Sign up for our weekly C-Suite Snacks webinars here: https://www.citrincooperman.com/infocus/c-suite-snacks Our C-Suite Snacks webinar series provides the middle market with brief, strategic, and tactical business improvement information for 30 minutes every week. Join Citrin Cooperman live every Thursday at noon for snack-sized insights for business executives. When in your lifetime have you witnessed the birth of an industry? As this industry transitions from illegality into a state-legal/federally illegal business, it faces business challenges like no other. Between difficulties in obtaining basic banking services, being taxed on gross margin rather than net income, and complex state and local regulatory environments, business owners and entrepreneurs face enormous hurdles. During this webinar session, we covered the business challenges in the cannabis industry. Key takeaways included: • Overview and business challenges faces • Taxation of the industry • Cash flow and fraud risks

1. In the Weeds—The Cannabis
Industry… What’s It All About?
May 6, 2021 | C-Suite Snacks Webinar Series

2. Disclaimer
Information contained within this presentation is intended to be educational and
informative, but not to provide legal or accounting advice. At the time of the creation
of this presentation, marijuana/cannabis (THC and certain CBD derivative products)
remains a Federally illegal Schedule I narcotic per the Controlled Substances Act of
1970. Engaging in the trafficking or sale of cannabis or cannabis related products is
a Federal crime and the information contained in this presentation is not intended to
assist in any way with the violation of applicable law.
The materials are being provided with the understanding that the information
contained therein should not be construed as legal, accounting, tax or other
professional advice or services. The contents are intended for general information
purposes only and should not be used as a substitute for consultation with
professional accounting, tax, legal and other advisors. In no event shall Citrin
Cooperman & Company, LLP, its affiliates, partners, principals and employees be
liable to you or any third party for any decision made or action taken in reliance on
the information provided herein.
Citations are given where appropriate to third-party sources, however, sources
included in this presentation may have originated from other sources or may have
not been properly cited as they represent information from various articles and
sources and have been pulled together for educational purposes.
citrincooperman.com

3. MITZI KEATING, CPA, CFE
Partner, Co-Leader of Cannabis Advisory Services Practice
Citrin Cooperman
mkeating@citrincooperman.com
401-421-4800
Welcome &
Introduction

4. AGENDA
Over view of the Canna bis Industr y
01
Taxation of the Canna bis Industr y 02
Cash Flow and Fr aud Risks 03

5. • Federal Illegality, State Legality
• 17 States have legalized recreationally
• 36 States have legalized medically
• Only Idaho has not decriminalized or legalized in some
manner
• US Schedule I Drug Under the CSA
• Subject to IRC 280E
• Banking challenges
• Insurance challenges
• Regulatory challenges
Overview of The
Cannabis Industry (US)

6. The Domestic
Industry
April 20, 2021
States with Legal Use of Marijuana
By Lokal_Profil, CC BY-SA 2.5,
https://commons.wikimedia.org/w/index.php?curid=2370050

7. • 2018 Global Sales: $9.1 billion*
• 2019 Global Sales: $14.8 billion*
• 2020 Global Sales: $19.7 billion (Estimated)*
• 2025 Global Sales: $47.2 billion*
• 2025 US Sales: $34.5 billion*
• *Source: BDSA and Arcview Market Research “State of Legal Cannabis Markets – 7th Edition”
About the Global
Industry

8. Taxing the Cannabis
Industry280E

9. Internal Revenue Code 280E
Example
Revenue $1,000,000
COGS (500,000)
GM $500,000
SG&A (300,000)
Pretax NI $200,000
280E Tax on $500,000
Non 280E Tax on $200,000

10. • Shareholder disputes
• PPM and fundraising documents
• Sophisticated investors
• Do they actually understand?
• Cash flow
• Comparability of different companies
• Inventory costing methodologies
• Passthrough versus Corporate Structures
• Other industry specific adjustments
• Impairment
• Stock compensation and dilution
Fraud Risks in Investor
Measurement of EBITDA

11. Understanding Cannabis Funding Structures
• Partnerships
• Tax distributions for phantom income
• Anticipated rates of return and ability to
repay
• Corporations
• Tax at corporate level
• Remainder subject to double taxation
Pship 1 Pship 2 Corporation
Investment 1,000,000 1,000,000 1,000,000
Pretax NI 200,000 200,000 200,000
Taxable
Income
500,000 500,000 500,000
Tax Rate 37%+2.9%+7% =46.9% 21%+8%
OA Dist 45% Available CF N/A
Tax Cash Out N/A N/A 145,000
Dist Cash Out 225,000 200,000
Cash Flow (25,000) 0 55,000

12. Sample Cannabis Holding
Company Structure
HoldCo LLC
Real Estate
LLC
Converted NFP
(C-Corp)
License Holder
Adult Use
License C-
Corp
Management
Company LLC
Employment
Company LLC
(rare)
• Rent and Management Fees may be going back and forth within the structure between the licensed entities
and the real estate and management company (and occasionally an employment company). Actual
ownership of each entity contained within the structure may be different at any of the corporate layers.

13. Fraud Risks in Corporate Structure
• Investors—What are you actually investing in?
• Arm’s length related party transactions?
• Rent
• Management fees
• Cross charges
• Understanding the operating agreement
• Waterfall provisions
• Preferential returns
• Cash flow and impact of tax distributions
• Risks of regulatory concerns/issues
• License limitations
• Suitability

14. • Take the time to understand the industry
• Those who get licenses are desperate to get funding
• Investors are desperate to not get left behind the industry
• Beware of false lenders in a pay to play environment
• Beware of the impact of competition in a highly regulated
environment
• Remember that this is still Federally Illegal
• Don’t discount the impact of taxes
• Remember the fraud triangle
• Opportunity
• Incentive
• Rationalization
Overall Industry Risks

15. Questions?
MITZI KEATING, CPA, CFE
Partner, Cannabis Advisory Services
Citrin Cooperman
mkeating@citrincooperman.com
401-421-4800

16. Thank You
F o r Wa t c h i n g & L i s t e n i n g
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