Nicholas Kovacevich, Kush Bottles

Nicholas Kovacevich, Kush Bottles

New Year’s Day will be more than just a party for some Orange County businesses. They’re gearing up for the day California legalizes recreational marijuana.

Irvine-based Terra Tech Corp. (OTC: TRTC), a supplier of medical cannabis and related products, is hiring as many as 250 people in California in the coming year, almost doubling its current workforce of 300. It plans to invest about $32 million in facilities in Santa Ana.

“We got a lot of stuff going on,” Chief Executive Derek Peterson said.

“It’s been the Wild West in California. There wasn’t much framework for people to get into the industry. We’re going from a lax environment to a highly regulated environment. The biggest thing is the administrative burden that wasn’t present. Everyone’s gearing up for operations.”

To be sure, large accounting and legal firms and certainly banks are staying away from the industry, citing federal regulations and reputational risks. That absence is creating a space for smaller service suppliers, like accountants, to enter the market.

“We’re probably one of the largest firms that have entered this space,” said Jon Zimmerman, director of business development for Cannabis Advisory Services at Macias, Gini & O’Connell LLP, a Sacramento-based accounting firm with an office in Newport Beach and the auditor for Terra Tech.

Zimmerman provides advice to cities including Santa Ana to help them understand the law, implement safety rules, and efficiently collect taxes. The accounting firm offers “a suite of proven solutions” to help investors and agencies navigate the budding industry.

“This industry uses the same services as the majority of business,” said Zimmerman. “They need all the traditional business services.”

Legal Bags

Kush Bottles Inc. (OTC: KSHB), which supplies paraphernalia to the industry, such as child-proof bottles and specialty bags, is expecting a three- to fourfold increase in California sales next year, up from $3.86 million in fiscal 2017.

“There’s a lot of excitement in California,” Chief Executive Nicholas Kovacevich said of legalization.

The company’s quadrupling its sales force from four to about 16, he said. It sold about five million marijuana-legal bags last year, a number that could increase fivefold this coming year. That may become a major choke point in the industry, he said.

To become legal, businesses must follow a host of new rules.

Perhaps most important is initial approval from local cities where they’re based before applying for state approval.

Most OC cities have prohibited the industry. When Kush Bottles bought a building in Garden Grove, officials gave a license after being assured it sells only paraphernalia and not cannabis itself, Kovacevich said.

Cannabis Hub

Two large OC cities are the exception.

Costa Mesa has approved some medical marijuana businesses, such as research facilities, but not dispensaries.

Santa Ana has gone full-bore and is permitting 20 dispensaries and maybe more.

10 Spot Collective, a Santa Ana dispensary that provides medical marijuana, will probably expand from 20 to 25 employees because of the legalization, General Manager Sydney Sellberg said.

The new law will force new rules on the dispensary, such as an edible being limited to 100 milligrams of marijuana extract rather than the typical 1,000 milligrams, Sellberg said.

She isn’t sure what customers’ reaction will be on Jan. 1—yes, the dispensary will be open. City regulations limit hours to 7 a.m. to 11 p.m.

“I’m guessing it will be a normal day,” Sellberg said. “We are growing.”

Terra Tech is investing about $18 million in buildings and another $14 million in capital expenditures in Santa Ana alone.

“Santa Ana is trying to position itself as the cannabis hub of Southern California,” Peterson said. “They are trying for first-mover status.”

Industry Size

The medical marijuana industry has been around $2 billion a year in California, and with recreational now legal, the industry may more than double to $5 billion in 2018 and eventually rise to $12 billion in coming years, Kovacevich estimated.

This quasi-legal industry must learn things that regular businesses know: processing payrolls, paying taxes and conducting audits.

“The mom-and-pop businesses might not have a ton of experience—there’s a huge learning curve,” Terra Tech’s Peterson said. “There is a lot to ramp up.”

He said it’s still difficult to find attorneys and real estate because of the stigma.

Kovacevich has noticed an “uptick” in the quality of services provided in the industry, such as legal firms to handle litigation, technology startups to develop tracking systems, and manufacturers selling automation equipment to roll joints.

Cash Problem

The biggest issue is cash.

Federal law prohibits banks from accepting the cash since marijuana is still a federally controlled drug. As a result, industry experts fear more robberies and fraud.

Some have suggested credit unions or a state-owned bank might resolve the problem.

“That issue is front and center. The market is about to open up, and it has not been solved,” Peterson said.

Ironically, even the state government doesn’t accept cash as payment for taxes. If there’s “undue hardship,” an exemption may be granted, which is happening in the industry, Zimmerman said.

In the meantime, Zimmerman’s MGO firm offers a service to collect cash called The California Cannabis Tax Collection Solution. Since many armored car services cannot participate because they have federal contracts that ban them from the cannabis industry, the accounting firm uses a third-party supplier that doesn’t have federal contracts, meets the necessary insurance requirements, and has access to bank facilities.

“There’s tremendous opportunity for all types of businesses,” Zimmerman said.