the crazy life of a cfo in the cannabis industry · heroin, lysergic acid diethylamide (lsd),...

The Crazy Life of a CFO

in the Cannabis IndustryJon Paul, CFO, Plus Products

March 17, 2020

Jon Paul FEI Member since 1992

Transferred from FEI Chicago to Silicon Valley 2018

CFO -Plus Products- since June 2018

Specialty- Hypergrowth Environments- 2X+ sales growth

Toys- Kidco

Generic Pharmaceuticals- Vitarine

Wireless Telecom- Aerial Communications

Healthcare- Focused Health Solutions

Furniture Distribution- Brook Furniture Rental

Each sold successfully to strategic or financial buyers

Financial Executives International, Silicon Valley Chapter

(FEISV) is the leading organization in Silicon Valley where

finance professionals build lasting relationships, develop

their professional and personal skills, and advocate for

one another and for the profession.

California Dreamin’

Saved

by a

Tie

www.plusproducts.com

www.plusproductsinc.com

Plus Products

Founded 2016

Leading producer of edible

gummies in California (source-

BDS)

Went public on CSE in October

2018 (symbol- PLUS)

Cross-listed on OTC (symbol-

PLPRF)

Expanded into Nevada

Launched high-dose hemp-CBD

line- marketed DTC (direct to

consumer)

About the Plant and the Industry

https://www.trupotency.com/trudiligence/post/how-does-cbd-work

Source: the-human-solution.org

Not

Medical

Claims-

Benefits

Some

Find:

What Makes

the Industry

Crazy For a

CFO!

Taxes

Cash Collections

Banking

Canada

Going Public

Being Public

Real Estate

M&A

Unregulated Market

Geographic Expansion

Taxes

Cannabis is Schedule 1 Drug with DEA

Schedule I

Schedule I drugs, substances, or chemicals are defined as

drugs with no currently accepted medical use and a high

potential for abuse. Some examples of Schedule I drugs

are:

heroin, lysergic acid diethylamide (LSD), marijuana

(cannabis), 3,4-methylenedioxymethamphetamine

(ecstasy), methaqualone, and peyote

280E Tax Code

What it Means

Taxed on Gross Margins!

Do get to deduct costs of producing the product

No Deduction for SG&A Expenses

Sales & Marketing

General & Administrative

Interest

Extremely High Effective Tax Rate

Normal Cannabis

Sales 10,000,000 10,000,000

Cost of Sales 6,000,000 6,000,000

Gross Margin 4,000,000 4,000,000

Operating Expenses 2,750,000 2,750,000

Operating Income 1,250,000 1,250,000

Interest Expense 250,000 250,000

Pre-Tax Income 1,000,000 1,000,000

Income Taxes 250,000 1,000,000

Net Income 750,000 -

Taxed On Pre-Tax Income Gross Margin

Workarounds

Move costs above gross margin line

Still need to substantiate- such as time allocations

Can distort financials

If public company, pressure to keep gross margins high

Create alternative line of business

IRS will look at total entity- is overall business still cannabis

Will see through artificial businesses, organization structure

What does work

Hemp/CBD business

Taxes

280E

Paying Federal taxes while losing money

Can distort financials

Accelerated Depreciation

May lose out on incentives available to other companies

Tax DepositsIRS ability to take tax deposits can be limited

Cash- A

Different

World in

Cannabis

Too Much Cash Flows Through System

Grower

Dispensary Distributor

Manufacturer

Extractor

The

Hefty

Bag

Story

Cash

Challenges

What’s our “Cash” Balance

Unloading the Cash

Not many suppliers will accept

10K limit for many

Cash Continues to Grow

Cash

Collections-

Four Stages

of Evolution

Shopping Bag

Private Vault

Courier

Electronic

Stage 1-

Shopping Bag

Take this Shopping Bag

Head over to Oakland

Come back with 250K

Check Your Life Insurance

Stage 2- Private Vault

Private Company Vault

Customer Brings Cash Over

There

Get Two Volunteers from

Your Company

Ties Ups Most of Afternoon

Stage 3- Courier

Line up a Cannabis

Friendly Bank

They Send Courier to Meet

Customer

Pick Up Cash-Count Remotely

Deposit into Correspondent

Bank

Stage 4-

Electronic

Deposits

Like Rest of World

Get Customer on Same Cannabis Network

Receive Payments Electronically

Banking

Evolution

Banking –

Early Days

1. On the Run

2. Several Accounts- Small Balances

3. Don’t Ask – Don’t Tell

4. Monthly Infusions

5. Be Nimble

Downside

Not Transparent

Cancel on a Moment’s Notice

Too Many Accounts

Cannabis

Bank

Collects Cash by Courier

Deposit in Correspondent

Bank

Credited to Your Account

Pay Bills Electronically

Downside

Long Time to Clear Cash

Short Leash for 30-90 Days

Balance Builds-Up

Fees

Servicing

Banking Challenges

Hard to find right financial institution

Rigorous, time consuming application process

Approval may be subject to other factors- bank, pool

High fees in many cases, even % of cash deposited

May also have compensating balances

Servicing and reporting not up to par

Relationship unstable- bank may exit on short notice

Dispensary

Horror Story

Found bank to work with them

Dumped by bank

No warning- just check in the

mail

Had to scramble on no notice

How to pay suppliers,

customers, other bills

Repeat

Repeat

Solution-

Segregate

Banking

Holding Company-

Regular Banking

Operating Company-

Cannabis Banking

Non-

Cannabis

Banking

Most of Banking is Non-Cannabis

Segregates Risk for Bank

Behave Like Normal Bank

Full Suite of Services

Credit Cards

Cannabis

Banking

Only Limited Portion of Banking is Cannabis Related

Payment for Hash Oil/CBD

Collections from Distributor

Fully Transparent

Risk is Contained

Joined Stronger Cannabis Banking Network

Lead Firm Does Vetting, Provides Technology

Tied to Network of Dozens of Banks/CU’s Across Nation

Encourage Others in Supply Chain to Participate

Customers- Enables Electronic Payments

Other

Banking

Issues –

Merchant

Accounts

Not Many Alternatives

High Fees

Can Get Cut Off Even With Full Transparency

Merchant Accounts Limited –

Cannabis

Master Card/Visa/Amex not opening

their networks

Alternatives very expensive

Alternatives can lack transparency

Point system

Multiple transfers

Eventually get snuffed out

Competitors call out unfair practices

Elavon Drops CBD Merchant Accounts

Terminated abruptly March 19, 2019

In it for only a few short months

Had offered competitive rates- similar to regular businesses

Gave firms 45 days to find other options

Appears to be business rather than regulatory related

https://www.cannabisbusinesstimes.com/article/us-bank-evalon-pulls-out-

merchant-services-cbd-industry/

Other

Banking

Issues-

Credit

Cards

Not likely to get regular credit cards

May rely on credit of principals

Danger of getting cut off abruptly

Risk to principal’s credit rating

Services May Be Short Lived

Corporate credit cards (for paying bills)

Payroll services

Software

Expense reports services

May have them, then get pulled back

Canadian

Banking

Issue 1-

Accepting

Capital

Raises

Take my money- please!

10M Private Placement

Hard to Find Anyone to Even Take the Funds

Issue 2-

Getting

Funds Cross

Border

Plan A- Credit Union

Credit Union No Longer Able

to Do Cross Border Transfers

Plan B- Trust Account

• IPO Proceeds Deposited in

Trust Account at Attorney

• Worked for Several Months

• Send down monthly

needs to US

• Eventually this window

closed as well

Plan C-

Solution

Cash Management Accounts

Setup at Investment Bank

Cash Management Group

Able to Transfer Funds

Going Public

Canadian

Audit Firm

Likely to Start with Smaller firm

Big 4 in Canada Won’t Touch US Cannabis Firms

Tough to Keep Staff on the Audit

Fear of not being able to travel to the US

Limited Resources

Historical

Records

Go back multiple years

Some records missing

Cannabis oil invoices

Audit started after year-

end

Recreate

Inventory

Cash Box

Non-Financial Records

Shareholder Registers

IFRS

International Accounting Standard

Differences from GAAP used in US

Share Based Compensation

Different method of amortizing value of options

Lease Accounting

Right of Use assets and corresponding liabilities

Convertible Debt

Other Areas

Natural vs Departmental Operating Accounts

Organizational

Issues

Setting up Canadian Holding Company

Establishing Tax-Free Exchange

Creating Second Class of Stock

Avoiding Foreign Private Issuer Trigger- Must Be Under 50% FPI

Otherwise could be subject to SEC reporting & Sarbanes Oxley

Notifying Hundreds of Shareholders

Insurance-

Directors &

Officers

Private company D&O invalid upon public offering

Very few underwriters

Premiums very high

Coverage limited

Retentions high

Can dwarf cost of all other insurance

Being Public

Few analysts

Unrealistic expectations

When will you …….

Pressure to grow fast

Brutal Public Market- Canadian Firms

Not Much Better- US Firms

Public Capital Markets Closing Tight

Easy public markets until early 2019

Many secondary offerings done with convertible debt

Convertible debt coming due in 2020 and beyond

Shares way below conversion price

Cannabis firms running short on cash

Over half less than 2 quarters cash on hand

May not be able to turn to current investors

Only major public offerings last 9 months are SPACs

Blind pool of capital – have to acquire within 18 months

Real Estate Limited number of communities

High tax rates on sales in some areas

May be located far away from corporate offices

Available supply may be limited in a community

Power supply can be an issue

Cannabis build-out may exceed market prices

Real estate investors can’t get loans- requires equity

Higher risk of cannabis firms

Cap rates are 2X or more- 14% vs. 7%

Twice the rent- 1,400,000 vs 700,000

M&A

High valuations

Private companies basing off public markets

Fragmented markets

State by State

Lack of Good Information

Other Challenges

Unregulated Market

Expanding Multi-State

Marketing Uncertainty

Limiting the

Crazy

Don’t Skimp on Finance Team

Get Historical Records in Order

Setup Your Organization Structure

Split Your Banking- Cannabis vs. Non-Cannabis

Help Your Customers with Banking

Plan for Capital Needs

Line Up Plenty of Private Capital

Go Public Only if You Must

Keep Plugged In- It Will Still Be Crazy

Get Outside Help

To Get It Done- It

Takes a Village!

Tax Advisors

Accounting

Attorneys

Insurance Brokers

US Audit

Canadian Audit

Bankers

Investment Bankers

Technology Firms

Thanks for Coming!

Jon Paul

CFO, Plus Products

847-372-1963

jon@plusproducts.com

jon@valueaddedfinance.com

www.linkedin.com/in/jonfpaul/