By Steven Schain
Magellan Fund founder Peter Lynch is credited with saying: “Although during the Gold Rush most miners lost money, people selling picks, shovels, tents and blue-jeans made a nice profit.”
With the United States’ legalized marijuana sales poised to exceed $7 billion, and Arizona, California, Maine, Massachusetts, and Nevada’s ballots listing “adult use” referendums, flower, vape, infused products (edibles) and concentrates sales are skyrocketing.
Mirroring the legalized marijuana industry’s growth, and imposing few of the attendant legal and financial risks, are “ancillary” businesses that support cannabis growing, processing and sales.
‘Plant Touching’ Versus Non-‘Plant Touching” Businesses
Although profoundly regulated at the federal, state and local levels, the bulk of the regulations are only applicable to cannabis industry businesses which “touch” the plant.
Specifically, The Controlled Substance Act, 21 U.S.C. Sections 801, Et. Seq (1970) (CSA), prohibits marijuana’s “manufacture, distribution, and dispensation” and any transfer or deposit of monies yielded from cannabis sale may be deemed “money laundering” in violation of the Bank Secrecy Act, 31 U.S.C. Section 5311-5330. The CSA also makes it unlawful to use, lease, rent, maintain, manage or control real property for purpose of manufacturing or distributing marijuana and, because deemed a “federal privilege,” protection under the bankruptcy law is denied to debtors’ whose income is generated from a marijuana business, as in 21 U.S.C. Section 856(a); Arenas v. United States Trustee (In re Arenas), Case No. CO-14-046, Dkt. No. 75, at 2 (B.A.P. 10th Cir. Aug. 21, 2015).
Further, Section 280E of the Internal Revenue Code forbids state-legal cannabis businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I CSA substances such as marijuana, (“No deduction … shall be allowed for any amount paid … in carrying on any trade or business if such business … consists of trafficking in controlled substances …”).
Thus, while marijuana “manufacturing, distributing or dispensing” is federally unlawful, denied bankruptcy protection, and discriminatorily taxed, these prohibitions solely apply to cannabis growers, processors and sellers (and, theoretically, their landlords).
These bans do not apply to businesses providing products and services to aforementioned “plant touching” enterprises, commonly called “non-plant touching” business. These “ancillary businesses” include hydroponics and cultivation products, testing and lab services, lighting, packaging and warnings, security services and equipment, technology and software, banking and payment processing, insurance, “paraphernalia” (marijuana delivery systems) and professional training and education.
Scotts Miracle-Gro
Mainly known for its lawncare products, through assisting hydroponics (cultivation of plants by placing roots in liquid nutrient solutions rather than soil) Scotts Miracle-Gro’s shares soared 30 percent to a record high in 2016.
With products mostly sold through specialty shops (Scotts’ Black Magic indoor growing brand is available at Home Depot), the company’s hydroponics business generates approximately $250 million of Scott’s $2.9 billion of annual sales.
Seizing this momentum, Scotts has been buying up specialty fertilizers, lighting and other hydroponics supply companies. Recently, Scotts coughed up $136 million for Gavita, a Dutch grow lighting company, bought Arizona-based Botanicare, a plant nutrient and hydroponics products provider that notched about $40 million in sales, invested heavily in Boulder’s AeroGrow indoor gardening company, and paid $130 million for California’s General Hydroponics.
O.Pen VAPE
Due to their potency and efficient effects delivery, cannabis oil concentrates, which come in the form of waxes and liquids known as “shatter,” “dabs” or “butter,” have become immensely popular.
One of the largest industry brands, O.PenVAPE manufactures and sells a pen-shaped portable vaporizer providing a smokeless cannabis delivery system of “oils.” Offering marijuana users healthier alternatives to smoking and edibles, O.penVAPE’s pen-shaped rechargeable battery-powered vaporizer features a smartphone stylus on one end, has a cartridge-filling slot, and comes with a lifetime warranty.
O.penVAPE presently has products in over 1,100 licensed nationwide marijuana dispensaries and in Jamaica.
Steep Hill
Opening the United States’ first commercial cannabis lab in 2008, Steep Hill tests and analyzes medical and adult use marijuana to ensure compliance with public safety standards.
Steep Hill analyzes raw cannabis flower, concentrates, infused products, capsules, patches, topicals, and any product that contains active cannabinoids, offers High Pressure Liquid Chromatography and Gas Chromatography, and screens for fungi, yeasts acetone, butane, ethane, ethanol, isobutane, isopropanol, methane and propane.
With company-owned labs in California and Washington state, and licensed labs in Colorado, Maryland, Nevada and New Mexico, Steep Hill has also developed two proprietary products: the QuantaCann™ and the GenKit™.
Kush Bottles
Providing certified child-resistant and customized packaging solutions, Kush Bottles, Inc. offers bottles, containers, and other packaging products in all legalized marijuana states and Canada.
Founded in 2010, and with over 100 million bottles sold, Kush provides dispensaries, growers, retail shops, and consumers with products ranging from custom packaging and labeling to point-of-sale items like grinders, lighters, and papers.
Following record revenues of over $4 million for fiscal year-end Aug. 31, 2015, (up 135 percent from the prior year), on Jan. 6, Kush’s stock began trading on open markets,
CannaGuard Security
Sitting on mountains of cash and cannabis while forced to comply with industry-specific federal, state and local regulations, growers, processors and sellers face urgent and regional security operational and compliance needs. Transcending alarms, video surveillance, and armored cars, legalized marijuana regulations specify how many days video surveillance needs to be stored, how long items must be “quarantined” before shipped off the premises, and which areas of the premises must be constantly videotaped.
CannaGuard Security engineers custom security systems for Oregon, Washington, Illinois and Florida’s legal cannabis industry businesses. Working with over 2500 licensees, completing over 250 installs, and scoring a “perfect” first inspection approval rate, CannaGuard helps ensure indoor/outdoor grows, dispensaries and retail spaces comply with all federal, state and local laws and regulations.
CannaSure Insurance Services
Since 2010, Cannasure Insurance has been one of the marijuana industry’s leading insurance providers.
Working with 180 independent brokers, Cannasure’s product mix includes: marijuana dispensary insurance; medical and adult use marijuana growers insurance; infused product manufacturer products liability insurance; medical and adult use marijuana insurance for landlords; medical marijuana physician insurance; and ancillary businesses’ general and professional liability, property, products and workers’ compensation insurance.