July Cannabis Industry Update

Cannabis Knowledge & Insights

Yesterday, Derek & Jim hosted our monthly cannabis industry update for July.

This past month, there have some relatively large updates that can affect cannabis businesses throughout the country.

If you need help or a second opinion on certain aspects of your cannabis business, then please reach out to us today to schedule a call with our team. You can also call us at 800-674-9050.

Below is a list of the topics we covered and the questions we answered.

Cannabis Update Transcript

Again, thank you for taking the time to join the GreenGrowth CPA’s monthly cannabis updates, where we talk about the news of the industry and answer your questions. Now, before we get started, I need to let you know that the information contained in this presentation is meant for guidance purposes only, and not as professional legal or tax advice, and further does not give any personalized legal tax investment or any business advice in general. So real quick, but then out of the way, let’s talk about the agenda. I’m going to go over about maybe 10, 15 minutes of prepared materials, a big industry news for the cannabis industry. And then we’ll hop into questions. Now, as I talk about some of these articles, you may have some questions that come up, drop them into the chat. We’ll hop into those. After we get through most of the articles, maybe we’ll bounce jump into what those are actually, whenever they come up, but without anything else going on here, if you need any help with anything tax finance, accounting related with your cannabis business, and please reach out to us via our website at green growth, cpas.com and click that get started button in the top, right?

Or give us a call (800) 674-9050. So let’s go ahead, hop right into the presentation here. So I’m going to cover a few different, uh, you know, topics here. First. Let’s talk about taxes. Everybody doesn’t want to talk about taxes, but we gotta talk about taxes. All right. So big thing happened this past, um, or will be potentially happening over the next few days. You have the California state assembly has unanimously voted in favor of a bill that would severely punished businesses and individuals that support illegal cannabis sellers with fines up to $30,000 per day. And a final vote is expected in the Senate. When legislators returned to Sacramento this month. Now this manager doesn’t just take aim at the cannabis businesses, but people that support them, people that help with advertising people that help with landlords and retail space. So if you’re supporting an illegal cannabis business, you’re likely going to be in some deep trouble in California coming in the next few months.

Now, where did this all stem from 80 to 90% of the cannabis in California and probably throughout the country is sold on the illegal or illicit market. It’s not being taxed. So what the legislators are trying to do is put some parameters in place and some issues are sorry, you know, ramifications in place. If you support these illegal businesses, diverting out tax revenue, then we’re going to punish you. Now, one of the things here to understand is that this will probably go to many other States, right? California is only seeing these kinds of pressures of low tax revenue because they’ve been around the longest, but things I can cannabis. The winds go from the West to the East. What happens in California moves to other places. So be thoughtful around that. And remember that tax evasion has no statute of limitations. If the error is material, especially if you did this purpose.

So tax issues, things of that nature, make sure you’re not avoiding any taxes cause cash crimes are the new drug crimes. So keep an eye out for that in California. Now you’re already seeing some type of enforcement and creative enforcement. I would call it against some of these illegal dispensary. So the CDTFA or the California department of tax and fee administration announced in July that they’re starting to do raids on illegal cannabis businesses. And they did this with the California highway patrol. So they did 12 of them this past month and that none of them, a million dollars in product, a hundred thousand dollars in cash. And it just, it becoming a big, big issue, right? For regulators to keep their hands on this. So be very thoughtful. If you’re going to run an illegal operation. Now they went on to note the CDTFA went on to note that if you’re willfully evading or attempting to evade the cultivation tax, you’re committing a crime.

So be very thoughtful on this, right? And it’s, you know, I don’t think I noticed this here, or I noted this, that all those businesses they rated were all illegal businesses. So if you’re operating or doing anything, you know, under the table, please do not do that. You’re putting your entire business at risk and it can become a really, really big issue later. All right, now we’ve got legal updates. There’s a few cases out here. I just like to kind of keep your eye on. We’re not lawyers, but it’s good to see what’s happening in the legal side, because it will open up for things later. Now, a month or two back, we talked about the Weedmaps subpoena. It was a very big overarching kind of the fed, putting their hands into everything from Weedmaps to, uh, the people that they deal with, things of that nature.

And it looked like the beginnings of a Rico case. To be quite honest. Now, something that’s been brewing is with ease the delivery platform. Now last month, Rubin Wiegand was arrested at lax. Now he was charged with one count of bank fraud and the investigation for him is ongoing. But prosecutors are saying he’s part of a big scheme to fool banks into processing legal pot transactions. As most banks have pretty much shied away from doing this. Now at issue is more than a hundred million dollars in transactions. And prosecutors are saying just a portion. That’s just a portion of the transactions that this is connected to now, ease has not been charged with any crimes yet, but at the heart of the indictment is ease, right? So ease is named in this indictment, but the feds alleged at ease executives are co-conspirators in this, but they’re cooperating very fully.

Now these are ex executives from my understanding, but look, these are really, really big allegations here. Bank fraud is no joke. And you know, just be very thoughtful with when you start to work on these platforms, what you are potentially signing yourself up for. Now, the second one here for legal stuff I want to talk about is that the us department of justice is demanding certain cannabis documents from the BCC, which is the Bureau of cannabis control in the state of California. So pretty much the legislative body or regulatory body that makes sure that everything is kosher for all the licensees. Now, the US DOJ is saying, Hey, we want information about shipping manifests and about licensees. It’s only about three companies and the owners. Now the BCC is pushing back saying, Hey, there’s private information in here. You can’t have access to this information.

And we don’t really know what this, why the DOJ is asking for this. It’s not in the indictment for that, you know, for what’s going on, but it’s possible that the feds are looking for this information to triangulate transactions about the unspoken and pretty unsightly movement of California or West coast cannabis. That makes its way over to the East coast. Now, if you’re in the industry and the cannabis industry, it’s no secret that many States in the East, we won’t name what those are, but they actually allow cannabis to enter the commercial market through loopholes of growers that bring commercial cannabis into this market. So what you see is you see these big amounts of cannabis loaded up into semi-trucks driven to the Midwest or to the East. They get COIs or certificate of analysis on this. And then California cannabis gets introduced into say a Midwest States, commercial cannabis market.

Now the laws and the details of this, I’m not going to talk about and get too deep into it. And you can do your own dive into that, but it’s pretty much tax evasion, right? So if you’re doing any kind of illegal operation in that manner, you probably will get found out, right? Whether it is a jealous competitor that finds out or whatever other way, there are many ways for them to find out. So be thoughtful if you’re shipping cannabis across the country, which is federal trafficking, it’s not good. Interstate trafficking don’t do that, but the DOJ is pretty much looking at this stuff now. And just be thoughtful of that. Now let’s see if any questions in here, nothing happening in questions. So what’s happened to the licensing and regulations, some big stuff here. So at the last month in July, I think the day we actually went live Los Angeles, you know, settled the lawsuit, or like I think the lawsuit was actually dismissed.

And then, uh, applications and things were going, you know, changing for the licensing for social equity applicants in, uh, Los Angeles. So what we saw at the end of the month, beginning of this month ended last month, beginning of this month is that LA has tightened the social equity rules for their cannabis licensing. So LA city council unanimously approved new regulations. That again, are going to tighten up that social equity program and create new law, new rules for licensing in cities that have already reached their cap. Now there’s this thing out there where if a business is too close to yours, you can’t get in, right. There’s just kind of this density issue that we have with cannabis businesses, LA and may other major metros have high population density. And so when you see like millions and millions of people here, you’re going to have millions and millions of shops, but in the regulations, they made this kind of issue around it.

Now, what we’re seeing with this is that the approved changes are going to tighten up this social equity program, implement a lottery system and not a first come first serve. That was the biggest issue with the licensing is it was first come first serve basis. And they’re also going to add new rules for dispense frees that for neighborhoods that have already reached their limits, it used to be such that, um, city council representatives from certain areas could, you know, be an advocate for a new dispensary in an area that has already reached its capped kind of the same thing, but the timeline has been kind of changed and the measures in there, but, you know, read a little bit more into that. If you’re in LA and you want to get licensed, reach out to us, we, our team is very familiar with these new updates and kind of the things that need to happen.

It’s not an easy process for anybody, whether it’s LA or any other state licensing is not easy and it’s changing right. LA one of the most mature markets still has some fluid regulations. So be thoughtful on that as well. A quick MedMen update pretty much bad news. It keeps just piling on for California based MedMen. After their founder stepped down in January, it’s just been constantly getting struggles here. And recently mad men has been hit with a lawsuit filed in may. That has resulted in temporary closure of their two Arizona based stores and Tempe and Scottsdale. You may remember we talked about it in January. They were trying to do a fire sale to kind of cover their, um, their, their, their cash. So, you know, there’s some issues with that and potential loss of a retail license and Pasadena because of the changes in their ownership potentially.

And now there’s a CFO is suing them for legal fees. So why are we talking about this right madman? Who gives a shit who cares? It’s very, very important because we’re getting a front row seat right now to the implosion in a very, very large cannabis unicorn right now. And everyone wants to be a unicorn. I don’t want to say that billion dollar check or that hundred million dollar check. I mean, not everybody, but a lot of people do. And we talk about this a lot. Now, all the issues that they’re facing are growing pains, but they’re great teaching moments for cannabis companies. So be thoughtful. Don’t expand too quickly. Don’t get into a land grab just to say, you’ve got it because you’re gonna have to drop those underperforming assets anyways. And management of your finances is priority over anything else, no matter how good your brand is.

If you have no cash, you have no business. So be thoughtful on that, right? So if we’re looking, if you’re going to try to be a madman, manage your money, like a Warren buffet, be very thoughtful. Like this is the most important thing right now. You ran out cash again, no business. Last thing at licensing here. I want to point out an example of when you do something wrong in Nevada, they will take all of your licenses way. So, um, here we’ve got a Nevada cannabis company was given a 1.2, $5 million fine, and they lost 12 of their licenses. They’re a very large operator in Nevada and pretty much how this all is called canopy. What happens is that they became late on their taxes in 2018. So it starts an investigation. Now they start seeing, Hey, they were selling cannabis off the books.

They were on not testing cannabis. They were destroying particular evidence of not testing. Look, man, this is real deal. Like be thoughtful when you start making good money, pay your taxes, or it could be the one string that pulls the whole sweater apart. Cause when they invite the, you know, local state tax authorities in there, and then the IRS gets involved, Oh boy, they can pull the business apart for weeks. They’ll be thoughtful on that. Now, next thing here, legalization just want to talk about this, get us to get it out of the way everybody talks about legalization every week is a new article of this or that. Congress is planning a vote on federal cannabis legalization in September. Now the leadership of the house of representatives is moving toward a floor vote, very comprehensive cannabis legalization bill again in September, multiple sources are saying this hasn’t come out.

I’m like, give me the bigger news stations, but there is something out there. Now if a vote is scheduled, great, cool. It moves through maybe the house, but you know, how’s the Senate gonna, you know, push back on that Mitch McConnell, the majority leader is a very big advocate of hemp, but not really much on the overbroad. You know, material changes to cannabis regulation. So I don’t know, man, we’ll see how this all comes about, but it’s kind of dovetails into, Hey, we’re in an election year, we’ve got about a hundred days of the election. Give or take. You’re going to see candidates coming out saying, Hey, we’re going to legalize it. And this and that, right? An example of this is the Joe Biden and Bernie Sanders task force. That’s come together and says, Hey, we’re going to anybody who gets elected as a Democrat.

We’re going to legalize this. And the key points to their document is that, Hey, Democrats are going to legalize cannabis for the use and reschedule it. They’re going to support the medical. And they’re going to tell the justice department, Hey, don’t interfere with state affairs. So, you know, candidates are going to promise a lot of things. And I’m not, I’m trying to get me to this political by any means, but candidates, you know, that got into office in 2016, promise a lot of things, not a lot materialize from those particular actions or those particular promises. And the same thing happens. We’ve been hearing about legalization for many, many years. Don’t get too wrapped up in it. This may be the time it happens, but who knows? You know? So don’t let these articles of legalization, get your hopes up too high, just to be crushed. Okay. Be thoughtful on that. Right.

And then, um, again, drop any questions into the chat

Chat, whether you’re on YouTube or webinar jam, we’ve got two more things here I want to cover. And then we’ll hop into the questions. Alright, finance and MNA. So MNA stands for mergers and acquisitions. I saw two big deals coming in this week or less this month that I thought were really, really cool. One of them is a Canadian firm that bought a U S firm through M and a. Now Toronto based multi-state canvas from red, white, and bloom announced that it’s going to buy platinum vape for $35 million in cash in $25 million in performance bonuses. Platinum vape has got their product in 700 different retailers in California, Michigan in Oklahoma. So not a lot of markets, but they’ve got good reach. Okay. This is huge news. Why? Because what we’re seeing is that Canada Canadian cannabis companies that want to get a good footprint in the USA, they’re not going to go through some, you know, rinky dink licensing process.

They’re going to buy proven businesses. Okay. So red, white and bloom, they make $70 million on top line. That was a $60 million purchase. This is a one X on top line as a pretty good, you know, movement for a brand that has no retail locations. All they do is provide product. So I think you see more of this happening over the next six to 12 months, where if you have a good hold, especially because cannabis is a local business, right by state, by state, you’re going to see companies start to buy in of Canadian companies coming to start buying some of these, uh, California or other States based companies, U S state based companies. So, you know, start the tee yourself up for that. Have good financials, have audits done. Make sure if you want to be playing with the big boys and big girls, you have to have your audits tightened up.

You have to have your financials tight. You have to be able to open up the full kimono and say, Hey, here’s everything would you like to buy us? So that was one deal I saw and then a really massive deal cure leaf and up, uh, finalizing their D their grassroots deal. That means they’re opening up their footprint to 23 States. Now it was a huge deal, was $875 million, but it did not come without a bunch of issues, right? It’s like a long time to look into this and just like legal issues. Thank you to Ben and Peter for kind of giving me the insight into this. I see some of the big articles, great M and A’s going on, but there was a, you know, minority, minority shareholders were pretty pissed about all this going on because of particular special cash bonuses, non-compete payments and other consulting and employment agreements.

So, you know, it’s done it’s over and done with, but we’ll see how it all comes together and how this deal materializes down the road. This is something good or something bad. So that’s all the big, big news updates we have now. So again, thank you for sticking around for that news portion here. Now we’re going to hop into some questions. So drop those into the chat here, whether you’re on again, YouTube or webinar jam, we’ll hop into the first ones here. So let me see here. I’ve got Kathy, Kathy has her first meeting with our company on Friday. How should she prepares your meeting with Adam, be prepared to answer questions particularly about your business and understand what you’re looking for and how we can help you out. Right? We, every cannabis business is very unique and they all need different things. There’s this, you know, boilerplate stuff, but, you know, be thoughtful on what you want to actually, uh, need help with. And then Adam can connect you with the right people within our business to make that happen. So hopefully that goes, well, I look forward to hearing how Adam speaks with you and how everything goes, right.

You Catherine.

All right. So let’s go ahead and jump in here. I don’t see anything on YouTube here, so let’s go jump into some of the other questions. Derek, do you want to talk in a jump into, let me see there’s one here. I thought it would be, you know, pretty helpful. So Michael asks here, you know, I would like to discuss tax mitigation, asset protection and investment solutions available to cannabis business owners in marijuana related businesses. So Derek, what are your thoughts on some particular tax mitigation, uh, you know, either strategies or high level frameworks you think about when you speak with clients?

Yeah, for sure. Thank you, Jim. Uh, I think the best approach before you jump into setting up a bunch of legal entities and, and making your tax and accounting reporting really confusing is you, you need to have the revenues, right? Like we’re, we’re talking at least two, if not 5 million a year in annual revenues to have these, uh, these various tax saving strategies work for you. If not it, you know, if you’re out the gate trying to set up a holding company assets, you know, asset company and operational entity, you’re going to bury yourself in compliance. You’re going to pay us much more money than you need to pay us. Right. You know, our goal is not to make money off of tax compliance fees. Our goal is to help support your business. So you need to have the revenues first. And if you do have the revenues, then you know what some great strategies are, asset holding companies.

They are, um, you know, uh, product packaging, compliance companies. You know, these are things that are generally considered cost deductible by the IRS, and they won’t hammer you on to ADE. So, you know, if that is in your wheelhouse and you know, you’re doing, let’s say 200,000 a month, maybe 300,000 a month, then now you may want to start thinking about setting up asset holding companies. And you may want to think about setting up, um, compliant product, uh, compliant, driven, uh, label related companies. And, and that, that will definitely help offset your two 80 E exposure

Hundred percent. That makes sense yet some of these problems will be you hear these problems, but they’re not really, you know, in your sphere of having to worry about at the moment, you know, so that’s, that’s very good thoughtful advice on that. Cool. Again, drop questions and we’ll get to them. We’ve got about seven prepared ones here. So one of the ones that I thought was very, very, um, interesting to get is that, um, Marcello, he asked something here that I thought was pretty cool is that my dispensary is kind of off the beaten path. And I get a lot of foot traffic. Now, there is vacant space in our buildings. So just wondering, should we open up some type of complimentary businesses to capture more revenue? And I think hell yeah, 100% you should open up if you can afford it, right? Don’t stretch your cannabis money to open up another business, but Hey, if you can capture other revenue cool, but what should you open?

You know, a lot of ideas come to mind, grow supply stores, a liquor store. It’s very cash intensive and licensing around that. But if you can do it potentially that, or a convenience store, like a seven 11 type thing, a laundry mat, a carwash to go only restaurant yoga studio. But one of the things you could do is you could ask your current customers, your cannabis customers, wait, what do you want to have here? Or ask them, Hey, what’s your next stop after you buy your cannabis here? Or what did you do before? See what’s actually going on with clients and customers. Cause that’s, who’s going to frequent the place anyways. So I would get a list from them or make a short list and then have people vote, maybe, uh, things of that nature. Obviously there’s the financial viability of the business. You have to do some kind of performance for it, cause it doesn’t make financial sense. Don’t do it. But, and also be clear with your regulations to, uh, whether there’s any particular regulations on owning multiple businesses in the same particular area or things of that nature. I think opening up a complimentary business to capture this type of foot traffic is especially cause you’re off the beaten path. I think that’s a really good idea. So hopefully this helps you out Marcello.

Yeah. And one thing to add on that, Jim is, um, the, our companies that are our clients more over that are starting to do really well are ones that are figuring out how to game Google, not game weed maps. Maps is we’ll charge you two arms and two legs. And the problem with that is the second you do list from Weedmaps or you decide to go for a lower ranking because how we’ve mapped works is the more you pay, the more they rank their business, sometimes we’ll fall off the wheel. So figuring out how to get that type of search on Google will pay far far dividends. For example, if you’re on Google and you’re saying, let’s say you’re in San Francisco and you, you put dispensary San Francisco, you better make sure that your company is listed on Google maps because oftentimes that’s what will rank you first. So, you know, you really want to get creative and figure out how to game Google because that’s the ultimate search engine that you want to rank highest for. Uh, because that’s, that’s how that’s how people and, uh, customers are starting to look for a dispensary is they’re just going straight to Google and they’re just Googling dispensary near me in my city. So that’s, you really want to start to gear more towards that and that will pay far dividends for you

Hundred percent. Yeah. I mean, people, you know, we’ve matched this for like the legacy clients and customers, not people are not downloading an app or going to a new site, they’re using something familiar or even asking their, their top device kind of, Hey, where should I go? So yeah, SEO is something that can be there forever, as long as you’re not doing anything black hat, you know, in the gray areas. Good white hat. SEO is a fantastic investment for your retail cannabis business, for sure. In other, not even just retail. I think showing up when someone says, Hey, I need a distributor. It’s great to show up as the first distributor in Sacramento. So good one on that good deal. All right. So then we got another question here from Amberley and Everly as I’m a smaller brand and I have trouble getting into dispensary’s, they’re asking me to pay fees, to place my products on their shelves. I can’t make these payments. And that means I can’t sell my products. So what do I do? Yeah. Yeah. Derek, you want to jump on that one?

Yeah. Uh, yeah. I’ll, I’ll jump in Jim. And then, and then you follow me up. So that’s a big problem for a lot of people. So, you know, you w you launched your new products, you know, you spent the last 12 months working on the logo, the product, blah, blah, blah. And all of a sudden you can’t get any sores because most dispensers will charge shelving fees. It’s very, very common. The best strategy to do that is you need to really understand who is your core target audience, right? Like, are you going after, you know, a high price point customer, or are you going after the bargain shopper? And then you have to make sure that that aligns exactly and very closely with your marketing budget, because you know, most places will invariably ask to charge. If not, you know, there’s a, there’s a lot of, you know, very basic, you know, out cold outreach, you can do, you can say, you know, your Instagram channel, you can start commenting on another pages. You know, there’s a lot of kind of low hanging fruit that you can do, but, uh, because shelving fees are so high, you need to really make sure that you know who your target audience is because you don’t want to just go out there and try to launch your product and go to 10 different sensories, couple high price ones, middle price, low price. You want to just target on who your core demographic is. Yeah,

Exactly. You don’t have to be in every shop. You just have to be in the right shops. And that’s something that I think people misunderstand and they want to be, they want to be in med men. They want to be in the biggest shop that’s in, you know, in Venice beach and things like that. You don’t have to be in the biggest shops to make the most money. Now, some other strategies, um, aside from, you know, the slotting fees, it’s a tough thing. And look, retailers have the closest of the layer one, right? They are closest to the customer. They can say whatever they want to get you in there. They’re called slotting fees. So, and these can range from like 500 to a thousand to 5,000, 10,000 a month, depending on the dispensary. So one thing you could do is to look for smaller dispensaries to carry your products in more obscure markets.

So what you could do is reverse look at, um, weed maps. I know where like, Hey, anti mass, but looking there’s a lot of data. Look at the newest dispensaries that are there and reach out to those customers or reach out to those retail places and say, Hey, I got a new brand. Would you like to carry this brand? Reach out to people that don’t have a ton of connections that don’t have a huge demand and you can grow with them. Another one here is to create a pull strategy. So Mo most purchasers or buyers in the dispensary’s are not the most sophisticated with how they choose to purchase product. They usually go by word of mouth things they see on Instagram. But one of the things that they do is, Hey customers, you know, what are they asking for nowadays? What you could do is you could have people go in, you know, five to 10 times a week, over a month period of time and ask for your particular product.

Even then the buyer may be starts to Google it, reach out to you, find out who your distributor is. That’s one thing to do. You can find those people on Craigslist or Facebook or your friends or whoever it’s going to be, but that could be one way to do it. And another one is to compete on prices, right? So think about this way. You’re going to pay slotting fees. Potentially. Maybe you sell your cannabis at a loss instead of paying a slotting fee to create more revenue for that retailer, essentially what you’re going to do instead of paying the sliding fee, you’re just giving them free products, right? There will be taxes that have to be paid on that. But there’s another way to say, Hey, give me a trial, give me a month. I’ll give it to you for free and see, and then you can eat the cost of your product, which would have been your slotting fee and then see where that takes you from there. All right, cool. That was a good one here. Any other questions? Drop them into the chat. Cool. We’ve got one on YouTube here. Kathy asks, can you speak to accepting cryptocurrency as payment for cannabis? Derek? Do you have any compliance things on that? Particularly? I have some,

Yeah. I mean, it’s, it’s not common, so I don’t know why you’d want to, you know, it just, it kind of smells like a red flag. Um, so just, I would accept cash, but, or some type of reportable transaction, but yeah, go for it.

Yeah. I mean, cryptocurrency, there’s like a thing six or 7,000 of them at this point now, major ones, Bitcoin, Ethereum, and every other one you could see coming down and there’s some pot specific ones or cannabis specific out there. Um, I dunno, I, I think it’s going to be a lot, a very little amount of your consumers are going to ask to pay with cryptocurrency and the potential overhead and the kind of how cumbersome the processes of doing that would probably slow down your line in that would not lower your revenue and just not make the easiest, uh, transactions happen. Um, yeah. Also I think Bitcoin got accepted or called money recently, and that banks could have custody or you be custo custodians of it. So I mean, able pie take off sooner rather than later, but if you’re going to implement cryptocurrency, I would reach out to someone who is experienced specifically in implementing POS checkouts of cryptocurrency.

It just doesn’t seem like, you know, you’re going to capture more clients because you offer cryptocurrency payments because cash is just traceable as those cryptocurrencies, which cryptocurrency is not really private. It’s not really anonymous. It’s pseudo anonymous. So I don’t know you could balance it to here, but I would say look into things. I think there’s one called gem to IO and a few other protect, uh, potential, uh, providers that do payment processing usually for websites, but, you know, look into it. I’m not the biggest advocate for cryptocurrency in a cannabis business. You’re just mixing like a lot of regulatory potential issues. You know, you accept one transaction in cryptocurrency. You now be on the hook for potentially other things that come down the line. So I wouldn’t suggest you drop some more questions in here. We’ve got a 20, 30 more minutes here. So I’m going to go down to the other prepared questions that we had here. So, um, here’s one on four 70 C. So careless asks kind of to talk about four 70 C and four 70 C is to deal with the limitation on deductions to property use by governments and other tax entities. This is not my wheelhouse. This is very nuanced and specific stuff. You know, what do you know about four 70 C in cannabis businesses?

Yeah, it generally is more oftentimes not, not applicable because you don’t have government incentives. Uh, and so, you know, I I’d be happy to speak to this issue more if, you know, if you’d like to reach out, but oftentimes it’s not applicable because it’s your, you don’t have any government exempt entities.

That makes sense. That makes sense. So care if you’re wa Carol, if you’re watching, uh, reach out to us again, visit our website, green growth, cpas.com, fill out the form and we’ll get back to you. And we can kind of have a more thoughtful discussion on your question on four 70 C. That’s all I got was the word for 70 seats. So that’s how we can’t go too deep into it, but there, it makes a good point, not many government entities and cannabis. Now, uh, another one here is Frank. He reached out to us and he says, sir, I am a Ghanian resident in Hamburg, Germany, and have a very huge land in Ghana and have interest in hemp farming. I’m really interested to go into the hemp industry and need your help and advice or a possible joint venture company. Thank you in advance, Frank.

So hemp is like, it’s kind of flying under the radar. I mean, you’ll see some articles here and there in America. I mean, it’s gonna be generating a lot, a lot of publicity once you get to the crop Tober, which is October, when all this starts to get harvested again, last year, it was kind of like a crap shoot. No one really knew what was going to happen with it, but now you’re seeing sophisticated equipment, a lot of money pouring into it, big businesses asking about it. So I, you know, I can’t really give you a particular contact in Ghana, Frank, but I can, um, you know, tell you that there’s a lot of opportunity all across the world with, with him. And I’m not sure if Ghana has actually legalized yet, but, you know, look into your local regulations and see, right. Cause it’s legal in America, but not every County has licensing for it.

So just because something’s legal doesn’t mean you can get a license to do it. And yeah, you could probably Sue and say, Hey, it’s unconstitutional, it’s legal. I should be able to do it. You know, just look into the regulations of it. But if not, if you’re getting stonewalled or you’re not getting very far in your own individual research, reach out to us again, and we can kind of go a little bit deeper into the specifics on the hemp in Ghana. I can have our team look, look a little bit into that and help you out there. So, sorry, not much, but hemp is, is a big, big wave coming. And I think many people are underestimating how big this wave is going to be. This is going to transform textiles, biofuels, electricity, plastics, so many things. So be thoughtful on hemp. I think it’s a really, really cool thing. All right. Robert asks a question here. What are the challenges of opening a cannabis testing lab in California? So I think first it’s going to be, is it lice? Are they licensing for it in the particular city that you want to be licensed in? Um, Derek, what are some other kind of limitations or challenges when opening up a, um, testing lab? Same cause, right? Not every city’s licensing for you.

Uh, that’s a really great call. Uh, what, uh, are you looking for? Do have a testing lab, licensed client in the city of Los Angeles that it’s turnkey. So if you are looking at, started in the city of Valley, please let us know we have a turnkey solution, but, uh, the biggest drawback for testing and, and it’s a great place to be in is, uh, ISO 17 zero two five. I believe that’s the, that’s the name, but it’s getting ISO certification that that’s generally the biggest bottleneck, um, and getting a testing labs set up, uh, that plus, uh, getting the, the equipment, the equipment will generally run you actually about a million dollars. You can of course buy it on secondary markets and buy used equipment. But, um, if that’s up to your preference, some people like new equipment.

Yeah. And make a great point with the ISO stuff. Why is this a problem? It’s a hard process to go through, but it takes a long time. You got to build your place out, have all your equipment, the businesses running, and then you have to go through the SOP process of getting ISO certified. Another thing I think is also a problem, not a problem, but a challenge when opening up a testing lab is getting clients, right. Testing is just as competitive as other places, you know? So it’s kind of, you know, looking to potentially buy one, maybe more thought a better solution for you that has a book of business or get on the SEO search engine optimization and make sure you bubble up, do a lot of good work and people review you and, you know, word of mouth that will grow and grow and grow and, and look, reach out to us about that one in Los Angeles, the turnkey solution for a cannabis testing lab, reach out to our website or give us a call. Now, Victor says here, uh, what skills would you advise a CPA with government contract or grant accounting? A one 33 far background to develop cannabis from CFO critical skills. I guess it’s more of like a coaching call for a, someone trying to get, I guess maybe you come up at a competitor.

Yeah. I mean, there’s, there’s a lot of clients in the space. Um, I think there’s the question is, do you want to start your own firm? Do you want to work with another firm we’re always hiring, so working together, please reach out to us. Um, if not, uh, if you want, if you want to start your own firm, I would really recommend just checking out our YouTube channel. There’s a ton of resources that should get you up and running to at least handle, um, a couple cannabis clients on your own, if you like. For sure.

Yeah. Reach out to us. We are always hiring more people, always wining our services. We’d love to potentially roll you into our business here. So yeah, reach out to us via the website, Victor, and maybe we could find a way to work together. All right. Cool. Jamie asked in regards to cultivation tax, I thought the tax had to be collected and remitted by the entity who it was first transferred to from the farm. I recently heard someone say that they passed it through from the manufacturer, which is the first stop that the distributor and the distributor, we admitted it is this legal I hundred, I can’t a hundred percent Derek. Do you know what this, I have some things to say about, they keep changing

The rules. It’s, it’s like a distributor to distributor tax payment. Initially it was, you know, first distributor. Now I believe you can pass it up to like two or three, but, but don’t quote me on this because I’d have to double check. But I, I do believe that the, there they do allow for just distributor to distributor transactions, but I would have to, I’d have to double check on the website real quick.

And that first distributors are the ones going to collect the tag, but they would just kind of continually pass it down to the next distributor you’re saying right. They wouldn’t have the second distributor went to go to the grower.

Yeah. Yeah. And one thing to be really mindful of, and this is only specific to the California markets, and this is actually a big phenomenon that’s that’s happening. But a lot of distributors are getting these quote unquote burner licenses. So they’ll buy a bunch of product under a distributor license and then just ship it out of state. Be really, really careful about that because you could also potentially be liable. So, you know, if you’re historically getting, let’s say 1800 a pound, and then all of a sudden you’re selling it to a certain distributor. Who’s, who’s, who’s buying it from you for 4,000 a pound. And then all of a sudden the product just goes missing. You have to be really, really careful because they may try to tag you on a conspiracy. So, um, make sure your product is actually going from your farm to the legal shelves in California. You know, the worst thing that can happen is you go through all these headaches of getting licensed, just to find out that they could potentially pull your license because you’re selling to the wrong distributor.

Yeah. It’s very important to vet your distributors, right? These are business partners. These are people that you are making and sitting, making money with. So, you know, do your due diligence on your distributors because they may ask for exclusives as well. And you wanna make sure you’re getting, you know, in business with the right people, things are on the up and up. So hopefully that answered your question. Jamie, if not reach out to us, Adam can do a little bit more deep dive on the BCC website and get you get the, um, guidance for you. Marco also up would probably know who’s, uh, our audit partner at GreenGrowth CPAs. He would know a little bit more, he’s a little bit more touching with the clients and being in the CFO work that he would see those kind of transactions and give you some guidance on that. So reach out to us. We can give you some thoughts around that. As Derek said, a lot, lots of things could be changing all the time here, so good deal. Um, let’s see. Another one here, Elliot. So Elliott as is cash banking with non-bank types. The idea is to downstream some cash profits out of the cannabis business to outside separate more traditional financial holding. So this is really a question here.

Um, let me see, how would I answer this year? I guess, I guess what Frank or Elliot I think is asking here is should you kind of move money out of your cannabis business, put it into a non-cannabis touching entity to bank it. And I would say probably not, you know, you’re going to see transactions coming in from a cannabis related business, into your non cannabis related business. And especially if it’s a big cash transaction, you know, it’s going to set off FinCEN and they’re going to do some kind of, you know, suspicious activity report SARS, and you don’t want that. So I probably wouldn’t be doing, you know, too much diversion of cash, uh, unless you’re, you know, there’s precedent within your state that you can do these things this way, Derek, what are your thoughts?

Yeah. And that’s also considered money laundering. So you can tell you definitely don’t want to do that. Um, there has to be economic substance under underlying, you know, the, the transaction, right? So that’s why asset management companies will sometimes work because, you know, you are paying for rent, you are paying for use of the equipment. If not, you’re just pushing money around, which is a hundred percent money laundry. And so, so stay away from that.

Yeah, for sure. You need to have a thoughtful reason of why you have these particular entities and it can’t be money laundering and cleaning up bucks. Um, cause you know, CA cannabis banking, you’re getting charged three to 10 points on your money when you make deposits. I understand it’s egregious, but you know, money laundering is, you know, something to put you in jail, right? Uh, what is this guy Al Capone, didn’t go to jail for doing all those bad things. He went to jail for tax evasion and money laundering. So cash crimes or drug crimes. Now no one cares about the cannabis or very few people care about the cannabis. They want to know where the money’s at do not be into any activities that are money laundering based. Um, anesthesia asks, what are some considerations when structuring my multi license Cannabis business. So I’m going to have a few that I want to share. I think when you do multiple licenses, so maybe you have a cultivation distribution and a retail business, maybe even a manufacturing, few things you want to put each license. Cause depending on where you’re at in California, you cannot move licenses between entities, but you could sell the entity. And then, um, now that license is transferred. So I would say if you have a multi-license cannabis business, put your licenses in separate entities to make it very easy to either, Hey, we don’t like cultivation anymore. You can drop the cultivation business. You still have the value that you can sell that business out for. It’s not going to affect the rest of your licenses or holdings. So individually looking at putting your licenses in these different, um, entities and then potentially setting up a multi-entity cannabis business.

Now that is a lot of work and a lot of thought has to go into it. It’s going to include lawyers, CPAs, operations managers, but it’s a function of two things, risk and cashflow and kind of like the economics of your deals. So you may need to set up particular parent entities to make it easier for tax reporting purposes. Cause when you start to set up multi entity, cannabis businesses, every entity, in most cases, if it’s not one of the, um, disregarded entities in a roll up, you’re gonna have to file a tax return. It’s expensive really, really quick. When you start doing multi entity tax returns, you know, we’ve got some people that have like 25 or 30 different entities in their cannabis, um, organization. So that may not be the thing for you. Um, risk really start with the risk on it and look and work with your lawyers on, Hey, all right, what should we do to protect our owners and keep our products safe? So that’s one thing. So to speak with your lawyers, particularly on that of their multi licensed considerations, I think specifically on structuring. Yeah. Other things that structuring here is you’re going to need to model out your cash flows. Okay. So particular

Entity types, you can only take money out

Of the entity in certain ways. And some entities are called pass through entities and you probably have are familiar with this. Um, so you gotta to model out how money flows in the business and what the true economics of the deal are. For example, you may have, uh, say Derek and I started our cannabis company. We’re growing cannabis, we’re growing a lot of it. Now, you know, another person comes in and says, Hey, I want to start a retail business with you guys. You’re going to set up another entity because the economics of the deal are not going to be, Hey, let’s split everything in 30, 30, 30 or 33 30, three 33. We don’t want to give this new person access or any claim to our cultivation business. We just only want them to be part of the retail business. So looking at the fundamental economics of your deal and who’s investing in what entities they have claim and stake too.

So that’s another consideration is the pure economics of your deal. And I think we’re making a video that’s on the content calendar in July. We’re gonna talk about all the different multi entity considerations. I think there’s like nine or 10 examples. We go and there’s video. So more deep exploration on that for the, for in August. But you know, there’s a lot of considerations to that, that, you know, every scenario and every situation is going to be different. So reach out to us. Adam can learn a little bit more about your business and kind of give you some guidance and then maybe set up a consultation with one of our CPAs to really again, model out your specific scenario.

All right, let’s see any more questions I’m to drop questions into the chat, anything, it could be anything cannabis related. It can be whatever you want. It can be about licensing, legal, whatever tax finance. Um, alright, let’s see what other ones are on this list here. Sandra asks, how can I effectively reduce my tax burden? I mean, there are many, many different ways to reduce your tax burden. I think we jumped into this a little bit. Um, proper accounting. I think one of the things that most people let me step back taxes are always on people’s minds, but it’s the last thing that they think about. They don’t build the processes. They don’t implement the systems that allow your tax professional to give you a good tax position. For example, you need to have great classification of your transactions. Like what are you spending money on?

And you know, what type of business are you in? Because some of these indirect expenses through four 71 can actually be deducted from your cost of goods sold. But if you don’t have the right tracking mechanisms and systems within your business, right, the, an improper or not the right chart of accounts can really damage your business. You may not have a way to classify transactions that, Hey, now the tax repair gets in there and says, all right, you know, we could have actually allocated some of these, but I didn’t have the information to know where that was going. So one way to effectively reduce your tax burden is capture the right information at the right times for your business, having the right chart of accounts, having the right systems. That’s very, very important. Another one to reduce your tax burden is work with a CPA don’t and work with someone who’s cannabis specific.

Now I’m not going to sit here and just like, Oh, green growth is the greatest thing on the planet. I think we are. But one thing to avoid is working with someone who’s like an oil and gas CPA, or someone who’s just small business specific that doesn’t have specific expertise in the cannabis industry that doesn’t know case law and how tax court cases it changes every month, right? I’m telling you about some things that change the tax court. I think in, in may, when there was a four 71 allocations between Richmond patient group, that was a big thing. Your generic CPA is not going to know that. So I would say work with a cannabis specific CPA to help you with reducing your tax burden because again, every scenario and every situation is different and I’ll make sure you get the right positioning best tax position for your specific scenario.

Cause everybody’s got other income too, right? When you maybe have all pastor entities, but then one year you get a lot of passive income through rental income. It could change your tax scenario. So you need to partner with a CPA who can look at the longterm effects of all of your business endeavors and not just silo cannabis business. We are a comprehensive tax firm and do your personal, your cannabis business and, you know, make sure that everything jives properly. So you’re in the personal best tax position. All right, cool. We got Adam on here. Adam asks, how do you value a cannabis dispensary license and is currently not an operation, just a valid license. He’s seeing a lot of numbers flying around. This is one of your favorite topics there.

Yeah. I love this topic, um, city and state. So if you can fries with a little bit of color on city and state that will, that will help drive the value. Um, cap licensing, uh, highly densely populated city. You’re looking at actually probably around seven figures, unlimited licensing, uh, low, low population density, low figures. So, um, you know, it’s, they’re, they’re, they’re levers that you pull. If it’s, you know, let’s say for example, city of Pasadena and Los Angeles, affluent city Capitol six licensing, six licenses. You’re gonna look at our super high figure, go to let’s say normal Oklahoma unlimited licensing, not very densely populated, probably not worth anything. So it depends. It depends on those factors, but, um, those are, those are generally the main drivers.

Yeah. The density. And if there’s a cap, right. If someone can go and get a license without having to go through you and it’s relatively easy, then you know, it’s probably not worth all that much. Another thing to think about as well is, you know, um, I want to say this.

Yeah. I mean, businesses are where the real, real value is at and with licensing. So here’s like kind of like the main value. If you’re gonna be able to sell a license and you wanna put a thoughtful valuation on it, it’s going to say, well, how much did it cost you to get that license in? How long was the time? And the time is the premium stuff here, right? It may cost 80,000 in legal fees and applications. And then it costs this much in rent, right? Rent is a big cost of getting licensed. Cause usually you have to have a space to get licensed. That’s not always the case, but in most cases, so you add up all the costs, it took you to get to your license, especially if you have documentation of that, that can be your starting point to getting a, a, a evaluation going on a license. But the big premium again is the time. If it took four years to get a license and it’s not going to change and it’s going to always be four years, people will pay a huge premium for that. But if it was like, Hey, you know, six months, you may not get that big of a premium on that. A license costs that you actually put in. So, you know, reach out to.

Yeah. And also, um, just quick back of the envelope, um, production-based licenses, aren’t, aren’t nearly worth as much, to be honest. Uh, it’s retail usually almost always holds value, but if you’re talking cultivation manufacturing, you have to go somewhere where the land is cheap. The labor is cheap, otherwise. Um, I mean, it’s just not worth that much.

Yeah. And one of the things that we have three videos on business valuations, it’s by different verticals, Marco, our audit partner and valuation partner. He, uh, put those together there. You know, it goes to the DCF is this kind of cash flow model and how to actually, you know, the considerations of valuing your business. So there’s a three part series, just look up cannabis, business valuations on YouTube. Our videos are the first three to pop up. It’s a three part series from Marco and he can give you more information on that. Cool. Alright. So Clifton asks a question. Do you recommend for 71, see and tracking, operating expenses as cost of goods sold and making that your policy. Uh, alright. You want to jump in?

Yeah. Yeah. Usually, I mean, four 71 is usually the golden rule. Um, there have been other tax, uh, tax court precedent that that’s thrown out two 63 a, but uh, to get not, not too technical to confuse everyone else, usually for somebody. One is the rule of thumb as of today, obviously that could change later down the road, but that’s, that’s usually the best approach.

Yeah. And look at, it depends on the vertical you’re in, you know, always track your expenses and then let your CPA or your CFO do the allocation. So it’d be, you know, your 47 call four 71 allocations. How much of your indirect expenses can be backed into cogs. Now with four 71, see this, you know, look back at to our YouTube channel. There’s one called the Richmond patient group. This came out this year. I think it was in April or may. And what it said pretty much has said, if you’re a retailer, you cannot have access to four 71. See your light manufacturing of rolling up joints or packaging up bulk flour into small flower. Like little eighths is not going to allow you to get access to four 71 C. And there was a whole long explanation of this and not really long but detailed.

And it’s very thorough and it gives you some guidance on that. But for 71, see, that’s the golden rule. There was a memo that came out about two 63, a unit cap don’t abide by those rules. So reach out to us. We can walk you through. This is something we do in our outsource CFO service, where we can help you kind of get a grip around the numbers of your business. So look, you can worry about creating great products and making business deals. Let someone else deal with the financials and giving you that a monthly dashboard. Here’s how things are going. Here’s what you should consider. This is tracking up. This is tracking down things of that nature. So again, Clifton reach out to us and we could potentially help you out with that. We’ll wrap up here probably like eight minutes at the most. I was wanting to get into the last few questions here. One second. Let’s see what else we have here in chat.

Okay. Clifton asks the potential loophole in four 71 C right? There was a thing that came out with, take the TCGA tax cuts and jobs act. If you’re asking about that loophole, we saw, I would not be the person to be testing this. There’s no case law, particularly on the changes. I think it’s like $25 million in revenue cap. And you don’t have to, you know, abide by two 80 or something like that. I would not be the business to go test out these waters a hundred percent not, you know? So I would just stick with what’s proven what court cases are out there that support your tax position. Don’t be a, Hey, I need to pinch every penny out of my taxes. I wouldn’t be doing that if listen, if that’s what you’re talking about. Yeah. It’s the 25 million gross receipts. You can read the blog post.

These are theoretical ways to reduce your taxes, but it may work and you get in and then two or three years is fine. You don’t hear a word. And then the IRS sends a letter, Hey, we need more clarification on this line item. And that opened you up to a bunch of issues being three, four years on the road, penalties, fines, and interest. If you get caught, I’m in a bad, you know, unsupportable position, then you’re in, you’re in some trouble. So I don’t reach out to us. I know that our team can give you some thoughtful guidance around, you know, what you should and should not consider for your cannabis business regarding four 71 C uh, we’ll get to two more questions here.

See, let me see what are

Manny ass? You know, what’s the best effective marketing strategy for delivery. Garrett got to it earlier. That’s going to be SEO search engine optimization. That is a instead of pay to play, don’t be paying the BM platforms because the moment you stop paying deflates your entire business. Um, so that, and customer loyalty programs work really, really well getting people to come back. And if people engage with random games, right rent, there’s a book out there called hooked it’s by near y’all. You should read this it’s about tech most specifically, but there’s a thing about random rewards and how that brings customers and clients back to looking at your place. So looking at random rewards for your current clients always helps them to keep coming back there’s mechanisms in our brains that we always want rewards, random rewards, really help with keeping clients. So I looking look into that book.

That’s a really good one, but SEO, best marketing strategy for any vertical. Last one here. Uh, do you consult on business models? Very interesting and understanding what seems to be working with, for manufacturers right now to get in to the black sooner rather than later. Yeah. I mean, we can surely consult on any types of business models specifically for manufacturers. Contract manufacturing is a great, great way to bring up your revenues without having to actually, you know, uh, at any incremental costs for most, in most cases, right? Your machines are sitting idle anyways, you could, depending on your license type, if you have a type S license, a shared license, you could potentially have people doing like almost a WeWORK model for your machine manufacturing. But yeah, Elena reach out to us. We have got a lot of thoughts around different creative business models. One cool business model I saw for deliveries, canvas delivery was kiosks at different places where clients can make orders and then have it delivered to their home or have it specific places.

Cause some, um, how do you say cities are becoming more lenient on delivery, curbside pick up and things like that because of COVID. So this could open up totally new, different business models with kiosks, where people make orders. So lots of cool stuff coming down the pipeline here. Alright. That’s pretty much all the questions we have here in the two chats. Again, thank you very much for joining our monthly live update. Hopefully this has been valuable for you and you’ve gained some insight onto, Hey, how the market’s changing the finance legal taxes. Hopefully your questions got answered. If you have any further questions about finance, accounting, anything cash in cannabis or anything, cannabis related, please reach out to us via our website at greengrowthcpas.com. Click that get started button in the top right corner. Or give us a call at (800) 674-9050. Thank you again, have a great day. And we’ll talk to you soon.

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