NEW YORK, NY / ACCESSWIRE / May 19, 2015 / On May 14, 2015, Shawn Phillips, owner of nine cannabis stores in Colorado, announced he had laid off 65 of his employees, accounting for approximately 45% of the company's total workforce. The stores are all part of a wider brand network called Strainwise, which currently operates 13 stores in Colorado, and sells marijuana both to recreational and medicinal users.
The reasoning behind the layoffs is rooted in licensing. While the whole thing is pretty confusing (as government licensure usually is), it seems as though Phillips had acquired a 40,000 ft.(2) facility and applied for a grow license from the Marijuana Enforcement Division (MED) of Colorado. He anticipated receiving the license during the first few months of this year based on previous license issuance timeframes, but this one is taking longer. This not only means he has a large growth facility standing empty, but also - through the quirks of the current regulatory framework - it put his existing licenses in a pending status, or limbo. The stores are still open, but the financial burden caused by the pending status of his existing licenses and the unusable grow facility has caused cash flow issues, necessitating cost reduction measures.
Essentially, Phillips had to cut his business nearly in half not because demand suddenly shrunk or competition became too fierce, but because by some quirk in the regulatory framework, he lost all his licenses when the government took a little longer than he expected to grant him an additional one for expansion.
This is not the first instance we have seen where marijuana businesses struggle to operate under the current licensing regime. Another of the major problems faced by current operators is banking. Most banks are hesitant to associate with the industry because banks are federally regulated, and cannabis is federally illegal. As a result, marijuana businesses have to deal exclusively in cash. Business owners are walking to government offices with piles of cash in order to pay taxes, and the companies themselves have to hold and store large amounts of cash on site. This obviously leads to security issues from both a theft and staff safety perspective.
So while marijuana is legal in a number of states and the industry is booming, the current regulatory system makes it almost impossible to operate at peak efficiency, even for large chain brands as we've seen with the latest Strainwise problems.
Medical and Recreational Issues
The issues are not just limited to the recreational side of the industry. Prior to recreational legalization, the medicinal marijuana industry was only minimally regulated. Now, post legalization, medical marijuana regulation falls under the regulatory umbrella of the marijuana industry as a whole. There have been instances where medical marijuana business owners have stated that legalization has hampered their operation rather than benefit it, as they must now adhere to complex licensing and regulatory protocols with which they have no experience.
Recreational legalization then has actually made it harder for medical marijuana providers to do business, meaning regulatory compliance issues will hit more than your just your average Mom'n'Pop marijuana dispensary operating in a strip mall out of Denver. Compliance issues could end up becoming a serious issue for the larger cannabis companies like the biotech pharmaceuticals developing cannabis-based therapeutics for the US market, like Cara Therapeutics (NASDAQ:CARA) and Pharmacyte Biotech (OTCMKTS:PMCB), which have yet to begin selling medical marijuana products to the US but will need to stay compliant in order to do so.
These issues have opened up a gap in the market for a company familiar with regulatory requirements to assist business owners in the marijuana space in staying compliant. As investors,this presents us with an opportunity to take a position in companies that are themselves taking advantage of this gap. As things stand, there are two front-runners in this space: American Cannabis Company, Inc. (AMMJ) and Blue Line Protection Group, Inc. (BLPG).
American Cannabis Company operates two vertically integrated businesses in the marijuana sector - having initially operated in just the medical marijuana side of the industry but now also operating in the recreational space. The first, its Trade Winds brand, is a marijuana production, development and research vertical. The second, and the more pertinent to the subject at hand is its American Cannabis Consulting vertical. The company offers a range of consulting services, including cannabis business planning, cannabis business license applications advice and deployment, business monitoring and cannabis regulatory compliance services. These include not only consulting but audit services through which a cannabis operation can confirm compliance for a fee.
The company's stock has struggled this year, down 32% from year open and 56% from 2015 highs. However - if the company can make its mark on the regulatory services side of the retail and medical marijuana space - the decline might be an opportunity to pick up stock at a discount ahead of the likely future growth of this subsector of the marijuana industry.
The second option is Blue Line Protection Group (BLPG). Blue Line offers a host of services to recreational and medicinal marijuana businesses, ranging from security and banking to compliance and regulation. On the security side of things, the company trains and provides security guard teams (many of which are from military and law enforcement background) for posting at outlets and growth facilities. With banking, the company transports cash from location to location using armored vehicles. For compliance, Blue Line offers companies free compliance consultation and then fee-based consulting services that can help ensure regulatory compliance.
Blue Line recently announced that it has recruited Jim Marty, a CPA in the Denver metro area of Colorado to the board of directors of Blue Line Advisory Services, the company's consulting and compliance arm. It is this side of the business that will likely benefit from the complex accounting, bookkeeping and regulatory requirements associated with the space at the moment. Blue Line has put together a team of financial and accounting professionals that offer services ranging from licensing, insurance and compliance through to expense accounts and quarterly sales tax returns.
Just as with American Cannabis Company, Blue Line shares have struggled so far this year, down 60% on the year open and 65% from 2015 highs, but, once again, if the company can establish itself in the compliance space the recent decline may present a buying opportunity.
What it really comes down to is this: the marijuana industry is currently worth mid-single figure billions of dollars, but over the next decade, as more and more states legislate for the legalization of marijuana, the industry will expand exponentially. As we have already seen, however, legalizing marijuana is one thing, applying (and adhering to) effective regulation and compliance is another. The current situation makes it very difficult for operators in the space to become and remain compliant, and as the industry expands more and more businesses will need the services of companies that can advise and aid compliance.
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SOURCE: Market Exclusive