Cannabis Industry Companies
The cannabis industry has been budding in recent years as a result of changing attitudes and regulations, Many states have legalized marijuana for medical purposes and an increasing number of states are also legalizing the use of cannabis for recreational purposes.
However, many cannabis companies still continue to face challenges because the Federal government continues to list cannabis as a Schedule 1 Drug in the Controlled Substances Act, the most tightly restricted criteria reserved for drugs that are considered to have “no currently accepted medical use.” As such, companies in the cannabis industry struggle to obtain banking and may be faced with conducting their business in cash. The difficulty in obtaining credit raises a number of significant risks, including the risk of loss from theft, as well as the safety of company employees.
While many continue to file lawsuits and argue that cannabis should be removed off of this list, owners of cannabis-related businesses are struggling to manage effectively due to the increased restrictions and guidelines related to the regulation of cannabis.
Further, until the Federal Government removes cannabis from the Schedule 1 list, many professionals have, and most likely will continue to avoid working with cannabis companies. As a result, this will continue to limit cannabis companies’ ability to obtain the best talent, both internally, and as it relates to external advisors.
Many states have limited the number of licenses available to prospective cannabis companies and therefore have limited the number of companies that may enter the industry. Licenses may be granted separately for growing, cultivating, and retail. Obtaining a license involves extensive background checks, including financial and criminal background checks on those individuals that want to own and participate in a cannabis company. States have imposed very restrictive regulations and perform regular audits to ensure compliance with rules and regulations.
Compliance with regulations creates a financial burden on companies both in terms of providing up-front capital for the business and to fund the high-cost associated with regulatory compliance.
How We Can Help Your Cannabis Company
Because the cannabis industry is a cash-based business and so highly regulated, it is critical that companies have comprehensive internal control procedures to ensure compliance with regulations and to ensure that company assets (and notably cash) are protected.
Safeguarding assets is key control. There need to be significant controls over the physical assets, including but not limited to: access to the facility and the inventory of products; for example, hiring armed security guards, using barbed wire fences, multiple check-points with strong locks, security cameras, IDs that are always visible designated by the department, and guard verification for entering and exiting the premises.
Controls over cash are critically important. Cash must be maintained in a locked vault and the vault must be in a room that is not accessible by staff and visitors. The best practice is to have at least two people involved in receiving and recording cash received for product sales and payments for purchases.
Cash activity should be recorded and verified by a person independent of the transaction and there should be additional counts of cash upon receipt and at the time cash is put in or removed from the vault. There should be controls over access to the vault and there should be no less than two people needed to open the vault. Once the vault is opened, the second person should observe the activity of the person in the vault. In addition, the room housing the vault should have cameras and the recordings should be maintained in accordance with state regulations.
As regulations ease in some states, there are some banks that are considering working with cannabis companies. As banks are also highly regulated, they require that their customers have sound financial operations and controls and in that regard. As a result, having a chief financial officer or controller on the team adds credibility to the company seeking a banking relationship. The CFO or controller will be able to provide banks with the various financial reports that they will require, typically financial statements on a monthly or quarterly basis.
In addition to being fluent in regulations in the Cannabis industry, accountants should have knowledge of 26 U.S. Code § 280E.
Section 280E of the IRS Code
Section 280E of the IRS code governs taxation for the Cannabis Industry. At a very simplified level, Section 280E states that businesses that involve a controlled substance (even if legalized within a state) will not be allowed tax deductions. In addition, Cannabis businesses unfortunately get taxed at a much higher rate than conventional businesses.
Section 280E has carved out one exception, which allows Cannabis businesses to allow deductions only for their cost of goods sold (COGS). Identifying which items can be deducted through COGS is a complex process and varies depending on whether your cannabis company cultivates (grows), produces (extracts), or is a retail dispensary. Contributing to the complexity is whether, and to what extent, certain expenses may be allocated between COGS and general and administrative expenses. Cannabis owners/management should confer with tax professionals on these complex tax rules as they would on any other tax matters.
CFO Strategies professionals will ensure that your recordkeeping is complete and accurate and that the internal control processes and procedures facilitate complete, timely, and accurate reporting. CFO Strategies can help “nip your financial stress in the bud.”
Some of the reporting and information we have provided to cannabis companies include:
- Cost per product sold
- The average cost per unit for cultivation, production, and retail
- Inventory reporting for cultivation, production, and retail
- Profit & Loss reporting by grow room
- Profit & Loss reporting by product
- Dispensary production and reporting
- Cash flow and earnings forecasts based on cycle times, number or rooms, days of blooming, and pounds per light
- Daily reporting and tracking of cash
- Excise Tax Filing and Reporting
- Construction Accounting for building and improvement of Cannabis Facilities
- Board of Directors reporting and Board Meeting Presentations
Other Deliverables we Provide to Cannabis Companies
Profit & Loss Statement (P&L)
Cash Flow Forecast
Annual Budget and Financial Business Plan
General & Administrative (G&A) Expenses Vs. Budget
Accounts Payable Aging
Accounts Receivable Aging
Debt Covenant Compliance
Gain/Fade Analysis (Comparison of profit margins from period to period)
Development and analysis of KPIs (Key Performance Indicators)
Evaluation of Internal Controls and Development of Standard Operating Procedures (SOPs)
Comparison of actual results to the business plan
Other Ad Hoc Reports requested by management
Additional Services CFO Strategies Provides
Work with lenders to obtain lines of credit
Identify and develop new banking relationships
Work together with outside 3rd parties (CPAs, Insurance, Regulators, auditors)
Assist in recruiting and training staff
Serve as a trusted business advisor
One-off projects such as mergers and acquisitions
Assist in implementing new regulations (PPP, EIDL programs)
Assist in Exit Strategies