the crazy life of a cfo in the cannabis industry · heroin, lysergic acid diethylamide (lsd),...
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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
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
www.linkedin.com/in/jonfpaul/