A Growing Opportunity

July 13, 2018
SD&I Cover Story (July 2018): Security integrators find new revenue opportunities in the booming cannabis industry

In 1996, California became the first state in the nation to legalize the use of marijuana for medical purposes. More than two decades later, medical marijuana is now legal in 30 states and the District of Columbia, while nine states and D.C. have thus far legalized the drug for recreational use.

With the country’s views on marijuana continuing to soften, the legalized cannabis industry is expected to see exponential growth over the next several years, which, of course, is good news for the businesses that serve it – and that  includes security integrators.

According to a report published earlier this year by Arcview Market Research and BDS Analytics, the total economic output from legal cannabis is expected to grow 150 percent from $16 billion in 2017 to $40 billion by 2021.

As one might expect, the demand for security equipment and services from this industry is high given not only the nature of the product itself – still illegal under federal law and easily moved on the black market – but also the extraordinary compliance requirements placed on growers in the states in which they operate.

Chad Gordon, VP of Visible Intellect, a new systems integration firm based in Orange County, Calif., says that as the legal landscape has begun to change in recent years – particularly with Colorado and Washington passing legislation to allow recreational marijuana use – he knew that more specific compliance requirements would be forthcoming and that security and other technologies would be in great demand moving forward.

Indeed, marijuana farming is now highly regulated by the states from the time plants are cultivated, harvested and sold in a dispensary – a process known in the industry simply as “seed- to-sale” tracking.

“These are things that we would normally find in a high-value environment,” Gordon says. “We see it in retail distribution and places where you have systems that are tied in with RFID so the organization has real-time awareness of what is happening within the facility – where a product is, where people are and that sort of thing.”

Gordon, who formerly served as director of client solutions for Cannatech Builders – a specialist in the planning, design and build of technical grow facilities – says that he and his business partner held off on making a full plunge into the cannabis market until last year, when California legalized recreational marijuana and started to form a more robust regulatory framework for specific security standards.

“At that point, I felt the industry was going to need professional organizations focused on the supply chain aspects of this new industry, which is a lot of what our background and experience have been in,” Gordon says.

While there is certainly a lot of opportunity in the space, Todd Kleperis, CEO of Palm Springs, Calif.-based Hardcar Security, which provides both armored car and systems integration services to the cannabis industry, warns that working in the market is not a walk in the park and that companies are not going to get rich quick.

“People think that this is easy, that they are going to get in, make a lot of money and they are going to do it fast,” Kleperis says. “I’ve been in this business for almost two years and have not drawn a salary. I’ve got every investment and everything I have in my life into this thing. It is incredibly challenging to raise money. No one wants to give you cash to grow your business. It is probably the hardest thing I have ever done in my life, and I lived in China for 15 years.”

Ethical Concerns

Given that marijuana remains a Schedule I controlled substance under federal law, and that many people are still morally opposed to its use, there are certain ethical concerns that integrators who want to tap into the opportunities presented by this market must take into consideration.

For Gordon, having grown up in an era of D.A.R.E. and the old “just say no to drugs” slogan, it was a certainly a big factor for him starting out; however, after doing some research about the medicinal uses of the drug and how the government’s position on it has evolved through the years, he says he saw that there was certainly value to it on the medical side. “I felt like there was enough evidence to say that maybe this isn’t what we all thought it was for as long as we have,” Gordon says.

Having worked for a Department of Defense contractor prior to Hardcar, Kleperis says he was never an advocate of the cannabis industry but had a change of heart as he learned more about the drug and its medicinal uses. In fact, Jeffrey Breier, who co-founded Hardcar with Kleperis, is a veteran law enforcement officer and executive protection professional whose views on marijuana were changed after it was recommended to him by a doctor for pain relief following a back injury.

“Jeff had been a police officer putting people away for cannabis for 20 years and he thought that it was never going to work, but oddly he tried it and it stopped the tremors and the pain that he had and he said, ‘wait a minute, there’s something to this,’” Kleperis says.

Still, Kleperis says he is not interested creating a generation of potheads – instead he wants to help those with a medical need. “I am supporting the medicinal growth of this industry. I don’t want to see five million more stoners out there that are just getting high,” he says. “The objective is we need to securely grow a segment of the industry that is right now a wild wild west.”

Common Challenges

One of the biggest lingering questions for the industry has been whether or not the Department of Justice and federal law enforcement would start cracking down on legal cannabis growers under the Trump administration. However, just last month, President Trump said that he would likely support a bipartisan bill recently introduced by Sens. Cory Gardner (R-Colo.) and Elizabeth Warren (D-Mass.) that would end the federal government’s longstanding ban on marijuana and defer to state laws on the issue.

Should the legislation come to pass, it would mark a proverbial sea change in U.S. drug policy and remove the threat of federal intervention that has hung like a Sword of Damocles over the industry.

Because most banks still refuse to accept deposits from marijuana-related business due to its federal prohibition, the industry is essentially an all-cash business, raising concerns about not only how the money itself will be protected but also whether authorities could seize payments to contractors working with cannabis growers.

As a service provider, Gordon says that integrators are not as susceptible to money seizure because they are not actually working with marijuana but merely the facilities that house it. “We have been working with investment groups or the people who are building the facility – which is a new construction environment,” he says.

“We are not touching the products and the business is not as yet up and running, so the money being paid to us is coming out of traditional bank accounts and normal sources,” Gordon adds.

Kurt Will, president of St. Louis-based systems integrator Will Electronics – which outfitted a cannabis facility in Illinois with security systems nearly two years ago – says the fact that growing marijuana is still against federal law, combined with the limitations growers have in working with traditional banks, can make things challenging for security integrators.

“It adds a layer of complexity for a company like ours to be able to evaluate (a cannabis business’s) credit worthiness,” Will explains. “Are we going to get paid to do this job, and what kind of recourse do we have if we don’t get paid through the courts?”

Perhaps the biggest concern for integrators working in this business is the liquidity of those who have contracted their services. For example, Kleperis says it is not uncommon for a company to come in, have several million dollars in funding, start growing plants and then suddenly go belly up because they did not have any additional capital.

Available capital was also a major concern for Will when his company won the contract for the Illinois facility. “It was a new company that was created to do this project so there were some concerns about their credit worthiness,” he says. “As the job (progressed), it became quite a challenge – but they did pay for it.”

Tom Silcott, president of Maryland-based S3 Integration, advises integrators to be careful which cannabis businesses to partner with. “It becomes a shock to them how much a security system costs,” he says. “There is a heavy security requirement, and a lot of security goes into (the facilities).”

Silcott adds that there are also various state requirements integrators must make sure they meet when working in the cannabis industry. Pennsylvania, for example, requires video surveillance footage from marijuana facilities to be stored for a minimum of four years – thus, it is imperative for integrators to familiarize themselves with the regulations on a jurisdictional basis. Some states, such as Maryland, also require security contractors to obtain a special license to work in cannabis processing sites.

“When it comes to dispensaries, cultivation and grow facilities, each one of has their own set of regulations,” says Mark Corbett, Senior Account Executive at S3. “We have done deployments in different jurisdictions, and every one has different regulations to meet.”

Like any other industry, cannabis growers are looking to get the most bang for their buck when it comes to their overall security investment. This means that security integrators working with these end-users will need to provide a certain level of education to help them understand that security and managing such a large amount of risk is about more than just being compliant.

“Many more mature industries have come to understand the way in which security products help them run and manage their business,” Gordon explains. “With the infancy of this industry and the people who are getting involved in it not having enough awareness and experience in the business world yet, we do not always see that.”

“When you are dealing with clients who are cash-limited in a sense, you have to make sure they are not cutting corners and taking just what they need to pass (inspection),” Corbett adds. “We have been fortunate that every (facility we have secured) so far has passed the first time.”

Not coming from a security background, Kleperis says many end-users getting involved in this space are not aware of what it really takes to have a hardened facility because they are simply trying to grow a plant.

“Here’s an idea of what kind of facility we are talking about,” Kleperis says. “If you have ever been to downtown Oakland, it is a bit of war zone...and in that little war zone is a very large (cannabis) facility. That immediately becomes a security (risk). If the facility is housing $20 million to $40 million in cannabis – that is the easiest commodity in the world to move right now. It is more liquid than gold.”

Opportunities Abound

While it is hard to put an exact dollar figure on how much the cannabis industry will spend on security equipment and services in the years to come, Gordon believes it is the single biggest emerging vertical for integrators. He adds that as larger players begin to consolidate their market share and standardize their systems, there will be even more opportunities for security service providers.

Given the fact that many grow facilities lack the space for on-premises solutions, there is also RMR to be had from cannabis cultivators as they look to cloud-hosted and managed services to ease their security burden. There are also traditional RMR opportunities in the form of ongoing monitoring and maintenance contracts.

“From an RMR standpoint, most facilities are required to have intrusion monitoring through a third party and most also want to carry a maintenance contract to ensure their systems are in compliance at all times,” Silcott says.

With marijuana growing facilities that can be as large as several million square feet in size, Kleperis says an increasing number of integrators are now taking a serious look at the cannabis business and are noticing that there is a lot money to be made – especially when it comes to video surveillance and access control systems, which are typically mandated by the states. He does caution that integrators need to make sure they are working with growers they have fully vetted, and that the integrators themselves are on a solid footing from both an insurance and legal perspective.

Despite some of the popular stereotypes of pot users and growers that exist within our culture, Gordon says that modern day cannabis businesses are not run by shady gangsters or hippie stoners – but rather by legitimate business professionals. “It is a serious industry,” he says. “Unfortunately, society is still trying to combat what they think a pothead is.”

Sidebar: How the cannabis industry meshes logistics and security technology

Due to the highly regulated nature of the industry, many cannabis businesses require some form of “track-and-trace” solution. One company that has developed such an offering for the market is Flourish, whose supply chain management software solution was purpose-built for cannabis cultivation, manufacturing and distribution operations to help them keep tabs on plants from seed-to-sale. 

“That includes tagging the plants, moving the plants through the different phases of cultivation, recording weights at harvest, tagging inventory that’s packaged out and, when you get to manufacturing, tagging all of the subsequent packages and the history of where they came from,” Flourish CEO Colton Griffin explains.

The Flourish software can also be integrated with video management systems to tie security more tightly with certain aspects of the supply chain. “We work with our clients to identify certain choke-points that would be valuable to have video associated with it,” Griffin says. “That could be a station where you are weighing product, a shipping or receiving dock, or maybe just a locked storage cabinet or room. If you wanted video every time somebody entered a room or located inventory to a specific location…then we can send them a message and, of course, that video is searchable and there can be analytics on top of it.”

Steve Birkmeier, VP of Sales and Business Development for Arteco, whose Video Event Management System has been leveraged by five different cannabis facilities, says that while video surveillance is a standard requirement for marijuana growers from a security perspective, it can also be used to help them operationally. “Compliance is the key to success in the cannabis industry,” he says. “What we look at is how to take video security – a basic requirement – and apply it to the grower’s facility in a way that increases their operational effectiveness toward compliance.”

Birkmeier says one of the ways Arteco has done that is by taking its Open Connector integration platform and incorporating seed-to-sale tracking software, which is a track-and-trace software similar to what can be found in the logistics industry. “It will track that plant from the moment it is cloned until it leaves the facility,” Birkmeier says. 

Birkmeier adds that they have also seen demand from the cannabis industry for facial recognition solutions to be able to verify identities at certain checkpoints within the facilities. “If someone gets through with somebody else’s credential and they are walking by what appears to be a passive camera...facial recognition will pick up that person’s face as being someone not recognized by the system and log that as a security event,” he says. “It is really a layered approach to security.”

Aside from traditional security technologies – such as video surveillance, access control and intrusion detection – there are a number of other solutions that integrators working in the cannabis growing market may have an opportunity to sell. These include augmented LED lighting systems that can be controlled remotely for indoor grow facilities; ventilation systems to remove noxious gases from the air; CO2 and oxygen sensors; temperature controls; as well as RFID solutions, which are used to tag and track plants.

Joel Griffin is the Editor-in-Chief of SecurityInfoWatch.com and a veteran security journalist. You can reach him at [email protected].