How to Build a Profitable Cannabis Business – Steve Gormley

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. 

About the podcast

Your company culture might attract talent, but your Spend Culture will make or break your company. Spend Culture Stories is a podcast that helps finance leaders learn the tactics, strategies, and processes to build a proactive Spend Culture. Learn how to pick the right tools, implement the most efficient processes, and how to develop the right people to transform the Spend Culture of your organization for the better.

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

Listen to the episode now

Episode highlights

Career history and 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 then went to graduate school in Asia. 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.

After, I bought, owned and operated a hydroponics retail gardening supply enterprise through that public company venture. We built a network of cultivators and manufacturers and 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:

• Cash management issues
• Dispensary operators
• Licence holders

Cultivating from the ground up

Next, I became a cultivator myself. I learned that I have a black thumb. 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].

CEO and director

Right now, I’m the CEO and 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 20^th 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 operate 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. The days of dispensaries and handwritten ledgers are 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 17^th 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 U.S. is 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 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.

With public companies, you also have the leverage of the stock. I think that that’s very new for a lot of cannabis entrepreneurs. Partnering 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 was a challenge. A lot of them were savvy and sophisticated in how they manage their accounting. Keeping records as 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 develop a brand, you leverage distribution. Then there’s licensing protocol and taxes that you have to deal with. 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.

A lot of successful entrepreneurs have criminal backgrounds for obvious reasons. If you’re building a large business with a view on a major public exit, the criminal history of an entrepreneur is very relevant. 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 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. 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. It also provides all the tools they need to extract the best experience with the best margins. And then when I look at software as it relates to production and cultivation and manufacturing of oil. I find technologies that reduce the cost of producing interesting. I also find technologies that focus on regulating CBD and THC content interesting.

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. Then it’s delivering that to the consumer in a timely manner. You need enough popular strains in stock. 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] Marketing cannabis businesses is difficult because you can’t use a lot of the traditional marketing venues in the USA. There are limits on social media. You can leverage Snapchat, you can leverage Instagram, you can leverage Facebook. But you have to be 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 is a popular way for cannabis businesses to use marketing. Unfortunately, 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. What’s the greatest learning experience thus far from transitioning into the cannabis industry?

Greatest learning experience from transitioning into the cannabis industry

Steve Gormley: [00:29:44] That is a really good question. I would answer that by repeating the old adage that you cannot judge a book by its cover. I’ve met some of the most creative and intelligent people 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 born from people of colour suffering the consequences of disproportionately working in a black market.

It is also a business that lacks female executive talent. For the industry to continue to legitimize, it must embrace female executive talent. Having said that, I work with people of colour, Russians, Persians, and Chinese. 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. 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 and looking for new shareholders

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 also need your creativity, your pragmatism, and 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.

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 lots of expert knowledge on running a cannabis business.

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

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