How to Build a Profitable Cannabis Business

This interview is taken from an episode of the Spend Culture Stories podcast. In the month of April 2019, we’re launching a monthly segment that focuses on cannabis businesses and best finance and operational practices. In this episode, Steve Gormley, the President and CEO of International Cannabrands, Inc. shares his perspective on running a profitable cannabis business, considerations on taking a cannabis business public, and the KPIs investors look for. 

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How to Build a Profitable Cannabis Business

Cannabis CEO | Investor | Entrepreneur | Advisor

In this episode, Steve Gormley, the President, and CEO of International Cannabrands, Inc. shares his perspective on running a profitable cannabis business, considerations on taking a cannabis business public, and the KPIs investors look for.

Speakers: Steve Gormley

  • President and Chief Executive Officer of International Cannabrands, Inc.
  • Founder, Managing Partner, and Chief Executive Officer at Seventh Point LLC.
  • COO of Silverback Investments, Inc.
  • President of Alta Via Ventures, LLC, a management services company to licensed cannabis businesses in the Los Angeles, California

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Episode Transcript and Highlights:

 

Career History & How Steve Started In the Cannabis Industry

Steve Gormley: [00:02:17]  I spent the bulk of my career working in private equity. I worked in a small family office, that was Pacific Rim based. I went to graduate school in Asia. I speak Chinese and my focus was largely the Chinese market.

And then in 2012, I was offered a position as chief business development officer for a small publicly traded U.S.-based data company. It was a company that was looking to penetrate Chinese markets, and this company was traded on the OTC. At some point, the board decided in 2012 that they wanted to capitalize and exploit the growing opportunity in cannabis. And so the company pivoted and I opened up the market in California because I lived in California for almost a decade. I had a number of good contacts and from there, the rest is history.

I bought, owned and operated a hydroponics retail gardening supply enterprise through that public company venture. I built a network of cultivators and manufacturers, legal experts, including the judge that came down off the bench to write the law that governed marijuana businesses in Los Angeles right up until 2016 before Measure M was passed.

I built a network of experts in dealing with the cash management issues, dispensary operators, licence holders, you name it, lobbyists and eventually really integrated myself into the community. I then went on to become a cultivator myself. I learned that I have a black thumb. I could kill a redwood but I learned how to actually properly vet cannabis and I started to really study the plant. It became clear to me during that time period that there existed an opportunity in cannabis that we hadn’t seen in the US since the repeal of alcohol prohibition.

Steve Gormley: [00:04:19] And I think for people getting in the market now, it would be like getting into the alcohol markets three to five years before alcohol prohibition was repealed and people, like Joe Kennedy, JFK’s father, who were the beneficiaries of that shift in the regulatory market, that intersection between a new burgeoning business and regulatory change, and there’s always tremendous economic opportunity.

I then eventually went on to launch a private equity firm that rolled up dispensaries in California. I am also part of a company in Michigan that recently achieved its preapprovals for licenses to operate marijuana businesses in that jurisdiction. I’m in Washington state. I’ve been in Oregon and now after being in the market for seven years, I’m widely considered a veteran, like most people. And so you’re going to continue to see a proliferation of people who had gotten their starts on Wall Street and in the case of Canada on Bay Street jumping into this tremendous market and really exploiting the variety of different economic benefits of being associated with the right cannabis play [5:34].

So, that’s really my background. Right now, I’m the CEO and a director on the board for international Cannabrands which is a publicly traded cannabis company that trades under the ticker symbol JUJU on the CSE. We’re rolling up brands. We’re a brand play and we’re also acquiring businesses that support vertical integration, like cultivation and manufacturing. So, that’s what I’m up to and that’s kind of been the trajectory of my career.

Carlo Alvarez: [00:06:04] Wow! That was very interesting backstory. Thank you so much for sharing that. I guess when you talk about your time in Wall Street and being a veteran, just on that point in contact with a lot of CEOs in cannabis, what are some cash flow issues that you’re finding in cannabis at this moment.

Cash Flow Issues in Cannabis at this Moment

Steve Gormley: [00:06:22] Culturally, at the point of retail, which right now is largely at the dispensary level, culturally consumers are used to simply paying in cash. And I think that cultural aspect of purchasing cannabis products will continue to remain in place for some time. Now, there are a variety of different dispensaries that do accept certain types of credit cards, credit cards that are backed by local banks that are not necessarily FDIC-backed banks, credit cards and debit cards that are supported by credit unions. Credit unions have really stepped in where the federal banks have fallen. But one of the shifts in policy that we’re grateful for is recently, as you may be aware, the House voted to take a look at changing bank policy and provide banking services for marijuana businesses.

Steve Gormley: [00:07:25] So, right now, the cash management issue continues to be very real. If you are a big dispensary, generally you’re going to employ the services of armed guards, you’re going to employ the services of armored car providers who will transport your cash from the point of sale from a retail environment to whatever banking mechanism or whatever repository you have for your cash.

Steve Gormley: [00:07:51] There are banks increasingly getting involved. A lot of state banks in places like Washington, Nevada, Oregon, California but we have yet to see a major bank jump into the industry and that’s simply because the prohibition on marijuana and its classification as a schedule narcotic still remains intact.

 

Biggest Misconceptions about the Cannabis Industry

Steve Gormley: [00:12:18] Presently, there is an evolution toward a more professional, traditional management structure within cannabis companies and I think that the biggest misconception about, in particular, cannabis entrepreneurs is that sort of 20th century, 1980s, 1990s myth of the stoner, right?

Steve Gormley: [00:00:23] When you look at the cannabis entrepreneurs who are successful today, they almost all got their start in the black market and they had to learn how to survive in the black market and then legitimize and then thrive. And so the intellectual skill sets among some of the more renowned cannabis entrepreneurs are every bit as robust and every bit as qualified as the titans you meet on Wall Street.

And I think that there’s a misconception that these businesses are still operated in some capacity as if they’re black market businesses. They are not. I mean there are still the mom and pops that do. There are still certainly black market marijuana sold throughout the United States particularly east of the Mississippi and in Texas but I think the level of professionalism, they don’t get enough accolades for that in my opinion and that’s a common misconception.

Carlo Alvarez: [00:13:38] That’s definitely something I found as well when trying to contact these interesting CEOs. In terms of cannabis companies’ need in order to scale to these giants, what changes do you think they need to make in terms of a financial process?

 

Changes to Make in Terms of a Financial Process To Reach Profitability

Steve Gormley: [00:13:54] Well, I’m going to be candid with you. I think that the cannabis stocks by and large are very tricky because most of them are predicated on hype. They’re not actually predicated on traditional fundamentals, like earnings and EBITA. And so I think that as would be the case with any business, the cannabis industry, in particular the larger companies that are operating in the red, really need to focus on making their businesses profitable, streamlining operations, bringing in economies of scale, efficiency standards, standard operating procedures that support stronger fundamentals and transparency.

Steve Gormley: [00:14:39] I think that a lot of the larger companies and I don’t want to target anyone in particular but when you review their financials, a lot of the larger ones are operating at large losses. They’re not profitable. And so I think the same thing that happened during the .com era where you had this onslaught of overpriced, overvalued stocks that did not have the businesses underneath them to support their valuations and their market caps. You know, we all know what happened there, it imploded and you’ll see some of that in cannabis as well. It will be those companies that have focused on building real businesses, those companies that actually generate earnings that will lead the pack at the end of the day.

Dani: [00:15:24] That’s a really great point you brought up there, Steve. Definitely with the hype in cannabis gearing towards profitability is a challenge for a lot of businesses that they still face. Maybe let’s talk a little bit about financial operations and cash flow with the cannabis. As company skills, you might see, like mom and pop, start with the general ledger, paper purchase orders and spreadsheets. But as they grow, they will adopt more mature processes and systems and eventually maybe hiring a senior finance leader, like a CFO. Do you think this is a common trajectory?

 

Cannabis Companies to Adopt More Mature Processes and Systems

Steve Gormley: [00:15:56] I think they’re doing it already. I mean in sophisticated markets, like California, you walk into most legal dispensaries and I’m only going to talk about the legal ones. And you walk in and your budtender has an iPad, they know what you bought the last time you were in and they know what’s in stock. And I think it’s become quite sophisticated. I think the days of dispensaries, keeping notes on paper and handwritten ledgers are long over. I think those dispensary operations and businesses that continue to comport themselves in that manner are not succeeding. And it’s also a younger generation of entrepreneurs that are involved who are more tech savvy who are more interested in inventory control and supply and management and supply chain management issues and all of that. I’ve seen, on the contrary, a big shift over the past seven years, away from the kind of hallmarks of what you see in a black market business to the more transparent kind of reporting that’s required to grow a real business.

Dani: [00:17:05] Thank you so much for sharing that. I think that transparency part we’ve heard from a lot of cannabis CPAs and cannabis CFOs how they said that because under the government regulations, they must also have a compliant software that tracks every seed to sale within the process of cannabis cultivation and growth. I’m just curious because you’ve been the CEO, it’s a little bit different from being a CFO of a cannabis business. You’ve also managed publicly traded cannabis brands. I’m curious on what the relationship looks like from a CEO’s perspective and a CFO’s perspective on taking a cannabis business public.

 

CEO’s and CFO’s Perspective on Taking a Cannabis Business Public

Steve Gormley: [00:17:39] Our business went public through an RTO which is essentially a reverse merger in the Canadian market and the Canadian markets for obvious reasons because their federal prohibition ended on October 17th of last year. Their markets are much more nimble and much more welcoming to cannabis businesses and so all the same fundamental aspects of going public in any industrial category apply to the cannabis markets. If you’re going to go public, you have to have the right shell, if you’re going to do an IPO. You have to have the right bankers, the right capital raise, the right assets, the right management team. I would say that all of those elements have to be the same. There isn’t anything special about going public with a cannabis company other than the fact that it’s very trend-driven.

Cannabis in the US Different from Mature Markets in Canada

Steve Gormley: [00:18:39] But at the end of the day, as the markets, the public markets in cannabis mature especially in Canada, you will see a focus on fundamentals as you would with any other business and any other industrial vertical. The US is different. We still have a federal prohibition on marijuana products in the US and as such, U.S. companies that go public which are largely on the OTC are very limited. They’re also exposed to market shorts. They’re exposed to toxic lenders. They don’t have the same protections that Nasdaq or AmEx traded stocks do. They languish on the OTC. It’s very challenging for them to uplist to the Nasdaq. I would be very hesitant to necessarily go public in the US market unless you also had more public than a Canadian market. That’s largely what I would say on that subject.

Carlo Alvarez: [00:19:36] I guess from your business solution aspect, you provide management services to and to these grow ops and vertically integrated cannabis community. What are of the most common challenges you found when working with them from a financial point of view?

Most Common Financial Challenges in Cannabis 

Steve Gormley: [00:19:51] Well, at International Cannabrands, we don’t actually provide just management services. We operate the businesses but I have worked in the capacity of providing management services. Generally, the most common need is back office, its legal, its accounting. It’s also strategic.

A lot of times when cannabis businesses are growing, traditionally they have just grown organically. Now, we’re in an environment where you can grow through acquisition. Right? And so that’s new for a lot of cannabis entrepreneurs, the ability to actually acquire another company that’s synergistic to the existing company and that will help create tremendous growth for a particular business.

And so with public companies, you also have the leverage of the stock in negotiating acquisitions and I think that that’s very new for a lot of cannabis entrepreneurs. And so being able to partner with people that have Wall Street and Bay Street experience is incredibly helpful in that regard because there are business opportunities that exist in cannabis that have only existed for a year or so. And some cases in Canada have only in existence since last October. So as the regulatory environment changes, so does the financial opportunities in the vertical.

Steve Gormley: [00:21:14] From an accounting standpoint, the biggest challenge that marijuana businesses have and I see this particularly at the dispensary level and with some cultivation facilities is providing audited financials because getting a good audit done on businesses that were largely black market is recent… Five years ago, it is a challenge. While a lot of them were very savvy and sophisticated in how they manage their accounting, keeping those records when you were a black market operator is risky. And so providing audited financials is always, from my perspective as a CEO, one of the biggest accounting challenges I face when I’m evaluating whether or not to buy a particular company or how to value a particular asset.

Carlo Alvarez: [00:22:05] When you’re auditing a company, what do you look for when you’re looking to acquire a business?

What to Consider when Acquiring a Business

Steve Gormley: [00:22:11] Well, you want to make sure that, for example, at International Cannabrands, we’re only buying profitable businesses, so you want to make sure that the businesses were profitable. There’s nothing different in cannabis. There’s no accounting principle that you would apply to any other business protocol that you wouldn’t apply to cannabis. And it’s an agricultural product. Right?

So when you’re developing a brand and you’re leveraging distribution and there’s licensing protocol and taxes that you have to deal with, all of the same components that go into evaluating a norm, I won’t use the word normal, but evaluating a non-cannabis business are applied to cannabis as well. And because it’s an agricultural product, if you’re in production, some facets of production, cultivation or manufacturing oil, you’re going to look at all of the same variables you would if you were producing cattle, for example.

So, each business protocol has its own inherent costs and issues and so cannabis is the same. Whether you’re in production or technology or you’re selling brands or you’re in distribution or you’re a dispensary operator, all of the same accounting principles apply. There’s nothing that’s really different.

Carlo Alvarez: [00:23:26] So, that’s how it seems, like a lot of companies take their turn to become with cannabis. They want to get their accounting systems in place. So I guess when it comes to mergers and acquisitions as you mentioned of other cannabis companies, how do you assess the financial health? What are the key metrics and key KPIs you look for?

Key Metrics and KPIs to Look for in Assessing Financial Health 

Steve Gormley: [00:23:46] Profitability, whether or not the operator has the right to operate, really vetting licenses and vetting the entrepreneurs’ ability to operate lawfully in the jurisdiction where their business resides, is the first component, then auditing their financials and then of course as is the case in acquiring any company, it’s the management team and it’s running clean background checks.

Because if you’re building a large business with a view on a major public exit, the criminal history of the entrepreneurs involved frankly is very relevant and a lot of successful entrepreneurs have criminal backgrounds for obvious reasons. Now, if somebody has a marijuana offense in their background, I’m less concerned than if it’s a fraud or something else, that would be prohibitive. But we take extra care in doing our background checks and really vetting management because that makes all the difference here.

Dani: [00:24:52] I completely agree on that part. Vetting the people behind the operations and the business is crucial and what you’ve mentioned when cannabis transitions away from the gray market. It’s really about being a legitimate business that is profitable that will allow you to do win in the game. Maybe let’s chat a little bit about technology as we’ve spoken to a few guests about the solutions market within cannabis. As a CEO, are there any particular software or tech solutions that a cannabis business can look into to make their operations more efficient? We’ll further a little bit more about seed to sale and compliance software. Could you maybe give us some insights into that?

 

Software or Tech Solutions to Make Cannabis Operations More Efficient

Steve Gormley: [00:25:29] I look at software solutions as in three basic buckets. There are software solutions that focus on cash management. There are software solutions that focus on point of sale and there are software solutions that focus on production. On the cash management piece, it’s basically tracking the money and tracking from seed to sale, what happens with the product? Those are really important solutions to have and there’s a variety of different providers and that landscape is always changing as is inherently the case with technology.

On the point-of-sale side, you obviously want point of sales technology that helps manage inventory, that helps up-sell consumers at the point of sale and that provides the budtender, the salesperson, if you will, all the tools they need to extract the best experience possible for the consumer with the best margins for the business. And then when I look at software as it relates to production and cultivation and manufacturing of oil, I find very interesting technologies that reduce the cost of producing, for example, a pound of marijuana and also technologies that focus on regulating CBD and THC content.

Carlo Alvarez: [00:27:00] What are some of the challenges with procurement and supply chain when it comes to cannabis are you finding?

Challenges with Procurement and Supply Chain

Steve Gormley: [00:27:06] Quality product and pricing, just like any other business. All the procurement issues that you would have in any other retail business are the same for us. It’s access to quality product that is either branded or has a consumer following, and being able to deliver that to the consumer in a timely manner and having enough inventory of popular strains in stock, in procurement. It comes down to your relationships. Assuming you’re not in the cultivation business, so it’s having the right relationships with the right cultivators and manufacturers.

Dani [00:27:43] That’s really interesting that you mentioned this because we talked to a lot of cannabis CFOs and what they mention is, they usually go for the same vendors all the time and they make sure that they’re establishing those relationships really long term. This is one of our last questions. I’m really curious on when it comes to tracking spend in a cannabis business. What are some mistakes that cannabis owners usually take?

Mistakes that Cannabis Owners Usually Take

Steve Gormley: [00:28:06] I think that as is the case with any business marketing is the tremendous challenge, right? And marketing cannabis businesses is very difficult because you are not in the United States allowed to use a lot of the traditional marketing venues. So, for example, if you’re a dispensary, you’re limited on what you can do on social media. You can leverage Snapchat, you can leverage Instagram, you can leverage Facebook but you have to be very careful on what you message to the public.

Challenges for Cannabis Businesses

Steve Gormley: [00:28:36] You have companies, like Weedmax and Leafly, that are at present the best option for marketing, and then events. There’s a lot of guerrilla marketing works. Leveraging influencers has increasingly become a popular way for cannabis businesses particularly brands and particularly dispensaries and the cultivators of certain new strains of marijuana, leverage Internet influencers in the development of marketing programs for their assets. And so until prohibition is repealed, marijuana business owners are going to have a challenge in marketing their services. B2B services, it doesn’t really apply there. Marketing B2B services is the same as it would be in any other business. But marketing directly to the consumer in cannabis remains a challenge.

Carlo Alvarez: [00:29:29] Awesome! Thank you so much. This has been an amazing conversation having you here with us, Steve. Just to leave our listeners a note, what’s the greatest learning experience thus far from transitioning into the cannabis industry that you’ve taken?

Greatest Learning Experience from Transitioning into the Cannabis Industry

Steve Gormley: [00:29:44] That is a really good question and I would answer that by repeating the old adage that I heard repeatedly from my mother while growing up and that is you cannot judge a book by its cover. Some of the most creative and intelligent and interesting people I’ve met in my career, I’ve met in the cannabis industry.

I’m grateful for the shift towards professionalism in cannabis. I would like to see cannabis retain its diversity. There’s a lot of middle-aged white guys getting in. And this is a business that was born of a box of a lot of people of color who suffered the consequences of working in a black market disproportionately from their white counterparts.

It is also a business that is sorely lacking in female executive talent and I think in order for the industry to continue to legitimize and be a major international powerhouse, it must embrace female executive talent. But having said that, I’ve worked with people of color or minions, Russians, and Persians, and Chinese and it’s such a diverse community at the production and dispensary level at least in Los Angeles. I’ve learned a great deal. I’ve worked with people from all over the world. I was not expecting that.

Dani [00:31:05] I loved how you mentioned the diversity aspect of cannabis and the future of what you think will make it even more well rounded, so thank you so much for sharing that.  And as you know, this is a female produced podcast so we make sure that we have a diverse range of guests on the show, too, so that really correlates to our message.

Hiring Female Executive Talents at International Cannabrands & Looking for New Shareholders/Investors

Steve Gormley: [00:31:22] We are actively hiring female executive talents at International Cannabrands. My last three hires have all been rockstar women who are really pioneers in the business. And I encourage all of your female listeners who have any interest in cannabis to pursue it. We need you. We need your talent. We need your understanding of the consumers. We need your creativity. We need your pragmatism. We need your intellectual strength. I really encourage women with an entrepreneurial spirit to consider a career in cannabis. 

Dani [00:32:010] That’s an amazing message. Well, definitely link your website into the box below, too, so that if any of our listeners are interested in getting into the cannabis business that you guys can see what Steve is offering in terms of hiring new positions in the company.

Steve Gormley: [00:32:15] And we’re also always looking for new shareholders and new investors. And we’re also really excited to share our story and share the wealth ultimately. So, we encourage your listeners to also look at JUJU on the CSE and invest.

Dani [00:32:34] That’s awesome, we’ll definitely make sure to backlink your stock ticker and to encourage our audience. Well, thank you so much, Steve, for giving your insights and expertise today. You’ve given us, the audience, lots of expert knowledge and useful tips on regulatory landscape on the wonderful emerging industry of cannabis.

Steve Gormley: [00:32:47] Thank you.

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