There’s no way to deny the incredible growth happening in the cannabis market. Industry research estimates North American cannabis sales increasing from $41 billion in 2018 to $95 billion by 2026. This includes both legal and illicit sales, so the growth rates will be higher for legal producers whose market share will increase as more markets open to legalized sales. New companies enter the market all the time as current producers continue investing in new capacity to capture the increasing legal demand.
Despite the enormous potential for future sales, there are several hurdles cannabis producers face that makers federally legal products do not. The legality of cannabis and its byproducts remains murky. Over 40 states have some level of medical or recreational use but navigating the variety of regulations in different states is daunting. Not to mention the continued federal criminalization that forces all producers and dispensaries to walk a fine line of compliance.
The federal classification adds additional costs to how businesses must operate in the industry. Nationally chartered banks generally don’t do business with companies that make money on illicit activities . This limits the ability of companies to manage their money and often keeps them doing most of their business in cash. There are also costs that impact tax filings. Federal statute prevents businesses from deducting business expenses on earnings related to controlled substances.
There are ways that enterprising companies have overcome some of these limitations. They can still deduct the costs of goods sold from earnings. Cost of goods sold includes inventory and is often one of the biggest costs for producers. Many companies also operate under a dual structure. One business handles everything related to the production and sale of cannabis and the second is all the other operations like merchandise sales or property management. Under this structure, the company not handling any cannabis business can file taxes and take deductions like any other firm. The total tax burden, while still higher than normal, is lower than under a single business structure.
Amid the complexity, some firms have found ways to take advantage of the cannabis industry while avoiding the worst issues. Companies that provide goods and services to cannabis producers and sellers benefit from the growth of the industry without facing any hurdles beyond those faced by any other business. Companies like VividGro, a subsidiary of the LED light company Lighting Science. They specialize in lighting systems designed for indoor cannabis growing operations. Due to legal and other security concerns, US cannabis production is done indoors and therefore has unique requirements that other agricultural industries do not face. The growth of the industry has been a boon for companies that VividGro who now design lighting solutions specifically for commercial scale indoor horticulture.
A more surprising entry into the ancillary cannabis business has been the US lawn and garden goods company Scotts Miracle-Gro (NYSE:SMG). Through their Hawthorne subsidiary they have invested heavily in becoming a supplier of growing hardware and supplies for cannabis producers. They nearly doubled their overall cannabis exposure through their acquisition of hydroponics supplier Sunlight Supply. The company also has a significant partnership with the Canadian cannabis producer Flowr (TSXV:FLWR) (OTC:FLWPF) and the pair is developing a 50,000 square foot cannabis cultivation research facility at Flowr’s Kelona campus. Scotts Miracle-Grow has a long history and reputation in the gardening and horticulture industry and has been very vocal about its opinions and expectations on the future of cannabis.
Maybe one of the strongest companies taking this approach is Helix TCS (OTC:HLIX). They are the market leader in seed-to-sale tracking systems , which are popular among producers and often required by regulators. Their recent acquisition of Tan’s International Security makes them a big player in the security business catering to cannabis companies. Helix’s diversified approach gives them exposure across the cannabis industry without facing any of the legal restrictions of traditional cannabis businesses. Helix also sets itself apart by providing highly specialized services to its clients. Other ancillary companies tend to take existing offerings and expand them to the cannabis industry. Helix exists in multiple business lines that are all created specifically to support cannabis.
These companies and others are positioning themselves to gain from the expansion of legal cannabis around North America while avoiding the issues related to a product that is still federally illegal in the US. Maybe the best way to grow doesn’t involve growing anything at all.
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