The cannabis industry has been growing like wild in recent years. Though only a few countries have legalized recreational use, many areas have full or partial medical use. Within the US, almost every state has legalized some degree of medicinal or recreational use. Legal cannabis production is one of the fastest growing industries in North America. If the US moves closer to full legalization of recreational use (currently only in 12 states), the market could explode even more.
The challenge that cultivators face is that ramping up production to sell to newly opened markets is a time- and capital-intensive process. In Canada, the largest producers like Canopy have raised billions in funding to build new production facilities. Most of this new capacity can take a year or more before it is usable. The competition among producers racing to meet legal demand squeezes margins. Just because there is a tremendous opportunity doesn’t mean that success is guaranteed for market participants.
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Production and cultivation have also been regionally focused. The first states to legalize recreational or medical use at scale saw local producers spring up to fill in the demand in that area with black market sales filling the gap as the legal growth got up and running. Companies that took advantage of the growth in their home market were not able to replicate that in other markets that became legal at later points. Only in Canada and other countries that legalized on a federal level were firms able to scale up significantly.
There is a big difference between new opportunities becoming available and an individual company being able to capitalize on that opportunity. This is even more true in a field as complicated as cannabis. Each state that has legalized to some degree has instituted their own systems of licensing, tracking, and other regulatory hurdles for companies to follow.
The biggest winners in an environment like this are firms like Helix TCS Inc. (OTC:HLIX) that actually benefit from the strict and complex legal structures. Since their merger with BioTrackTHC, they have been the market leader in seed-to-sale tracking and dispensary point of sale systems. These systems are used to follow each bit of cannabis product throughout the growing, cultivation, processing, and sales process. Regulators concerned about collecting taxes and preventing illegal diversion of product often require the use of these systems as part of the licensing process.
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Other major seed-to-sale providers have big positions in individual states (California is the most notable here) but their business has not extended into neighboring jurisdictions. Helix (OTC:HLIX) has created the largest presence in multiple jurisdictions throughout the US and has avoided service issues that have plagued several competitors. The most noteworthy example is in Pennsylvania. Since being awarded the contract for seed-to-sale tracking in PA, the contractor in the state has experienced a number of technical problems that have brought all cannabis sales to a halt on several occasions.
The risk aversion of state legislators relating to cannabis is a great opportunity for firms like Helix with in-depth tracking and reporting platforms. Their software even works for tracking cannabis products past the point of retail sale. Companies can track which customers buy which products and keep medical use records that combine purchases with prescription info. Regulators get insight into sales and use data to make sure legal restrictions are not exceeded.
While most of the press attention focuses on the companies cultivating and processing cannabis products, the best growth opportunities and profits might be going to the ancillary firms supporting the industry. Companies like Helix, which benefits from both its BioTrackTHC tracking software and its recent announcement of intent to acquire Amercanex and the ACExchange cannabis commodity sales exchange, may be able to grow more consistently and not suffer from the margin compression that many producers are expecting as new capacity supply comes into the market in the near future.
This story was originally published on Daily Marijuana Observer.
