Business

5 reasons the marijuana black market won't go away

Cannabis has been anointed by Wall Street as one of the fastest-growing industries on the planet. After sales more than tripled worldwide between 2014 and 2018, Wall Street has forecast a roughly fivefold to 18-fold increase in global annual revenue by the time 2030 rolls around. This type of growth is impossible for Wall Street and investors to ignore, which is a big reason pot stocks have been all the rage.

But if you've been paying close attention to the industry, you're likely well aware that marijuana stocks have been nothing short of a buzzkill over the past six months and change. Many have seen their share price cut in half, or possibly worse, as a host of challenges have cropped up.

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Black market marijuana is here to stay

Worse yet, the legalization of recreational marijuana in Canada, as well as in select U.S. states, hasn't stomped out black market cannabis, as initially expected. In California, the largest legal weed market in the world by annual sales, illicit marijuana sales are projected to outpace legal pot sales in 2019 by a significant margin: $8.7 billion to $3.1 billion. Meanwhile, analysts at Scotiabank estimated in early February that the black market would be responsible for 71% of total cannabis sales in Canada in 2019.

How are illicit producers bucking the push toward a legalized marijuana environment, you ask? The blame rests with the following five factors.

1. Supply issues in Canada

In our neighbor to the north, supply shortages have been a persistent problem since recreational weed sales began one year ago, with a trio of problems to blame.

First, regulatory agency Health Canada has been buried by cultivation, processing, and sales license applications. It entered the year with more than 800 applications on its desk, and despite implementing aggressive changes to the cultivation licensing process, it's going to take months, or perhaps more than a year, for the agency to work through its backlog. In the interim, cannabis growers are forced to wait to either grow or sell marijuana.

Secondly -- and I'll have more to say on this in a subsequent point -- certain Canadian provinces have been slow to give the green light to physical dispensary licenses. With few retail stores for consumers to shop at, illicit marijuana has filled the void.

And thirdly, pot growers have been slow to start and complete cultivation projects. All of these factors have allowed illicit weed producers to thrive.

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2. Tax issues in select U.S. states

In the United States, high tax rates have been effectively driving consumers to purchase black market marijuana.

California, for example, is taxing the daylights out of its pot buyers. In addition to passing along a state tax and local tax, buyers are paying a 15% excise tax, as well as a wholesale tax of $9.25 per ounce of dried cannabis flower, or $2.75 per ounce of cannabis leaves. Add this up, and it could work out to an aggregate tax rate of 45% on legal pot. And, mind you, this doesn't include additional costs such as the laboratory testing on weed grown in the Golden State, which is also being factored into the price that consumers pay.

Suffice it to say that legal cannabis simply can't complete with illicit producers on price. This is one of the reasons I firmly believe MedMen Enterprises (OTC:MMNFF) has struggled of late. To be fair, MedMen is losing a lot of money -- $178.4 million in net operating losses through nine months of fiscal 2019 -- and it recently terminated its acquisition of PharmaCann to seemingly conserve capital, so it has more than just one problem. But according to the company's third-quarter operating results and preliminary fourth-quarter review, MedMen's existing California locations delivered just 5% sequential growth in the third quarter and 10% sequential growth in the fourth quarter. That's not very impressive given how nascent the recreational industry is in the Golden State, and it speaks to the influence the black market has for the time being.

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3. A slow dispensary approval process throughout North America

Another clear problem that's allowed the black market to persist is the slow approval process for dispensary licenses in both Canada and select U.S. states.

In Canada, Quebec-based grower HEXO (NYSE:HEXO) announced during its fourth-quarter operational update that the slow pace of dispensary store openings has adversely impacted its sell-through rate. Despite recreational weed sales commencing last October, HEXO's home province of Quebec didn't even see its own dispensaries open seven days a week until May, primarily due to severe supply shortages. Furthermore, there are far too few locations open to provide adequate supply to Quebec's adult residents. Perhaps, then, it's no surprise that HEXO removed its 2020 sales guidance and reduced expectations for sequential fourth-quarter sales growth from "a doubling" to about 19%, at the midpoint. 

In the U.S., local regulators in California have been notoriously slow to approve dispensary store licenses. As of the midpoint of 2019, California had just one dispensary open per 61,000 adults aged 21 and over, which compares to one open dispensary per 5,567 adults aged 21 and over in neighbor state Oregon.

If the legal retail points aren't there, it becomes easy for consumers to turn to black market retailers.

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4. Jurisdiction problems in select U.S. states

Fourthly, the fact that legalized states have allowed municipalities to decide whether cannabis retail stores can open or not has also been a serious problem.

In Canada, the passage of the Cannabis Act made marijuana legal throughout the country, so this particular issue isn't of concern to our neighbor to the north. But in states like California and Colorado, statewide legalization looks more like Swiss cheese rather than a unified decision passed by voters.

In California, close to 80% of the 482 municipalities in the state have banned commercial marijuana activity. Although the Golden State's significantly higher population cities have given marijuana retail stores a green light, it's still left plenty of the state as sort of a no-go zone for pot. With such a large percentage of municipalities failing to OK licensed dispensaries, it's opened the door for the black market to flourish.

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5. Regulatory enforcement has been spotty

Last, but not least, regulatory enforcement designed to drive the black market out of business hasn't exactly been working. Based on data from the United Cannabis Business Association, via an audit that was recently turned into California Gov. Gavin Newsom (D-Calif.), 2,835 of the 3,757 listings of marijuana sellers in California on website WeedMaps were unlicensed. Although the state has promised to step up enforcement on illicit producers, it's yet to do so.

Enforcement has been a bit tougher in Canada, where CannTrust Holdings (NYSE:CTST) was recently taken to the woodshed. CannTrust announced in early July that it had been growing marijuana in five unlicensed grow rooms for a period of six months. This admission led regulatory agency Health Canada to suspend CannTrust's cultivation and sales licenses in mid-September. CannTrust also announced this past week that it would destroy roughly $58 million worth of plants and inventory from its illicit grow rooms in an effort to regain its licenses. With Health Canada making an example out of CannTrust, it's at least a step in the right direction toward tougher enforcement in our neighbor to the north.

Long story short, the black market isn't going anywhere anytime soon.

‘Largest pot recall ever’ shows how legal cannabis rules can add safety

In what appears to be the nation’s biggest pot recall ever, Colorado company Bonsai Cultivation voluntarily moved to take its products off of shelves at 144 retail stores in Colorado. Denver’s Department of Public Health and Environment issued the announcement on Monday.

During a DDPHE investigation, samples of dried marijuana were checked at labs and found to contain potentially unsafe levels of yeast or mold. DDPHE originally opened the investigation leading to the recall after identifying multiple samples that had failed tests from multiple retail store locations.

The recall covers the material — bearing the OPC code 403R-00228 — that came out of three of Bonsai’s cultivation facilities and eleven manufacturers who came into contact with the product through Oct. 14.

The owner of one of the stores mentioned in the recall list told Cannabis Now they have sold Bonsai products in the past, but they didn’t have any product from them at the time of recall. Nevertheless, they found themselves listed because they carried the company’s prerolls in the spring.

“It’s because it was any store that had bought from them since April,” the store owner told Cannabis Now, on the condition of anonymity. “Between that and the outdoor harvest being seeded by hemp, it’s been an interesting Croptober.”

We asked the National Cannabis Industry Association if this was the biggest recall of legal cannabis yet in the post-prohibition era. While Media Director Morgan Fox couldn’t confirm it was the largest, he did say the Colorado recall perfectly exemplifies how cannabis legalization can help keep cannabis consumers safe.

“This is exactly what a regulatory structure is meant for,” Fox said. “Testers caught it, and the single producer responsible is working with regulators to make sure these products are removed from stores and that consumers are warned about it.”

Fox said as far he knew, no one has gotten sick from these products, “and hopefully no one will thanks to this effective implementation of regulatory oversight.” (This stands in obvious contrast with the ongoing vaping crisis, where 26 people have been killed and 1299 sickened from what appear to be unsafe vaporizers bought on the illicit market.)

Fox believes the industry is putting in a solid effort to avoid these kinds of days.

“This is hardly a common occurrence either,” Fox said. “Overall, state regulators and licensed cannabis businesses are doing a great job at keeping potentially dangerous products out of the legal market, though federal descheduling and regulation would help them get even better. None of this control or mechanisms to protect public health exist in the illicit market.”

To help put it in perspective, Fox noted there were nearly 400 food recalls in the U.S. last year.

“I’d say the cannabis industry is doing quite well by comparison,” Fox said, before mentioning that over 206 million eggs from a single supplier were recalled for salmonella in 2018, 12 million pounds of beef from another that same year, “all under what is generally considered to be the safest food regulatory system in the world.”

Bonsai Cultivation bills itself as a state-of-the-art wholesaler of high-end cannabis. According to the company’s website, the management team has over 25 years of experience in the industry.

In July, Bonsai’s Sales Director Brendan McCormick told Westword he believed that state was undervaluing the price per pound of cannabis after the first batch of outdoor, probably light-dep, started hitting the market. Unfortunately, the flowers he was speaking on at the time would have seemed to have been caught up in this week’s recall.

While a lot of Colorado recalls only impact a handful of stores, every now and then there is a big one.

Back in 2015, Denver-based edible manufacturer EpiPure saw 7,700 units of 17 different products recalled. Some of the products tested positive for one or more pesticides banned by the Colorado Department of Agriculture. You can’t legally use things like myclobutanil, avermectin and imidacloprid on marijuana in Colorado, and they definitely can’t be in your finished oil.

We reached out to Bonsai Cultivation for comment, but had not received a response at press time.

Cannabis legislation progresses, yet US companies and US cannabis investors are moving in reverse

Buoyed by wide-scale public support, legislation to legalize and properly regulate cannabis in the U.S. on the state and federal level continues to gain steam. So why are commercial and investment banks moving in the opposite direction? And what are the risks to U.S. companies and workers who are trying to build out this high growth, CPG (consumer packaged goods) sector? As a result, the U.S. retail investor has become collateral damage.

The passage of the 2018 Farm Bill, which legalized the cultivation and sale of hemp and hemp derived CBD, signaled federal acceptance and expansion of the cannabis marketplace in the United States. Republican Majority Leader Mitch McConnell’s endorsement of the legislation and continued support is a further testament to Washington’s growing embrace of the cannabis industry. And recently, the House of Representatives passed its version of the SAFE Banking Act, which would give cannabis companies access to the U.S. banking system including retail banking, credit card processing and access to institutional lending (as opposed to dilutive convertible debt financings).

So it comes as a surprise that an influential U.S. commercial bank would take a step to thwart the efforts of Americans to invest in legal cannabis companies with U.S. operations.

Bank of New York Mellon Corp., one of the largest custody and clearing banks in the world, announced earlier this month it would stop accepting positions(custody) or trading with U.S. marijuana-related businesses, a decision which would restrict trading of popular cannabis companies that are listed on Canadian exchanges, but have U.S. operations. Canadian-listed firms without U.S. operations would still be able to be traded.

BNY Mellon’s head-scratching decision has moved in the opposite direction of the thrust of U.S. public opinion. A Gallup poll conducted in 2018 found that 2 out of every 3 Americans support legalizing marijuana, while key 2020 swing states including Nevada and Michigan have adapted to voters’ concerns by legalizing recreational cannabis use.

The only way to provide lasting relief for U.S. investors in cannabis is with legislation from Washington.

Currently, if you’re a U.S. company that employs Americans and provides legal cannabis products to Americans, you have to publicly list your shares on the Canadian Securities Exchange, without the benefit of U.S. Securities and Exchange Commission oversight.

Currently, if you are a U.S. retail investor you must do cross-border trades in order to invest in cannabis stocks with all of the capital and fees flowing right out of Wall Street to Bay Street in Toronto. But more importantly, the protection of US exchanges and securities laws are also missing.

It also means that America’s homegrown multi-state operators have to raise capital in Canada where there are major constraints on capital and prohibitive costs to the companies and to investors. Almost every deal/listing in Canada carries dilutive warrants that are ultimately cashed in once professional stock short-sellers drive share prices down. The result is that shares of almost every U.S. multi-state operator are down over 60% from their yearly highs, mostly at the expense of the retail investor who is the primary investor in these deals because large institutions are still restricted from investing in the sector.

Moreover, professional investors operating actively-managed or fixed portfolios of cannabis stocks are unable to invest in some of the highest growth cannabis companies — even though they are operating in states where what they do is totally within the law.

At a time where we are hearing chatter about restricting Chinese companies from listing their shares in the United States, this BONY Mellon decision serves to actually restrict U.S-based operators and investors in the cannabis industry at home.

The U.S. cannabis marketplace is one of the largest and most heralded emerging industries in American history. And unlike other nascent sectors, it’s a 100% American-made story. Because traditional credit and/or lending has not been made available to the marketplace due to marijuana’s antiquated and misguided classification as a Schedule 1 drug – along with heroin – the only meaningful way to access capital has been via a reverse merger go-public strategy in Canada.

The SAFE Banking bill now awaiting debate in the Senate is a historic piece of legislation that will open the door to broader financial and legal reforms. But it’s currently missing a key component that would allow for the movement of American, multi-state operators to the U.S. capital markets, with oversight by U.S. regulatory agencies. Such a provision would provide safe harbor to U.S. exchanges while allowing investment banks and pension funds to invest in U.S. cannabis operators compliant with state and federal laws.

Capital in an exciting, profitable and socially-beneficial industry shouldn’t just be flowing north to Canada. It should stay in the U.S. so that when Americans invest in this space, they can do so with confidence.

Legal California has a booming black market: Here's how tech can lure consumers to the regulated market

California may have been the first in the country to pioneer cannabis law reform, but the Golden State is still struggling to eliminate the black market and sell affordable, legal pot, writes Erin Hiatt

In 1996, California voters passed Prop 215 to legalize medical marijuana. In the years immediately following its passage, medical cannabis was a small and largely unregulated affair. With the passage of SB 420, the state allowed for collectives and cooperatives to handle cannabis sales "not for profit," although California soon became known as the "wild west of weed" and an easy place to score a medical marijuana card. The state's cannabis industry became riddled with legal grey area, where cannabis companies on the scale from illicit to semi-legal essentially coexisted. 

With the passage of Prop 64 to legalize marijuana, California launched two parallel, legal markets: adult use and medical. But even so, the black market has not gone away, as proponents of the new law had hoped. Many argue that the industry is overregulated to the point of exclusionary, making if difficult for many players to either enter the industry, or to compete in it. The new program's pricey licensing fees, rigorous testing standards, hefty taxes, zoning restrictions, and altogether costly burden of getting involved have laid fertile ground for the illicit market to grow.

California is expected to ring in $3.1 billion in legal cannabis sales by the end of 2019. That's up from $2.5 billion last year. Any industry would be thrilled with an annual growth rate of 23 percent, but that $3.1 billion pales in comparison to California’s black market sales, expected to haul in more than $8 billion.  

Among other expenses like attorneys and licensing fees, legally compliant businesses often pay taxes exceeding 30 percent, and are unable to deduct employee payroll or other business deductions on their tax returns due to federal regulations — that extra business expense then falls on consumers. Black market operations simply don’t face the same expenses and can keep their prices lower. 

You can’t really blame California cannabis consumers if they are unknowingly, or even knowingly, buying from the black market. Even though there are 583 licensed pot retailers and 263 home-delivery outfits throughout the state, Weedmaps, the ubiquitous online tech company that connects users to local dispensaries, has been listing thousands of dispensaries and delivery services on is platform, making it difficult for regulated businesses to compete against the black market. 

So while cannabis regulators continue their work on sorting out cannabis tax structures and quashing illegal businesses, some cannabis companies are taking it upon themselves to step in and connect consumers with legal, affordable weed. 

Alice Moon is the director of communications at Splitbud, an online ordering platform that offers daily deals on cannabis products for consumers in the Los Angeles area — a.k.a. the world capital of cannabis. Moon thinks that the firm, which soft-launched in June and officially launched in August , could fill an affordability gap for consumers. “The price of cannabis went up in general, but especially the cost of legalization for retailers, brands and cultivators,” Moon told Civilized. “Their costs went up, so they’re passing that cost onto consumers. And we [Splitbud] really want to bring those illicit consumers into the [legal] market.”

Splitbud is a family-owned business whose name was inspired by the days when “you and your buddies would all pitch in and grab together. Everyone paid less and got more.” They offer some deep discounts — up to 65 percent — making some of the prices closer to the cost of weed in Colorado than in California. The company secures these deals by negotiating bulk pricing with cultivators and distributors. Some buds sell for $50 a quarter ounce, and they also sell edibles, prerolls, vaporizers, and concentrates. 

Moon explains that the site is easy to use, and it’s not necessary to be a Los Angeles resident to utilize the service. Simply go to the website, create a user profile, and submit your ID to certify that you are of legal age to purchase. The verification process takes anywhere from one to 24 hours, but once that’s completed, people can order for delivery or pick-up. 

Moon says that even though Splitbud is Los Angeles-centric, their delivery service covers a lot of ground, going as far east as Pasadena. “Right now, we’re working with two [dispensaries],” Moon said. “Marina caregivers, and Koreatown Collective. Consumers can either choose to pick up from those dispensaries same or next day. There is a $10 delivery fee, but with the discount and the daily deals, it makes up the difference.”

Splitbud is hoping they can make a long term impact, not only by connecting consumers with more affordable weed, but by helping them understand the benefits of buying cannabis from compliant businesses. “A lot of people lack awareness, and consumers don’t know if they’re buying from a legal business or not,” Moon said.

So far, their impact plans include street teams, utilizing social media influencers, posting content on the WeedTube (YouTube for weed), and an educational blog to connect consumers with information. Splitbud is also working on a social responsibility with an eye toward having more local engagement and impact. 

In the meanwhile, California lawmakers are still grappling with useful responses to improve the legal cannabis market while reducing illegal sales. Some ideas under consideration are fines for websites that advertise unlicensed pot shops, the creation of a state-sanctioned bank for compliant businesses, and a push to get more local governments to include legal businesses within their borders (76 percent of cities and 69 of California counties have banned cannabis stores). 

The importance of consumers having access to and buying from legal canna-businesses is coming more into focus, as the industry hit its first major crisis with the proliferation of counterfeit, illicit market vape carts that are suspected of sickening more than 1,080 people and claiming the lives of at least 23. 

Since Splitbud’s June soft launch, more than 3,000 people have signed up on the site, proving that consumers are eager to purchase tested, licensed, and safe products, especially when they are affordable. 

Other companies are trying different approaches to bringing consumers more affordable weed. There’s the discount weed brand Dime Bag from Loudpack Farms, who lower their price by cutting out the middleman and growing and processing their its own weed, and utilizing their own distribution networks. There’s also Flower.co, a membership-based cannabis wholesaler (anyone can purchase, but the best deals come through purchasing a membership), who sell in quarter ounces or more by delivery only. 

Moon says she would like to see stronger action from lawmakers to bring down the cost of legal weed. “It’s been a challenge for a lot of companies to operate because of the licensing [requirements,” she said. She would also like to see the legal industry regulated in a way that allows more companies to get involved and that protects those that are compliant. “I think illegal dispensaries need to be shut down," she said, "and the city needs to be more flexible with the licensing process." 

Marijuana stocks are starting to make moves in the market

Those who keep a close eye on the marijuana stock market have seen there be better days in the past few months. This, however, is shadowed by the multi-billions worth of growth that is supposed to occur in the near future. With projections showing the market reaching triple-digit billions within the next ten years, it seems as though short term downtrends may just be that. Of course, we have to consider that pot stocks are notoriously volatile. This stems from the fact that the market is still very much in its infancy.

With such an infant market, it can at times be difficult to deduce where the value is hiding. This however, is made much easier by the amount of research that one is willing to do for a given company. With the utmost information at hand, one can have a much easier time deducing which companies have the most value moving forward. Research is also an investors best tool, and the easiest way to ensure that there are no surprises when it comes to price action of a given company. All in all, pot stocks are continuing to look up for the not too distant future.

A Global Investment Pot Stock

SOL Global Investments Corp. (SOL Stock Report) (SOLCF Stock Report) is one of the leading international investment companies currently working in the cannabis market. The company states that they have a heavy focus on both the U.S. and European hemp and cannabis markets. SOL Global Investments has made quite a name for themselves by investing in partnerships throughout cultivation, distribution, and retail components of the cannabis market. With their prestigious ties to the University of Miami for a new research and development program, the company is positioned to have a unique advantage for the future of the market.

Recently they announced that their wholly-owned subsidiary, Scythian Biosciences, will be spun off into its own entity. Those who hold shares in the parent company will receive shares of the new one as well. The new company will be known as Impact Biosciences Corp. and will work further on developing drugs utilizing cannabis within the U.S. With so much research going on, this looks like just another way that they have maximized their exposure to the pot stock market. The company remains a key marijuana stock to watch for this reason.

A Newly Listed Pot Stock

Sundial Growers (SNDL Stock Report) is an Alberta based pot stock that was only recently listed on the prestigious NASDAQ exchange. The company works on growing the raw cannabis substance and has stated that they have the potential to put out around 75,000 kilograms of cannabis when operating at full capacity.

Additionally, they have an almost 3.6 million square foot farm located in the U.K. which should give them a greater amount of access to that side of the market. As they continue to grow hemp and cannabis, they remain one of the key pot stocks to watch as we move forward for the future of the industry.

Top pot stocks to watch this week

The marijuana stock market is reportedly worth double-digit billions in the present day around the world. With so much money pouring into an industry that was only just legalized a few years ago, it seems as though we are on the cusp of something large. Many of the most popular pot stocks to watch have seen some big losses recently due to a variety of factors. These factors include everything from the large vaping epidemic to some speculative issues with the market.

All of this, however, is characteristic of pot stocks as the industry is still very much in its infancy. One of the key factors of an infant market is the high volatility that we have seen with certain pot stocks to watch. The good thing about this is that many expect the volatility to slow down in the near future as the market becomes more and more established. For now, it seems to be a waiting game to find out what new laws go into place that could effectively allow the pot stock market to flourish to the greatest extent.

A Canadian Pot Stock Worth Watching

Stillcanna Inc. (STIL Stock Report) (SCNNF Stock Report) is a Canadian early-stage life sciences company that is focused on a very large scale extraction of CBD within Europe. The company has stated that they have intellectual property that effectively allows them to produce CBD at a higher rate and a much lower cost than other competitors working in the same part of the pot stock market.

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Recently, they stated that they signed into an initial extraction contract in Europe that would allow them to be the exclusive extractor for Dragonfly Biosciences, a U.K. based CBD supplier. The company has also signed into several other agreements that show that they could continue to be a key pot stock to watch moving forward.

Recently, the company announced that its Polish extraction facility has been able to reach unparalleled purity levels for its CBD distillate product. Currently, there are very few standards that exist in the way of CBD production. The company, however, has aimed on its own accord, to produce some of the highest quality product that is available on the market. This has helped to bring them a large amount of notoriety in the present day. The company continues to show why they are such an important pot stock.

A Popular Pot Stock

OrganiGram Holdings (OGI Stock Report) is one of the most recent pot stocks to uplist on to a large U.S. exchange. The company is considered to be one of the largest growers of marijuana in the whole of the industry. They have stated that they have the potential to grow around 113,000 kilograms of the substance when operating at peak capacity. This means that they should be able to meet the high and growing demand for Canadian cannabis in the present day.

The company has stated that they are also yielding around 230 grams per square foot which they do through a revolutionary three-tiered growing system. Because the company is so committed to reaching the future of the pot stock market, they remain an interesting company to watch moving into the future.