Most of the first 26 businesses to win Kentucky medical cannabis cultivator and processor licenses from its lottery system are tied to marijuana companies based in other states, one of which likely submitted hundreds of applications.
Kentucky Gov. Andy Beshear unveiled the 26 medical cannabis applicants who won a cultivator or processor license in late October through a random lottery drawing, repeating his often-used line that the system is the fairest and most transparent way to allocate limited licenses for the new state program.
But the end results of the first lottery have some questioning whether the process allowed several deep-pocketed marijuana companies to game the application process and push out Kentucky applicants.
A Kentucky Public Radio review of the 26 lottery winners’ license applications and business filings with the secretary of state’s office show roughly three quarters had no current ties to Kentucky, and instead had ties to large out-of-state cannabis companies that flooded the state with expensive applications.
It’s especially upsetting to some Kentucky hemp farmers, as they received none of the 16 cultivator licenses, despite their belief that they are the most qualified to grow marijuana quickly.
Also raising eyebrows is the fact that Sean Clarkson — a co-founder and CFO of Dark Horse Cannabis, an Arkansas marijuana company — organized 350 new businesses with the Kentucky secretary of state’s office in the month leading up to the Aug. 31 application deadline, all of whom listed their principal address as the Arkansas headquarters of the company.
The companies tied to Dark Horse submitted at least 104 of the 918 total applications for cultivator and processor licenses, winning two: a processor license and one of the two given out for Tier 3 cultivators, the largest operators that can grow marijuana in greenhouses of up to 25,000 square feet. Under state regulations, a parent company or ownership interest can hold multiple licenses in one category, but not ones that are vertically integrated, such as one cultivator license and one processor license.
In response to questions about Dark Horse potentially subverting the process by stacking applications, the Beshear administration claims the Arkansas company did not game the system, as the executive and Dark Horse have no ownership interest in the hundreds of companies.
However, an investment pitch presentation obtained by Kentucky Public Radio shows the parent company of Dark Horse Cannabis also claiming ownership of two companies that won these licenses.
The pitch deck also says it expects to win 2-3 more dispensary licenses in Kentucky’s next two lottery rounds, which will give them “a full vertical that will allow for increased overall margins and bargaining power within the state,” estimated to bring in more than $150 million in revenue over the next three years.
Dark Horse Cannabis and its executives have not responded to numerous voicemails over the past month.
Michael Adair is one of the Kentucky hemp farmers who is fed up with the licensing process and has voiced those concerns repeatedly to the Beshear administration. The Dark Horse pitch deck confirmed his suspicions of application stacking, and he says the administration should pull the companies’ licenses.
“Clearly they broke the rules in being vertical and everything else,” Adair said.
He says he followed the rules when applying for cultivator licenses and was ready to start growing right away on six acres of greenhouses on his Paris farm had he won.
“I can hit the ground running,” Adair said. “I don’t have to build-out buildings. If they want material, I can have material in a couple months.”
Beshear and others in the cannabis industry have touted the lottery process as a way to limit big money lobbying corrupting the licensing process. He also says it could speed up the process of growing, processing and dispensing cannabis medicine to patients, ideally in the first quarter of 2025.
He has cited other states that attempted a competitive scoring process for who gets such licenses, only to get delayed for years by litigation from companies’ claiming they were discriminated against — an outcome less likely by a random lottery system.
Paula Savchenko, a Florida attorney with cannabis clients across the country, agrees that a lottery system is the best way to avoid litigation, but says that doesn’t necessarily mean that it leads to the best results for medical marijuana programs.
“I’m always going to recommend that it should be a competitive process,” Savchenko said. “The reason for that is because you really do want the best groups to be operating in this industry. When you go through a lottery, you are not able to really choose who’s best for the state and for the patients, in my opinion.”
Adair countered Beshear by arguing the lottery process will still lead to a long delay before there is any medical cannabis in Kentucky stores, as many of the license winners either have no experience or won’t have facilities in place to grow or process cannabis until well into 2025, if not 2026. Some winners are shopping licenses around to see how much money they can get for selling them or partnering with another business, while the potential of big vertically integrated marijuana companies could choke out smaller operators and raise prices.
While Beshear has held out hope that medical cannabis products will be in Kentucky dispensaries early next year, Adair says that’s nearly impossible given the companies that won licenses.
“Six months, a year from now, when there’s nothing on the shelves and people are screaming, and you’ve got big cannabis out here doing stuff, it’s gonna look real, real bad,” Adair said.
A wave of out-of-state applicants, license winners
Of the 16 businesses to win a cultivator license, only two Tier 1 licensees — the smallest tier, with a maximum of 2,500 square feet in a secure indoor facility — were made up of residents of Kentucky. None of the 16 cultivators had any ties to Kentucky’s hemp industry — despite the state giving local hemp businesses “priority” in the application review process.
What nearly all of the 26 lottery winners had in common is that they registered their business with the state within a month of the August 31 application deadline.
Though the Beshear administration has denied open records requests for all applications and a full list of the applicants, they did release a list of all cultivator and processor applicants after the Oct. 28 lottery. Of those 918 applicants, nearly two-thirds registered their business with the state within a month of the application deadline.
And these applications — 350 of which were organized by Clarkson of Dark Horse — were not cheap. The Clarkson businesses applied for 28 Tier 3 cultivator licenses that cost $20,000 each, 28 Tier 2 cultivator licenses that cost $10,000 each, and 48 processor licenses that cost $5,000 each — together totaling more than $1 million.
The Beshear administration has not released a full list of the more than 4,000 applicants for 48 dispensary licenses around the state — which will be awarded in a lottery Monday and another in December — but hundreds appear likely to be among the businesses organized by Clarkson. The application fee for each is $5,000.
The two companies organized by Clarkson that won a license are Natural State GreenGrass CannaCo LLC, which won the Tier 3 cultivator license, and Hilltop Healing Investco, one of the 10 processor licensees.
In multiple press conferences dating back to April — when the administration first released its regulations outlining the application and lottery processes for licenses — Beshear said one of the benefits of the lottery would be that deep-pocket out-of-state companies would not have an unfair advantage over Kentucky’s small businesses.
In a September press conference shortly after the application deadline — and a late flood of applications that grew from 1,000 to nearly 5,000 in the final days — Beshear said their regulations were designed to prevent application “stacking” by companies with money to burn.
“We think we set up the system very intentionally to prevent these harms,” Beshear said. “It’s going to take us a little bit of time to say whether we are seeing it or not, but we’re going to be able to deal with it if it’s there.”
After two of the hundreds of companies organized by Clarkson of Dark Horse won a processor and cultivator license, Kentucky Public Radio asked the Office of Medical Cannabis how this didn’t amount to application stacking by the company.
Stephanie French — a spokeswoman for the Cabinet for Health and Family Services, which houses the new Office of Medical Cannabis — answered that this was not an example of prohibited application stacking, as neither Dark Horse Cannabis nor Sean Clarkson are listed as the parent company, member or owner of the two license winners.
French added that “it is commonplace in Kentucky that individuals register or organize businesses, but have no ownership in them.” She cited Louisville Public Media as an example, as it was organized by a law firm that does not own it.
However, a review of the companies’ applications calls that interpretation into question — in addition to the explicit pitch deck made by the parent company of Dark Horse Cannabis.
Both companies’ applications listed Clarkson and two other Dark Horse executives as their principal officers and board members, while redacting what ownership percentage each has in the company. The applications also listed two unaffiliated individuals as the owner of each, but neither would comment on the company.
These two license recipients also listed the same physical address in Bowling Green for where their cultivator greenhouse and processing facility would be located.
A week after receiving the Tier 3 cultivator license in the Kentucky lottery, Natural State GreenGrass CannaCo filed with the secretary of state to have four new assumed names for the company. All of the new names have the words “Dark Horse,” including Dark Horse Cannabis – Kentucky.
The pitch deck for Arkanna Investments also makes these ties much more explicit. The company lists itself as the parent company of Dark Horse Cannabis in Arkansas, Missouri, Mississippi and Kentucky.
The investment requested in the pitch deck would support the company’s “expansion plans,” which includes a “build-out of complete vertical in the new Kentucky medical marijuana market.” It notes that in October 2024 it acquired management rights to a processor and Tier 3 cultivation facility in Kentucky, both in Bowling Green, and has “potential for 2-3 dispensary licenses” in the upcoming lotteries.
The Arkanna Investment pitch deck notes that Kentucky will be the company’s first cultivator license, as it previously only operated dispensaries and processor facilities in its other states. The company says its new “25K square foot canopy cultivation and processor facility in Kentucky” will be open next summer.
Noting that its two current licenses in Kentucky account for 20% of the state’s canopy allotment, the deck adds that “by scaling quickly to meet initial market demand, Arkana expects very high revenues and margins in the first 24-36 months.”
Just how high can these revenues, margins and returns get for potential investors? The document goes on to estimate that after bringing in $12.5 million of income from Kentucky in 2025, Arkanna Investments will grow that to $69.5 million and $73.7 million in 2026 and 2027, assuming they pick up two more dispensary licenses in the next two lotteries. The estimated profit in Kentucky over the next three years is $86.3 million.
As for the enterprise valuation of its Kentucky cultivating and processing operation, the deck values the Tier 3 license at $44.1 million and the processor license at $6.3 million.
Lottery vs. scoring, and a race to the shelves
Beshear unveiled his long-awaited regulations for the state’s new medical cannabis program at an April press conference, touting it as a way to prevent legal challenges and lawsuits that have bogged down other states’ programs.
“What we know is that states that don’t have a lottery system, that go through other things, get weighed down in years of litigation,” Beshear said. “Everybody who thinks that they should have scored this or that they should have scored that file litigation and it delays, and delays significantly.”
That opinion is shared by Bradley Clark, a Lexington attorney who says he helped clients submit hundreds of applications in Kentucky. Six of those clients won a cultivator or processor license in the first lottery — four from out-of-state and two from Kentucky.
While he understands the frustrations of Kentucky farmers who believe they were the most qualified and ready to grow — thus having a better chance if the administration scored each applicant or gave preference to in-state hemp farmers – Clark says the experience of other states shows such a non-lottery system would have been delayed by ligation for years and eventually struck down.
“Ultimately, what takes longer: building a greenhouse, or a court case proceeding at least to the Court of Appeals, if not the Kentucky Supreme Court?” asked Clark. “You can build a greenhouse a lot faster.”
While showing favoritism for Kentucky farmers would be a clear violation of the dormant Commerce Clause and not stand up to a legal challenge, Savchenko says even scoring systems that don’t favor locals are being held up for years.
In Alabama, medical cannabis licenses issued last year are still tied up in litigation, while Florida’s was held up for four years. Ohio attempted competitive scoring at first, but switched to a lottery system after licenses were held up by lawsuits.
Savchenko believes the experience of other states is what scared off Kentucky from a non-lottery system, as “states are just like, ‘Okay, we’re just not going to deal with this at all,’ because it’s going to cost too much money to litigate.”
As for the apparent actions of Dark Horse executives in Kentucky’s system, Clark says there’s a big difference between what he has done for many separate clients and what the Arkansas company is alleged to have done. However, he says their large investment in applications shows they may have a deep commitment to investing in Kentucky, even if their technique may have skirted the spirit of state regulations.
“It’s capitalism on some level,” Clark said. “If the government sets standards, people are going to conform to them, even, sometimes, some would argue, maliciously, to the benefit of their shareholders and their members.”
“To the extent there’s a story here, it’s just that people with lots of resources had better access to this, because they were able to get attorneys to help them write applications.”
Savchenko says the downsides of lotteries are that wealthy companies often try to flood the zone with applications, which can lead to mixed outcomes on their quality.
“That’s why it’s also kind of annoying to do a lottery, because it’s really just a game of who has more money to be able to submit multiple licenses, as opposed to who’s the best candidate for this,” she said. “Just because a company has a lot of money or is able to raise money, doesn’t make them the best candidate. Sometimes it does, sometimes it doesn’t.”
As for Adair, the Paris farmer with hemp experience who didn’t land a lottery license, he says the Beshear administration could have prevented abuse by being more vigilant in its regulations to prevent application stacking.
“There should have been about 10 more bullet points of (stuff) you should have had to have in order to be approved to go into the lottery,” Adair said. “And they didn’t do it.”
Lottery winners tied to cannabis and hemp counties across country
Three days after Kentucky announced its first lottery winners, Beshear handed out the first cultivator license at his press conference to Matthew Goeing, a Lexington attorney who applied for a small cultivator license under his business Goeing Blue. He thanked the governor and said his “Kentucky-owned” business would grow medical cannabis in an enclosed indoor facility in Fayette County.
The Kentucky-based Goeing Blue was mostly an anomaly among the winners. Meanwhile,Dark Horse was far from the only big out-of-state marijuana company tied to a lottery winner, as this was the case for the majority of new license holders.
The other applicant to win a large Tier 3 cultivator license of up to 25,000 square feet in Glasgow was KSKYAPP LLC. The application indicated it is owned by Krista Sampson, whose resume listed her as a stay-at-home mom.
She is also the wife of Robert Sampson, the former chief operating officer and current board member of Cresco Labs, one of the largest publicly traded, vertically integrated, multistate cannabis companies in the country that is based out of Chicago. The administration redacted 46 pages of her application.
Among the four applicants winning a Tier 2 cultivator license was Armory Kentucky, which plans to build a greenhouse of up to 10,000 square feet in Estill County. Its application listed several owners who are founders and executives in several cannabis and hemp companies that do business in West Virginia, Maryland and Florida.
Also winning a Tier 2 license was NG Health, a business owned by Cincinnati real estate developer Nicholas Grammas. He also co-founded King City Gardens, a marijuana dispensary in Ohio.
Most Tier 1 cultivators in Kentucky also have a tie to out-of-state cannabis companies, based in Colorado, Michigan, Missouri, Arizona, Oregon and California. The same is true of the winners of processor licenses, as owners and members have ties to marijuana or hemp companies in Illinois, Missouri, Arizona, Nevada, Mississippi, Arkansas and Tennessee.
While no Kentucky hemp farmers won a cultivator license in the lottery, three with a background in the hemp business were able to win a processor license. Among these is Limestone Processing, which will operate out of Lexington. It is co-owned by Gary Hilliard, who has years of experience growing and processing hemp, and Hil Boone, the owner of a restaurant who was just elected to Lexington’s city council earlier this month.
AJ Alchemy Labs also received a license and will operate a processing facility out of Bowling Green. It is owned by Kentuckian Jonathan Knarreborg, who already owns two companies that deal with hemp and CBD products.
Ice House Processing received a processor license to operate out of Fulton in far west Kentucky. While one of its co-owners is based out of Arizona and is a chemist for a cannabis company, another is Eli Green of Mayfield, who owns a farm and has been involved in the hemp industry.
A professional gambler hits another big jackpot
For some of the lottery winners, the application wasn’t one of dozens or hundreds, but a long shot wager that just happened to come up big.
This was true for Joseph Serock — a cultivator Tier 1 license winner who just so happens to also be a professional poker player.
Serock finished eighth at a World Series of Poker event in July, winning $1.25 million, so he figured he would place another big bet in Kentucky the following month.
“Yeah, it was a good year for me, so I figured I’d gamble,” Serock said.
Also winning one longshot application bet on a processing license was Kalle Deming of Kaldem Holdings. Just a couple years removed from graduating college, Deming of Clarksville, Tennessee has been involved in the hemp industry and owns a CBD and kratom store.
“I can’t even gather words to explain the excitement that I had when I found out,” Deming said. “I mean, we had less than, like, 5% odds of getting it, so that was crazy.”
Deming says she plans to operate her business out of Hopkinsville, but has many companies reaching out to her with offers to partner with her or buy the license.
Gerard Coombs Jr. of One Leaf Technologies says he also submitted just one application for a processor license and had just a .3% chance of winning, but hit paydirt.
“I could not believe it,” Coombs said. “When I saw the company get called, I was in a meeting, and I started screaming. And my executive assistant, I heard her screaming across the office. So we were really excited.”
Though he and the company he founded in the hemp industry are based in Florida, Coombs says he already does business with hemp growers in Kentucky.
Coombs noted that he has heard some big marijuana companies had created hundreds of companies to flood Kentucky with applications, saying some “really take advantage of the system.”
“We did it the fair way,” Coombs said. “I do have ties to Kentucky and I’m not like the other companies that made 400 companies and just sent a bunch of applications in. That’s wild.”
Boone of Limestone Processing in Lexington says that few of the license winners have a concrete plan on what they’re going to do next.
“I think that with the dispensaries not quite out yet, there’s a little bit of unknown there, as far as where is all this going,” Boone said. “And a little bit unknown of when there will actually be product to process.”
Boone says he and his business partner are pretty sure they want to operate and make partnerships, but noted that some big cannabis companies are looking to buy up licenses from lottery winners.
“I know there’s some big money players with these multi-state operators that are trying their best to get in, you know what I mean. Some already have, some are still trying,” Boone said. “There’s a lot of money getting tossed around trying to buy some of these licenses, for sure.”
Adair, the hemp farmer from Paris who missed out on a lottery license, noted that he has heard one of the Tier 2 cultivator license winners is attempting to sell it for $10 million, and even turned down a $7 million offer. He’s also putting in offers to partner with license holders as well, though he can’t keep up with those high numbers.
Clark, the Lexington attorney who helped six clients win a license, says he’s heard the same thing about a $10 million offer, though it is not one of his clients.
“That sounds about right,” Clark said. “I mean, I’ve heard that. There’s certainly a vein of truth to that idea, based upon what I’ve seen.”
Clark added that some “people that are very well connected politically” are calling him with offers to buy licenses.
French, the spokesperson for the Kentucky Office of Medical Cannabis, said that such sales of business licenses are expressly permitted under state law, though the Cabinet for Health and Family Services must approve any potential sale.
Just one day after Kentucky’s cultivator and processor license lottery, David Kram, an investor from California, made a post on LinkedIn indicating that his client won a Tier 2 cultivator license in Kentucky “and we are accepting bids on it starting today.”
Kram responded to a message by declining to name his client and what price he was seeking for the license, saying they “would like to remain anonymous at this time given the sensitive nature of the identities of the lottery winners.”
H/T: www.lpm.org
