Texas Cannabis Groups Need Foresight to Gain Coveted License

When Texas enacted House Bill 46 in June, it updated its cannabis license application. The companies vying for one of 12 new medical licenses will now have to clearly demonstrate strong financial viability.

Texas’ example may be the wave of the future for states that choose to legalize cannabis. Whether it’s a medical or adult-use program, states now realize that financial strength and sound financial management skills are critical for the success of any legal cannabis operation, particularly considering competition from the illicit operators that exist in all states.

Moving forward, the finance and accounting sections of a cannabis license application may be the most important when it comes to acing a competitive application process and obtaining a state’s coveted cannabis license

More Licenses

HB 46 increases the diagnoses for which patients can be treated with low-dose cannabis products, including PTSD and chronic pain. It also allows for the issuance of 12 more licenses, taking the state from the existing three to 15. The Department of Public Safety will be issuing nine new licenses by Dec. 1, 2025, and will follow with another three by April 1, 2026.

The first nine licenses will be awarded to those who applied in 2023 (Phase 1). The state requires these applicants to provide documentation that emphasizes their financial ability to get a vertically integrated business operation up and running within the 24-month deadline specified by HB 46. Phase 2 applicants, which will include the three highest-rated applicants in Phase 1 who didn’t receive licenses plus all 2025 applicants, will also be required to submit this information.

All three existing licensees are concentrated in Health Service Region 7 (Austin), which is one of 11 regions. Texas wants to expand access to medical cannabis to all health service regions and to ensure that access happens quickly and stays active for at least the first two years after opening.

The state’s application scoring criteria awards 25% of possible points for the financial statements and supporting financial documentation. However, additional points will be awarded in the section called “accountability” for other aspects of the new business’ financial viability. This includes its inventory control system and its policies and procedures for recordkeeping, both of which are aspects of a business’ accounting system and the bookkeeping that goes along with it.

Adequate Capitalization

The application focuses on the finances and requires “proof of the financial ability to maintain operations for two (2) years from the date of application.” While Texas doesn’t specify the exact amount of capitalization needed, it is expected to be in the millions of dollars.

Applicants may not realize the extent of startup costs for cannabis businesses. Licensing experts focused on Texas suggest a bare minimum of $2 million to $10 million or more in capitalization.

If awarded a license, the applicant is expected to construct a vertically integrated cannabis business including cultivation, manufacturing/processing, and retail, with sophisticated security system requirements at each point—all of which must be HIPAA compliant. They will have 24 months from awarding of their license to become fully operational, or risk fines and even license revocation.

Texas also requires a description of available assets sufficient to support the dispensing organization activities, a current financial portfolio, and a current balance sheet to prove financial feasibility to accomplish three tasks:

• Get the vertically-integrated company operational and dispensing within 24 months.
• Survive the first two years, generally considered the most challenging for a new business.
• Expand operations, using satellite dispensing locations, to serve all health districts.

This last item is so important to DPS that it requires each applicant to have opened one satellite location in all 10 other districts before opening a second satellite location in their home district. By incentivizing license holders to open satellite retail outlets in every district, they hope to make sure that Texans in less populated areas get access to the cannabis medicine they need.

Clear Roadmap

The second critical component of the financial section of the application is the projected two-year budget. The more thorough the budget, the better. It should paint a clear and compelling picture of the initial growth of the business, a financial story uniquely slanted to the Texas cannabis landscape.

Standard aspects of a high-quality startup budget are well documented and include:

• A detailed description of your company/brand
• Operating agreement
• Structure of the organization
• Analysis of the market and competitors
• Sales and marketing strategies
• Security protocols
• Team management and organization
• Compliance and risk management strategies

Common budget pitfalls include overly optimistic revenue projections, neglecting to factor in regulatory costs, and underestimating operating costs—so it’s important to ensure a thorough presentation of all anticipated costs associated with building the vertical business, as well as showing capital reserves for unanticipated costs.

The project will involve a lot of build-out, so a budget should anticipate significantly more expenditure for construction than initial construction or remodel contracts would indicate.

DPS is also concerned about “double-dipping,” where convoluted ownership structures hide that an individual or entity has a financial interest in more than one license applicant, which isn’t allowed. Having a clear and uncompromised ownership structure is a critical part of the applicant’s financial picture.

Key Takeaways

The last five years have seen a stark landscape across the country for cannabis companies, with the only recent bright spot being the president’s comment on Aug. 11 regarding looking at reclassification and making a determination “over the next few weeks.”

Whether or not cannabis is reclassified as a less harmful drug, however, states entering the cannabis sphere—or those that are expanding as Texas is—want their licenses to go to businesses that can demonstrate strong capitalization and a clear business roadmap in the application process. Demonstrating strong financial foresight and resources may be the factors that award a coveted license to the discerning cannabis business applicant.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Abraham Finberg is principal at AB Fin and has worked in the cannabis sector since 2009, counseling clients in all phases of business advisory and tax.

Simon Menkes supports accounting firms, their clients, and advisers through accounting and advisory services.

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