do your own testing, too. “We’re required per the regulations,” said Denton.
Is that part of what makes Texas special? I had read that Denton said there was something unique about Texas in this marketplace. “Well, I think that Texas is the most strategic cannabis market in the United States, and in North America,” he said. “It’s the last big state that hasn’t been developed. It is the linchpin to what happens to basically the South, and what connects the east to the west. And so, from that perspective, Texas is ordinarily unique. I think that our legislators and our regulator are eyes-wide-open on what’s happening in other markets, and because we’re late to the party, so to speak, they’re seeing what’s working and what isn’t in other markets, and they’re paying attention to that. As a result, while a lot of people may look at the Texas market and say, ‘Man, that thing’s so far behind and it’s so small and so strict and this and that, it’s also not going to be rife with a bunch of the challenges that we’re seeing in other markets that went too far and then had to try to get the genie back in the bottle from a regulatory perspective. So, I think that Texas is still got a lot to say, and we’ll be speaking over the next three to five years in particular.”
Is Florida a market that Texas in its own way is following as a model? Top down, very few licenses, big players? “On a sort of a generalized basis, yes,” said Denton. “But there are things within the Florida system from a legislative perspective, that enabled Florida to move quicker than Texas. For example, ballot initiatives. If Texas had a ballot initiative, if we had the ability for the people to be able to put a prospective piece of legislation on the ballot, we’d be much further along right now, because there’s such overwhelming support for a full medical program in the state. But the only way you can get a ballot initiative is through the legislature. But in terms of being vertically integrated, being limited license, and being a well-regulated state, there are a lot of similarities.
Does that mean Texas Original is the Trulieve of Texas? “We’re the Texas Original of Texas,” said Denton with palpable pride.
And when will we see Texas Original stores or products in a state other than Texas? “There is so much for us to say grace over right here in Texas, we got our plates full,” said Denton. “We figure if we can win Texas and dominate Texas, then we can start to think about how we might want to attack other markets if we want to. Right now, our focus is 100 percent on Texas.”
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