Big Cannabusiness: Reconciling the Recreational Boom and the Medical Marketplace
On New Year’s Day, as retail sales of cannabis went legal in Colorado, the state’s dispensaries registered well over $1 million in sales. Despite cold and wet weather, most of the 36 shops that opened that day reported long lines, with some customers waiting outdoors for hours. By the end of the first week, by which time another dozen retail outlets had opened, the figure was a whopping $5 million. More than 100 dispensaries in the Centennial State have now received licenses for retail cannabis sales and over 500 are eligible to apply. More are applying every day.
“A new industry is developing in a nascent state in Colorado,” says Rachel Gillette, director of the Colorado chapter of the National Organization for the Reform of Marijuana Laws (NORML). “We’re not just talking about retail sales, but a lot of other types of business associated with it — construction companies, HVAC contractors, nutrient companies, lighting and equipment sales, packaging, printers, labeling, marketing materials, websites, marijuana tourism, attorneys, payroll companies… This could represent a lot of jobs.”
She points to Franwell Inc’s $1.2 million contract with the Marijuana Enforcement Division of the Colorado Revenue Department to provide RFID tags for the state’s new Marijuana Inventory Tracking System (MITS), which will follow each plant from seed to sale.
Says Gillette: “Through Amendment 64, Colorado voters have chosen to pursue the path of a regulated and licensed for-profit cannabis industry, and that means a lot of ancillary industries are prospering.”
The consensus is that this is just the beginning and not just in Colorado, but nationwide. According to a new report by San Francisco-based ArcView Market Research titled “The State of Legal Marijuana Markets,” the legal cannabis market is already valued at $1.4 billion nationally and is projected to grow to $2.3 billion in 2014. The five-year projection is a staggering $10.2 billion.
Newly-formed ArcView Market Research is an arm of ArcView Investor Network, which came together in 2011 and is made up of people looking to invest $50,000 or more in the cannabis sector.
“Our investors were looking for info to make good business decisions,” ArcView Group’s CEO and co-founder Troy Dayton said. “What we discovered is that legal cannabis is the fastest growing industry in America, with 64 percent growth expected between 2013 and 2014. We are likely to see 14 more states pass full adult-use legalization over the next five years.”
Publicly-traded cannabis businesses saw their stocks soar as legal sales began in Colorado, although the spike leveled off in subsequent days. One beneficiary of the surge was Colorado Springs-based Cannabis Science Inc, a biotech firm that just filed a patent in Europe for a cannabinoid formula designed to treat neural-behavioral disorders such as anxiety. Cannabis Science chief financial officer Robert Kane says that even for a company that hopes to market federally approved products, the advance in Colorado only helped.
“There’s an indirect value on the perception side,” says Kane. “Legal progress in any state is a benefit for us; it allows us to participate in research and development of our cannabinoid portfolio. And even if it’s just perception, it leads people to wonder if the federal government will reschedule cannabis. That would be the biggest benefit to us. Then we could eventually get our products on the market with FDA approval and that’s huge.”
Meanwhile, Cannabis Science owns 7.5 million shares in EndoCan, marketing a line of over-the-counter cannabinoid-infused products such as body oils, lip balms and sea salts. These are legal, as they fall below federally permissible levels of THC, the chief psychoactive cannabinoid.
Kane says the company is “also considering products with active levels of THC for sale within Colorado and other states where it is legal. There’s a way to do this while being totally legally compliant.”
Also reaping the stock boost was Greengro Technologies of Anaheim, Calif., which has just won approval to oversee cannabis cultivation for the medical market in Arizona through its subsidiary Vertical Hydrogardens. In an optimistic press release, Greengro CEO James Haas expresses his hope “to execute similar agreements across the country, with near-term opportunities in Colorado, Washington and Illinois, as the laws of the states are implemented.”
Will business support the political initiatives?
ArcView’s Dayton admits that the expansion of the industry is contingent on political progress.
“The big question mark there is whether money will be raised to pass those initiatives, whether people will step up to the plate to donate to change these laws,” he says. “That’s also what it takes.”
One week after legal sales began in Colorado, Alaska activists submitted enough signatures to put cannabis legalization before voters in August 2014. It’s little remembered today that Alaska actually pioneered legal cannabis with a 1975 state Supreme Court decision, only overturned by a ballot initiative in 1990. The courts overturned that law again in 2003, but the state legislature passed a new one re-criminalizing three years later. Now voters will seemingly have the chance to reverse the damage of the 1990 referendum.
San Diego-based Medical Marijuana Inc. is another firm that saw a jump in its stock value in the new year. Through its distribution arm HempMeds, it is marketing a line of dietary supplements such as hemp oil rich in CBD, a non-psychoactive cannabinoid thought to have a wide spectrum of healing properties. These products are available in all 50 states, as CBD is not illegal.
Again, while not legally impacted by the development in Colorado, the company reaped gains.
“It’s a name recognition thing,” says Medical Marijuana Inc. public relations spokesman Perry Coleman. “When good news happens, the stocks go up.”
Optimistically, he adds: “When the federal government does legalize, Medical Marijuana Inc. is positioned to move in that area, although we are going to stay on the good side of the law.”
And there are a slew of new enterprises in a secondary economy around California’s cannabis business that don’t actually involve contact with the plant — and therefore don’t have to reckon with federal law. Among countless such firms suddenly smelling a windfall is WeedMaps.com, with a new website allowing users to rate and review cannabis dispensaries. The idea’s is hardly new, but the company boasted to NBC that it expects to post $30 million in revenue this year and increase that by 20 percent in 2015. The business plan calls for charging dispensaries to respond to reviews and post their photos and videos. A “Deals” option styled on Groupon will draw traffic to the site and business to participating dispensaries, without WeedMaps actually taking a cut.
The greening of NAFTA?
In Michigan, Gov. Rick Snyder signed Senate Bill 660 into law, which could create a new “pharmaceutical grade” cannabis program to run alongside with the state’s existing medical marijuana program. The law actually reclassifies cannabis at the state level to Schedule II status, while it remains under Schedule I — for drugs with no medical application — at the federal level. It will only go into effect if cannabis is reclassified to Schedule I status at the federal level.
Senate Bill 660 — now Public Act 268 of 2013 — allows the “pharmaceutical grade” stuff to be distributed through licensed pharmacies, with laboratory testing for quality and dosage standards.
One prominent supporter of the bill was Michigan’s former state house speaker Chuck Perricone, who now represents Prairie Plant Systems of Canada. The biopharmaceutical company has been Canada’s primary medical marijuana supplier for more than 10 years, and now hopes to grow top-grade cannabis in an abandoned copper mine in Michigan’s Upper Peninsula. The move is plugged as a boon for what local media call the “hard luck town” of White Pine, which has been dying on the vine since the mine closed in 1996. The company’s subsidiary SubTerra is already growing the Andean tuber oca in converted chambers in the mine, but the far more lucrative top-standard cannabis holds greater promise for a revitalization of the depressed region.
And in what almost seems an advertisement for the North American Free Trade Agreement (NAFTA), a Michigan firm is also hoping to get in on the action across the border in Canada. Creative Edge Nutrition Inc of Madison Heights has set up subsidiary CEN Biotech in Ontario to compete with Prairie Plant Systems in Canada’s medical market. A hydroponic center is being built for the scheme in the town of Lakeshore, Ont. If Ottawa approves the plan, CEN Biotech hopes to see $20 million from its first year of operations — and $100 million a year by the fifth.
Cracking the financial sector
Then there’s the question of basic financial services. Banks have generally been wary of the cannabis industry, fearing the potential for federal money laundering charges. But there are signs of a change here too.
At dozens of cannabis outlets in Colorado, customers can make purchases with credit cards or ATM cards. Media reports indicate that Visa and MasterCard have “quietly decided not to enforce their own rules,” trusting to the Justice Department’s 2013 “Cole Memo” that advised non-interference in cannabis business that comply with state law. In a statement to the Wall Street Journal, Visa said it adheres to federal law, but also that the federal government’s stance on cannabis is an “evolving legal matter.”
Six lawmakers from Colorado’s congressional delegation are meanwhile urging the federal government to allow canna-businesses access to basic banking services. The group includes both of the state’s senators, Michael Bennet and Mark Udall. Their open letter to Deputy Attorney General James Cole (author of the memo) and Jennifer Calvery of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) calls for action on the question “in the most expeditious manner possible.”
Amidst all of this flurry, in early January the Treasury Department’s Bank Secrecy Act Advisory Group met in Washington D.C. to discuss the question. The Seattle Times reported that Treasury Secretary Jack Lew acknowledged the “serious challenges” posed by recent developments at the state level.
On Jan. 23, Attorney General Eric Holder himself told an audience at the University of Virginia that the Obama administration is planning to issue new regulations that will allow banks to do business with state-legal cannabis merchants.
Room for small producers?
There are concerns from grassroots activists fighting to free the weed that amid the economic opportunity, cannabis will fall prey to capitalism’s cult of giganticism. The new Michigan law was opposed by many cannabis advocates in the state, who fear the control of medical marijuana by “Big Pharma.” One problem is that the state’s new pharm-grade program will be bureaucratically separate from its existing medical marijuana program — which has hardly flourished, hampered by legal disputes and vague regulations. Patients will ultimately have to choose between the old program or the pharm-grade one — which could lead to narrowed access to the healing herb if the existing program is not revamped.
Then there’s the reality that the cannabis industry has a huge carbon footprint — something of a dirty little secret for the legalization movement. This is an especially relevant fact in Colorado, where Amendment 64 specifies that all legal weed must be grown in an “enclosed space.” This could include greenhouse cultivation, but not outdoor, so it is assumed most will be indoor. A 2011 study by California’s Energy Associates, “The Carbon Footprint of Indoor Cannabis Production,” found that the added energy use of an indoor 4-by-4-foot grow is equal to the consumption of about 30 refrigerators.
Organic producers like Northern California’s Tea House Collective eschew artificial fertilizers and chemical sprays, and promote an ethic of “Grow it in the sun!” There is virtually no room under the law for such initiatives in Colorado.
Scott Bergin of Edipure, a successful Colorado cannabis edibles venture, spoke in December to the “Cannabis Consciousness” program on Northern California’s KMUD Radio. He invoked fears of a “Marijuana-Industrial Complex,” facetiously recalling Dwight Eisenhower’s warning of a military-industrial complex.
“We had a lot of big money come into Colorado and open a lot of big grows and a lot of big dispensaries, but they just grew OK marijuana,” Bergin said by phone from Denver. “The guys who really did well and are considered the cream of the crop here are the small boutique farmers, the small guys that can really pay attention to the plants… They’re the ones who have got people lining up around the block trying to get hold of their good herb.”
“Cannabis Consciousness” producer Kerry Reynolds, reached for comment in Garberville, Calif., takes a harder line: “Its profoundly ironic that cannabis, which is capable of raising consciousness about the interconnectedness of life, may accelerate climate change through the continued proliferation of energy-intensive indoor warehouse grows. That’s why it’s crucial that we develop cannabis laws that recognize the advantages of outdoor growing.”
Originally published in issue 10 of Cannabis Now Magazine.