FULL TRANSCRIPT: Cash Flow Lessons Learned from a Cannabis Dispensary Owner

FULL TRANSCRIPT: Cash Flow Lessons Learned from a Cannabis Dispensary Owner | Convert audio-to-text with the best AI technology by Sonix.ai

Chris Cody:
There’s still a lot of mismanagement, poor spending habits from even companies that are incredibly well-funded. There’s the company you’ve probably heard of. They’re fairly large. And, right now, the owners, the two primaries are being sued by several of their investors for, basically, what amounts to misappropriation of funds, where they have total control over their books, they have raised hundreds of millions of dollars, and simply spend it as they will beyond their acquisitions and licensing that they have done. There’s that. So, I mean, it’s really all over the board. And they told them, like, “You guys are going to waste a million dollars. You’re going to have this whole crop fail,” and they tell them, “Well, we’ll just spend another million.”

Dani Hao:
Hi, I’m Dani.

Nicole:
And I’m Nicole. Welcome to the Spend Culture Stories Podcast where we explore the connection between company spending and culture. Join us as we dive deep into understanding the people, processes, and tools that makeup spend as a whole or what we call spend culture.

Dani Hao:
Hi, everybody. And welcome to another episode of Spend Culture Stories. And today, we have two special guests here today. One, we have Carlo and he is a cannabis technology consultant from Vancouver, BC.

Carlo Alvarez:
Hey, everybody. Hey, Spend Management Podcast.

Dani Hao:
And we also have Chris Cody, the CEO of Highly Functioning.

Chris Cody:
Hello, everybody.

Dani Hao:
Hey, Chris. And we’re so excited to have you here today, just because I know we running a special segment on cannabis. So, we’re really excited to hear from you on what the space is like right now, how is it like managing the finances of the cannabis business. And, also, what you have learned throughout the years.

Chris Cody:
Yeah. It’s been a very interesting experience just from start to finish, I have to say, with so many different regulatory and tax implications for all this stuff.

Nicole:
Maybe you can tell us a little bit more about yourself and your previous roles because we looked at your LinkedIn a little bit, and we noticed that you open your own dispensary called Urban Legends. Can you give us a little bit of that experience and tell us a little bit more about your role there?

Chris Cody:
Yeah. So, in 2011, I founded a company called Urban Legends. It’s a medical marijuana dispensary in Washington State, just south of Seattle. And it’s very, very interesting. I mean, very wild west. Basically, what you needed then was at least a small little nest egg. I think between me, and my partner, and my wife, we had about 20 grand. And it was really just about finding a landlord who would rent to you. It was kind of a gray market and very challenging just to find that part.

Chris Cody:
And so, I’d spent a few months looking around. And, finally, had found a location that I could set up in. There’s real basic stuff. The state here was going to be passing rules. And then, they didn’t. And so, that became this very confusing situation where there was going to be a state regulation, and then there was not.

Chris Cody:
And so, from that, I became very involved in the political process. I helped form an industry organization here called the Coalition for Cannabis Standards and Ethics. The City of Seattle had come to a bunch of us, operators, who they had allowed to open thinking that this regulatory environment was going to exist. And then, they said, “Well, can you guys put together some self-policing rules, some standards that you will adhere to, so that we, at least, have some good actors to point at?”

Chris Cody:
And so, that’s what we did. We spent about a year putting that together. And the whole time, each one of us, small business owner, running our own businesses. But activism was foisted upon some of us. Some of the operators were also activists. And, yeah, we, kind of, ground that out in a very unregulated environment. Within about a year of me opening my store, there were 10 stores within three blocks, very intense competition, very much a race to the bottom for the pricing.

Chris Cody:
One of those businesses was what they call a farmer’s market. So, it would be 30 odd tables set up from producers who would just grow in their basements, or garages, or maybe drive it up from Oregon or California, and just sell it right there out of that store.

Chris Cody:
Anyway, so, a lot of competition, very interesting. And then we had legalization comp, which opened up a whole new raft of problems. So, here in Washington, they did a lottery that myself and my partner entered. And we won a few of those licenses. And then, we realized, how are we going to raise money? There are rules about where you could place the stores. There is limited availability for real estate because of the buffers and requirements of distancing from schools and whatnot. And especially in the City of Seattle, there are dozens of schools, and then also preschools, and daycares, and libraries, and all these things that you couldn’t be near.

Chris Cody:
And so, the difficulty was trying to simply find a location. And then, once you found a location, how do you secure the lease or maybe even purchase? And a lot of business owners, in the same position, everybody had different solutions. Maybe you had a wealthy uncle, or you had done pretty well in medical, and you had a pretty significant bankroll. Literally, cash in most cases. But just being able to get a shop up and running was very difficult.

Chris Cody:
Some people lucked out. Their location’s already buffered, and they had a good relationship with their landlord. For us, we had to try to cut a deal with a group that had secured a lease, and they were going to build out the shop, and provide the funding. And that did not go well. We ended up, essentially, losing that business. They had to pay us out after a year and a half of disagreements as to how it was all going to go.

Chris Cody:
And that’s very common in this business. I can’t tell you how many companies have folded or had significant troubles because of partnership, arguments, disagreements, much of it around the finances. Partly, a lot of that experience, along with my lobbying efforts, we were able to get a path to licensure again. And that’s when I was able to open Urban Legends downtown in Seattle, which is still a going concern. I sold out of that a year or so ago.

Chris Cody:
And since then, I’ve been focused on the national legalization. At least, to state by state, following, tracking, and then also taking on clients, mostly in the retail realm, people trying to set up shops in the most efficient way possible. When I was talking about those financial difficulties, especially the taxes, many people just coming into the industry don’t really understand what the IRS tax code 280E is and what it means for your bottom line. So, that’s been a real challenge.

Chris Cody:
So, parlay that into consulting, and I’ve been up and down the coast, down to California quite a bit, helping people do mergers and acquisitions. I, also, go through licensing applications, just setting up their — doing their layouts and helping them with their SOPs, so they can be ready to go when opening day comes and be able to actually get to opening day, which is pretty difficult.

Carlo Alvarez:
That’s actually really interesting that you mentioned that. I guess, in terms of the people that call you looking for help, in terms of like when it comes to finance, what are their biggest concerns?

Chris Cody:
Well, I’ll tell you, most of them don’t actually consider the finance. In my experience, you’ve got two basic kinds of entrepreneurs in the space. The first kind is rapidly disappearing, and that’s the mom-and-pop shops. They’re also called maybe heritage stores or legacy brands. These are the guys who’ve been in business in California since the early 2000s and in Washington since like the late 2000s.

Chris Cody:
A lot of them came up in the black market, gray market. The financing portion, the finances, I would say there’s a strong strain of economic ignorance. People don’t necessarily understand cash flow. They don’t understand budgeting, you know, very basic things. They haven’t really needed to use them for a very long time. Lots of issues there.

Dani Hao:
So, I just wanted to do like a follow-up question to Carlo’s point. So, I know what the situation of the gray market at that time when you opened your own dispensary. And, now, with legalization coming into the States, I’m just wondering, how do you think business owners are now currently managing their books?

Chris Cody:
So, the other kind is not the mom and pops, it’s the corporate guys coming in now. Most of it is private equity. And in a lot of cases, what I’ve seen is the people bringing in the money act as the CFOs. And if it’s a big enough fund — like there’s different sizes, right? There’s some groups that are just trying to set up like one large grower, which is pretty significant in and of itself. There’s other groups that are setting up chains of growers or chains of stores. And for those folks, a lot of them come from finance in some way. A lot of it is real estate money.

Chris Cody:
In terms of regular processes, yeah, they do have that. They do have, you know, budgets, and forecasting, and all of that. What I’ve seen though is there’s still a lot of, I would say, mismanagement, poor spending habits from even companies that are incredibly well-funded.

Chris Cody:
There’s the company, MedMen, which you’ve probably heard of. They’re fairly large. And right now, the owners, the two primaries are being sued by several of their investors for, basically, what amounts to misappropriation of funds where they have total control over their books. They have raised hundreds of millions of dollars and simply spent it as they will beyond their acquisitions and licensing that they have done.

Chris Cody:
There’s that. So, I mean, it’s really all over the board. There are some companies that are very well-run. Some mom-and-pop shops who understood finance, and budgeting, and all that upfront, then they have been able to — as long as their business itself is strong, their location is good, and everything else, they’ve been able to parlay that into significant funds and are now able to find pretty decent rates on hard money from private equity.

Chris Cody:
And the other side of it is guys who does larger conglomerates that know how to raise money, but maybe aren’t so much versed in actually running the businesses. And so, those companies are able to actually have a large footprint, but they’re not run very efficiently. They have a lot of issues with their budgeting, with their spending, not really understanding where to put their marketing dollars. not really understanding how much they need to set aside for their tax burden.

Dani Hao:
Maybe you can give the audience a little bit clarification on the differences because I know some of our viewers are in the States. So, definitely around that kind of legal regulations, there is definitely a lot of difference there.

Chris Cody:
Yeah, okay. In the United States, there’s a special tax code called the 280E, which was written in the ’80s mostly to kind of go after coke dealers, people running cocaine from Colombia. And it goes back to an old United States tax law, which is that you pay taxes on what you earn, not what you do. So, it doesn’t matter if it’s legal or illegal, you’re still liable for your taxes, right?

Chris Cody:
Anyway, what 280E does is it means that you cannot write off basic expenses. Like you can write off your cost of goods sold, right? But you can’t write off your employees. You cannot write off your rent. You can be somewhat creative if your processes allow to roll some of that expense into your cost of goods. But anything that’s considered trafficking by the IRS is nondeductible, which means that whatever your payroll is, whatever your rent is, you have to add that to your income, and you have to set aside cash for that base as it is income, which means that your end tax burden ends up being higher than it would be significantly.

Carlo Alvarez:
That was a really great explanation. Thank you for that. So, I guess, in terms of your company, Highly Functioning, so you manage growers, brands, retail outlets, real estate. What kind of tools do you think make a responsible company, cannabis company, need in order to survive?

Chris Cody:
Well, certainly, tax planning is a big one and having a very good standard operating procedure manual. Having those positions defined, making sure that people operate within their roles, making sure that you can back up your explanations in an audit to be able to tie things into your cost of goods sold that are directly related.

Chris Cody:
It’s very important. It’s happening now in California where a lot of companies, they’ve been licensed legal for a year. And, now, they’ve all got traceability software. Now, they’re tracking everything. And now, they’re not able to push stuff under the rug. It’s all trash.

Chris Cody:
So, they’re starting to look at their, now, tax burdens and they’re significant. If a store does, like, say, a store is about $5 million annual growth, you are looking at maybe a million-dollar tax burden. Pretty significant. It’s still nearly 20%. And then, once you add in all your other expenses, I mean, most of the properties that are involved in these transactions, especially for a decently cited retail location, they definitely get a premium. If you bought it, if you were able to purchase it, you have those holding costs. If you weren’t able to purchase it, and you’re paying extremely high lease, same problem. You can’t write that off.

Chris Cody:
So, being responsible, yeah. I mean, you just have to be very, very organized. You have to have a good team that understands all of these things. They understand compliance because it’s less of a marijuana or cannabis-selling business, it’s more of a government-compliant business. That’s what I tell everybody whenever I go in the shop. I’d say like, “We’re in government compliance these days. We have to maintain seed-to-sale traceability. You can’t endanger the license. You can’t endanger our ability to operate.” And so, that needs to be priority one, right next to generating as much revenue as we can.

Carlo Alvarez:
That’s actually really interesting that you talked about compliance. I’ve actually been in contact with a few retail shops. In terms of the state-regulated compliance software, what are some of the gaps that you find is missing when it comes to managing their spending?

Chris Cody:
Well, number one, none of the systems I’ve used are — they’re compliance systems. They’re not for managing you’re spending. The most they do is you can place orders through vendors, have them come in. The whole point is to make sure that all of that stuff is counted when it arrives, tracked and traced, paid. Outside of Washington, a lot of it’s done in cash. Washington has banking, but most of the country does not. Although, that’s hopefully changing. There’s a bill right now in the US Congress that could allow for cannabis banking to be legalized finally.

Chris Cody:
But like I said, the compliance software, its whole job is to just be compliant. You can do histories. You can get your spreadsheets downloaded. They’re supposed to integrate with QuickBooks. Most of the systems that I use don’t. We have to print out our spreadsheets. And then, in a lot of cases, input that data into QuickBooks manually to be able to manage, and generate forecasts, and everything.

Carlo Alvarez:
In terms of the systems that you use in the past, can you describe what systems you have used that are for compliance and that don’t really do the job that you’re saying?

Chris Cody:
Well, there’s about a hundred different solutions right now. BioTrack, Metrc, Leaf. Then, there’s Green Bits, Corona, IndicaOnline. Those are the ones we’re most familiar with. There’s easily another 50. There’s lots of tech guys who want to try to, like, solve problems.

Chris Cody:
In my experience, what they’ve kind of done is — I mean, especially the earlier systems, a lot of the more scab down. Oh, yeah. Like MMJMenu, MJ Freeway, those were products that were meant for a different business, and that were repurposed for cannabis. And those never really worked well for me in terms of, like, really being able to see a solid snapshot of your inventory, keeping things like very square.

Chris Cody:
I mean, it’s been difficult. Like generally speaking, you’ve got a bookkeeper and then a CPA. And then, you’re going over the numbers pretty regularly with both of them to make sure everything’s coherent and that you’re hitting your budgets.

Dani Hao:
Totally. And speaking of hitting your budgets, I’m just wondering, what are some misconceptions when it comes to CFOs and compliance when it comes to financial controls? Because you mentioned a lot of these businesses nowadays, you have like the big corporations, and you have the mom and pops. So, what the financial controls, like, obviously, if it’s a bigger corporation, usually, you have a finance team there to, kind of, enforce policies and procedures. But with the like smaller shops that are trying to scale up their processes, what are some things that they lack?

Chris Cody:
Discipline. The mom and pops have a real problem, and that, like, a lot of them actually have, like, a mom and pop and your family around. I’ve seen it where, like, guys, the owner’s dad come in, just pull cash out of the till, give stuff away for free to customers, that kind of stuff. When I try to tell the guy like, you know, “Get your dad out of here, man. He just [??],” he doesn’t want to get rid of him. He trusts him. He doesn’t mind that he takes some money from the till every now and then. So, okay, that was a difficult conversation to have, and it didn’t really go well for me.

Chris Cody:
But that’s not just the mom and pops. You know, the other thing I’ve seen is that a lot of these bigger companies that are managed to raise all this money, they just — amendment notwithstanding, a lot of them have real budgetary issues where they don’t have real control. There’s usually a group of owners at the top, people who hold equity and are signers of the bank accounts, and they will spend.

Chris Cody:
Some of them, they’re making plenty of cash. And some of them have just raised plenty of cash. And you understand the difference there. It’s just weird when you go into an office and set of offices that are very nice. You’re looking around, and you’re trying to figure out what the company actually does. You see like some kind of famous artist piece on the wall, hazard to say a Picasso or something. You’re like, “Well, what do you guys actually do?”

Chris Cody:
And it’s difficult. You know, especially, like I am very deep in the industry. So, I kind of hear about, you know, like, “What’s up with these guys? What are they doing?” I’ll dig down to it, and I’ll find out like, “Oh, yeah. No, they had a huge grow, and it failed this last year. And, now, they’re doing something else. I don’t know. But they managed to raise enough capital that they can sit that out.”

Chris Cody:
A friend of mine was doing consulting for a large grower here in Washington. And he was going through their facility, and they did not have a good SOP. In fact, it was terrible. They were tracking powdery mildew and mites from room to room without any kind of clean processes to mitigate that.

Dani Hao:
Oh, wow.

Chris Cody:
And he told them, like, “You guys are going to waste a million dollars. You’re going to have this whole crop fail.” And they told him, “Well, we’ll just spend another million…”

Dani Hao:
Oh my goodness.

Carlo Alvarez:
Wow.

Chris Cody:
“… and get it right.” Yeah. There’s a whole lot of that, especially at these bigger groups. You know, once you’ve raised $100 million, especially if you’ve never had that much money, it’s pretty significant. And you, kind of, just stop counting.

Dani Hao:
Yeah. So, that’s really surprising to us because you would think that with all these VC-backed resources, they would be able to have more of like, I guess, robust way of tracking these finances. And, you know, you mentioned that cannabis is a heavily audited and a compliant industry. So, how are you able to get away with things like that?

Chris Cody:
Well, when you say auditing, you’re talking about money?

Dani Hao:
Yeah.

Chris Cody:
The government says auditing, they’re talking about inventory. They’re not linked. I mean, not in a practical way here, right? The government doesn’t care, like, if you blow every penny you’ve got, but you better not lose a pot because that’s a violation.

Dani Hao:
Gotcha.

Chris Cody:
That’s the biggest difference. And like I said, not every company is like this. There’s plenty that are responsibly run and are doing very well, but it’s just running the gamut. And another thing I would hazard to say is like some of these big idea guys, these VCs, they get maybe carried away, get sucked into the free style of the industry, in general, and kind of lose focus, or, you know, there’s other companies where they’ve got the budget to lose money for a decade, and they’re just comfortable with it already. And I’ve seen that as well.

Carlo Alvarez:
That’s really interesting on how the difference with the auditing and what the government actually looks for. I guess in terms of the supply chain and procurement, seem to be big pain points based on some business owners we’ve spoken to. How does having a compliance software work with a procurement department in cannabis?

Chris Cody:
Well, I mean, it’s pretty straightforward. The procurement department really needs like a budget from the CPA or bookkeeper, right. And that just tells them, like, you’ve got some rough projections, so you know about what you’re going to do for that month. And so, you get a budget for your buying, for like a retailer anyway. And most of my perspective here is from the retail side, by the way. Growers is a little bit different.

Chris Cody:
So, yeah. So, the procurement department, the buyer, right, there’s usually, like, every store or group of stores has a single buyer. And that buyer goes out to farms, and discusses terms, and places orders. The responsible or the best ones that, you know, they don’t wait for the salesman to come around and provide samples. They’ll go, and go to the farms, and see how the product’s being grown to find out if it’s going to be a good product for their store, something that will have a good consumer response and encourage repeat clientèle.

Chris Cody:
You know, the software itself, I mean, it’s straightforward. The hard parts with it are there’s gaps, there’s data ghost from time to time, especially the point of sale system’s not generally the same. Like they’re integrated with the state track and trace systems, but they’re not the same systems. So, sometimes, one loses products or mislabels products, which can cause a lot of lost time and tracking that down on an inventory audit. You know, there’s all sorts of barcode errors. There’s also just basic employers where you’ve got an employee ringing up a barcode that’s a different lot but the same product.

Chris Cody:
So, if you’ve got one strain, say, Blue Dream, right, so many growers grow Blue Dream because it’s a great producer. But then, the state has rules on, like, how large a lot can be, right. So, it’s five pounds of Blue Dream is a single lot, right. But if you have a giant grow, you have maybe a hundred lots. I don’t know, maybe 20 lots. Each one of those lots ends up with a different barcode, but they’re the same product.

Chris Cody:
So, at the end user, when your bud tender’s bringing up a customer, they’ve got something in the display that’s just displayed for the customers to see. And they’ll pull that out, they ring it up, it goes into the system. The system’s tracking a different barcode now. And then, you’re pulling the old barcode or the new barcode out of your inventory to actually make the sale. That can lead to — especially if that happens a few times a day over the course of the month, it can be a lot of time to track all that down and figure out like wherever they went and just making those corrections in the system.

Carlo Alvarez:
What kind of tools do you recommend to your clients when it comes to managing and tracking spend, as well as are there any features that you wish the industry offered?

Chris Cody:
Yeah, I mean, generally speaking, like the tools you need are just good forecasting, a good bookkeeper, a good CPA. And just good forecasting as you can get, so you can really optimize your bottom line. What I really wish is that — and like I said, I could be wrong right now. I hope I’m not. But having an actual point of sale system that is integrated with QuickBooks, so you can simply, like, run all the numbers directly into QuickBooks and not have to pay somebody to input them all and try to sort them out. That would be a super handy tool.

Dani Hao:
Yeah. When you mentioned QuickBooks, you think a majority of the industry that’s kind of like a standard accounting solution that everybody uses.

Chris Cody:
A lot of them do. There’s maybe some private accounting software used by the CPAs to represent these companies that they use. Maybe internally-specific things like they wrote it for themselves, if they’re big enough. But anybody who’s got their in-house bookkeeper, they’re generally using QuickBooks-like product.

Dani Hao:
And do you think as cannabis companies scale, do they usually look for a CFO, or do you think they’re usually okay with just hiring CPAs and bookkeepers to make sure that their books are clean?

Chris Cody:
It really depends on the scale. If you’re talking retail, it’s like five shops or less. If you’re talking growers, it’s like maybe one large grow, and you’ve just got like your internal team. But once you start jumping into different states, then people are looking for a CFO at that point because it’s just too much to manage. You need somebody on board. And like I said, a lot of the CFOs that are currently doing it, they’re finance guys who helped raise the money or even brought the money. A lot of them may end up just delegating it to somebody on their team already.

Dani Hao:
Awesome. I guess the one last thing is, like, what would you recommend to cannabis business owners to be more aware of its fan culture, from someone who has been in the cannabis industry for many years?

Chris Cody:
What I would say is don’t spend your money, man. Live like you’re making slightly better than minimum wage if you can. And just write it out because — especially in the states with the tax code, like I said, when you could end up owing for years. If you don’t save that million dollars, or $600,000, or whatever it is that you have to, like, pay the IRS, and then you don’t have it, and you’ve got to set up a payment plan, and then your next year’s taxes come due, and you still don’t have that saved. And now, you’re just stuck in taxes on taxes and taxes, and you’re never going to get out of it.

Dani Hao:
Wow. Yeah that would be a nightmare.

Chris Cody:
Yeah, literally. There’s several companies I know doing that. Like they’re in that position now, or they’re literally in receivership because of it. So, it’s something you just gotta keep your mind in. That should change as soon as it becomes legal here in the States, but I got to think, that same advice is applicable to Canada because you guys just generally have a higher tax rate anyway. And I know Canadians are not unfamiliar with detailed tax planning.

Dani Hao:
Yeah.

Chris Cody:
You know.

Dani Hao:
Well, awesome. Thank you so much Chris for joining us today and sharing your expertise with us.

Chris Cody:
Thank you. I really appreciate you having me on.

Carlo Alvarez:
This was an awesome conversation, and I learned a lot from you. So, thank you so much for coming here.

Chris Cody:
Yeah. Well, thanks, Carlo.

Dani Hao:
Thanks for tuning into this week’s Spend Culture Stories Podcast, sponsored by the Procurify. If you’d like to learn more about your Spend Culture, take our quiz at spendculture.com.

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