so welcome everyone to our first of many webinar series that will be covering pretty much everything as it relates to starting your cannabis business I’m Derrick Davis I’m a CPA at Greenville CPAs and I’m also joined here with Chris Russell hey everyone Chris Russell here finance manager at green growth CPA it’s a pleasure to have everyone today we’re excited to share some information with you about the new aspects of the Los Angeles licensing package we’ve been fortunate to support a large number of clients through a licensing process here in California in other states as well we’d love to help you get a business start here in Los Angeles for anyone looking to connect with us directly after this webinar please visit the green growth CPAs website you’ll find the get started form there complete that form and our team will be in touch to you directly to learn more about your situation how we can help support your business so with that we will get started so a little bit about us we are a CPA firm I personally have been licensed to practice accountancy in California since 2012 and I’ve been involved in the cannabis industry since 2010 when 280E first came out and it was a big issue this was also in conjunction with California trying to legalize cannabis and become the first state in the nation to legalize cannabis but unfortunately that proposition failed and so here we are today as a finally legalized market so let’s talk about cannabis in Los Angeles measure M which was the most comprehensive overview regulation that was passed in March of 2017 and it pretty much gave the City Council the full authority to regulate cannabis within the city of Los Angeles as a result of measure M passing they also established the Department of cannabis regulations and it’s a five-member committee that’s responsible for the cannabis regulatory framework as well as implementations licensing and all that good stuff so some key aspects of Los Angeles DCR is that they are responsible for the business application process determination of the applicants administering as well as coordinating the auditing and inspection for licensed cannabis related businesses and enforcing compliance compliance is really really important not only in lausanne but across the nation as more states begin to pick up some form of regulatory framework so it’s really important that you thoroughly understand the rules and requirements because those companies that are set up with the compliance focus mind are those companies that will win so this webinar will be specifically for phase 2 applicants so those individuals who have been in the business prior to January 1st 2016 and naturally once phase 3 comes online we’ll do a webinar to cover that as well phase 2 will open according to the city on August 1st and applications will become available on July 30th so those are key dates to remember and according to them that phase 2 will be open from the beginning of August until the end of September but quite honestly I think phase 2 will go until the end of this year it will be located at cannabis.lacity.org if you’re not too familiar make sure that you check out those sites because a lot of great information is detailed on there this is really important which is how large is your facility if your facility is gonna be over 30,000 square feet you’re gonna have to go through a lot more processes and you’re gonna have to get a lot more approval than if your building is under 30,000 square feet so if you’re looking at a couple buildings and you see something that’s 28000 square feet of 32000 you have to really ask yourself do you need that extra 4,000 square feet so these are generally the types of licenses that are available so you have the type A which is the adult use of the type M which is the medical use for those of you that are teetering back and forth what I would probably recommend is you look at other legalized states let’s say Colorado for example to see how sales have worked out after they’ve implemented full-scale legalization what you’ll generally find is adult sales will soon surpass by a factor of 2 to 3x medical sales why is that even though it’s more expensive it’s because it’s easier people are lazy what we find is that people will generally not care to pay the additional taxes because it’s just they don’t want to have to go and get a medical marijuana license and one of the most important things to remember is that oftentimes to get out of the sales and use tax you need to get issued medical marijuana ID card so you have to go down the county you have to apply you have to give them a headshot it’s a huge and drawn-out process that lets say 98% of people will not do it because it’s just too much work I think it’s generally safe from the sales and growth perspective to go after the adult market and potentially stay away from the medical market so the types of commercial activity you have the type 10 which is the retail you have the type 9 which is non storefront retail and then you also have the type 1 through type 5 licenses the one thing to make sure that you’re aware of is that the city of Los Angeles generally does not allow for mixed-use lighting and if you’re

thinking about going for cultivation license in Los Angeles I would generally say don’t do it why la is really expensive real estate is very very expensive here and what we’re seeing with a lot of our cultivation related clients is that it’s a drive to the bottom in terms of pricing so you know you’re gonna be operationally at a disadvantage and also financially a disadvantage if you have to pay high rent high electricity costs you’re using city water it’s usually more operationally efficient if you go to lower cost jurisdiction you know let’s say Humboldt County Trinity County Mendocino generally land is cheaper there you can get it well and it’s more efficient so it kind of works hand in hand that la is not the biggest fan of cultivation right now because it’s also not financially secure so additionally there are some other license types that are available the ones to consider is type six which is manufacturing type seven which is also manufacturing the the main difference is when you think about manufacturing it’s whether you’re gonna do a volatile and non-volatile extraction and then type N and type P so type and n type P licenses are really fascinating they also kind of fall in line with the type S so these are like the co-working models such that you’re rebranding repackaging you know someone else is doing the manufacturing but you have a strong consumer audience and you just slap your label on it you push the products out this is a really great way for people to get up and running without having to spend a tremendous amount on capital assets especially when you look at extraction some of these equipments can run in between half a million a million dollars so if you’re on a little of a tighter budget you may want to think about some of these alternative license types to just get your product out on the market crude product market fit and then from there you can think of it about going potentially downstream and doing your own manufacturing activities the other types of course you have testing and distribution the quick caveat on testing is that if you have a testing license and you own other license types you cannot have more than 20% ownership in the testing license the reason why California specifically did this way is they wanted to make sure that there was no conflict of interest with the testing as well as the production right because if you’re doing testing and production you have a call to get interest such that if your product fails you can still say that it’s approved even though it’s not just to make sure that your product goes to market so for that license type specifically it has to remain as a separate entity and so if you’re thinking about you want to also go into testing as well as manufacturing distribution branded products you need to make sure either a you don’t have a majority interest and the non testing activities or you have a minority interest and non management responsibilities in the testing company so there’s a lot of requirements that you have to abide by for the phase 2 licensing and we’ll cover them in kind of broad detail but more specifically we’re happy to set up free consultation calls and go over the details with a little bit more description we just want to make sure that for today’s discussion we covered the broad topic so people know where they stand applicants they have to show that they’ve been in business prior to 2016 that they showed you diligence with with the required regulations so for example the city of Los Angeles depending on where you fall on the supply chain you have to pay either 5% or up to 10% tax per thousand dollars of gross receipts the city of Los Angeles did bump down the rates slightly for medical licenses in terms of the amount of taxes that they have to have to pay however it’s important to note that based on where we’ve seen historical sales of other legalized states paying a little bit more in taxes but being able to access them much broader market is generally worthwhile so let’s go over some of the requirements you have to show with the physical address of both the business premise and the cannabis activity were located and where it was conducted one of the most interesting aspects I came out of yesterday is that you could potentially apply for Phase two without a location now this is huge news right because if you look at other cities let’s say what’s Hollywood or Culver City you oftentimes have to show when you apply for a city license you have to show that you either own the building or the landlord is okay with you operating cannabis on that facility you need to have an architectural design layout you have to have the security plan layout you pretty much have to show exactly how this company will operate if it is granted the license now that’s generally a huge barrier to entry and if you look at cities such as Blue Mesa and San Diego the city took forever to roll out their actual licensing almost a year and so what happened is you you know there’s a big rush to apply for a license you secure the lease you started paying rent and in the city distract its feet on licensing as a potential business owner you’re losing money every single month by paying rent and you don’t know whether or not you’re actually gonna get

the license so this is really cool that the City of LA will potentially allow for you to apply without a physical presence established that being said though if you do make it further down the application licensing stages what will then end up happening is you’ll of course have to show where your business will be located a security plan fire and safety and all that stuff but you could potentially delay that a little bit I personally like that approach just because I think it provides more flexibility and less risk but it was slightly unclear if the city will pay preference to those that have a complete application so you know you go in and you apply you have the building you have to lay out you have the architectural plans you have the security plans it’s not clear if they’re gonna allow preference for those types some other details you know you’ll have to have the address for the applicant telephone number website if applicable obviously email address everyone who applies all the owners the business will obviously have to under a background check and we’ll cover that in a little bit more details relates to social equity part and then you’ll have to make sure that there’s not undue concentration in certain neighborhoods let’s say in the warehouse district of downtown LA they don’t want to have 15 cannabis operators all lined up so you want to also obviously have your organizational structure so are you LLC are you an S corp are you C Corp and just very broadly speaking to taxes which is you know on the CPA this is what I do day in day out for tax liability protections you oftentimes are starting to see a lot of see corpse in California the reason being is that if your company goes under or undergoes a IRS audit and there’s a huge adjustment because of tax code 280e they could potentially levy the tax on the corporation itself so see corpse are fully enclosed whereas if you’re a pass-through entity let’s say a LLC or S corp and you undergo 280 e tax audit they could potentially assess that liability on to the individual owners that’s all I’ll talk about for taxes today but if you have any questions on how to structure your company as it relates to taxes specifically then please feel free to reach out we’d be thrilled to help you in any way we can so another thing that you’ll want to show is obviously proof of funds or financial viability you know if you’re applying during the phase two and you only have $20,000 in the bank you know that’s probably not gonna look in your best interest and I do understand that a lot of pushback and a lot of feedback we get in the space is that cannabis right now still rich man’s game historically it’s the people that owned the buildings I have a couple million dollars in cash or generally ones that getting licensing and I think how the DCR is addressing this is by implementing social equity program so one of the key things with regards to phase two is you want to show that you have a business tax certificate right and a valid seller’s permit it seems a bit crazy that you’re registering at the city knowing that you know what you’re doing is potentially federally legal but that’s one of the rules of operating in Los Angeles and so you also want to show the unit valid seller’s permit and you’re paying all sales tax for those of you that are not on the retail front so let’s say your manufacturer branded product anything that does not sell directly to consumers want to always make sure that you provide people with your resale certificate if you don’t do that and you undergo a sales tax audit they could potentially say hey you sold all these products to these customers but were they actually and consumers or were they businesses and if you didn’t show compliance with the resale certificate they could say that hey you owe sales tax on on all your sales and sales tax obviously varies based on sydney city but it could be upwards of 10% off your top lines so it’s really really important that if you are not a retailer ie not selling the consumers that you always provide the resale certificate obviously one of the other requirements is you want to show proof of liability insurance a summary for your security plan a description of how you will abide by the track and trace program and for those of you that aren’t too familiar with track and trace it’s a huge beast and you have to use metric that was the company that scored the contract with the state of California one of the most important things when thinking about location if you are going to apply without a location in mind is that you want to make sure that abides by the zoning right and there’s specific zoning maps that are available in Los Angeles counties website so it’s just really important before you go into a lease that you make sure that it’s in the zoning areas potentially and putting in your lease you might want to think about having a contingency clause right so you don’t want to put yourself in a one-year lease if you don’t get the license oftentimes the landlord may make you pay more money for them want to hold a building for you they’re gonna double the rent until you know that you’re licensed and they could drop the rent rate down but from a liability perspective and it’s all for your perspective the worst thing you can do is stick yourself in a one-year lease or even buy a building and not get the license so that’s really kind of worst-case scenario another thing to potentially think about if you do get the license is if the landlord will be open to a lease to purchase option

someone once told me that if you don’t own the land you don’t own the business and that’s that can hold very true in the cannabis space for specific requirements if your retailer you must have the retailer plan for delivery you must write delivery plan and summary of how you’ll meet all of the operational requirements if you are cultivator remember they’re not allowing from mixed light but there are specific plans to operate I would potentially think twice about doing cultivation if you are new to Los Angeles if you already have an existing building you’ve been operating there for a number of years it obviously makes sense to stay there but if you’re thinking about going into the Los Angeles market you think about doing cultivation I would just weigh your cost versus benefit on that just because it’s so expensive and of course if your manufacturer provided proposed manufacturing plan and operational requirements if you were a testing lab company you want to make sure you have a testing plan and the plan for how you will meet all the operational requirements it’s also really important that yet ISO certification and then if you are distributor you have to provide specific distribution plans in addition detailing how you will meet all those requirements regardless of which license type you’re going after you need to make sure that you are subject to the pre licensing its inspection and you check all those boxes off and what the pre licensing inspection includes it includes that DC are building fire safety Police Department fire department that they all come out and they sign off on your building and they sign off on how you’re being structured there’s a lot of items that do require permits and there’s a lot of items that don’t require permits when you’re thinking about updating your building so it’s just important to check with the DCR and all the Associated regulatory bodies to make sure that if you have to get a permit let’s say you’re adding that extra room you’re enclosing another room for your extraction facilities that you’re meeting all the required permitted requirements the worst thing that can happen to you is if you don’t get the permits you’re up and running the city comes and they do inspection audit and they find that your non compliance they make you shut down your business until you fix it and you’re not operational for a few months let’s briefly talk about the social equity plan so there’s specific requirement they according the city they’re gonna accept licensing based on tier 1 through tier 3 so specifically the social equity program is LA’s way of giving back to the community that was disadvantaged by the let’s say we’re on drugs you know one of the key points to remember is that to apply for this you potentially have Tier one you were arrested for a nonviolent cannabis related crime so let’s say you’re selling cannabis you’re cultivating it you know Dinah’s historically illegal that’s not illegal and you also are considered low income so what does that mean that means your household income is roughly forty one thousand dollars or less and you’ve lived in Los Angeles between five to ten years in specific zip codes and all phase two applicants will need a qualified in the social equity program but if you do not fall within one of the categories you could be paying potential fees and what this means is that if it does not apply it to you you’re not low-income you don’t live in a certain neighborhood in Los Angeles you can always partner with someone the thing with tier one though is that the social equity applicant has to have 51% ownership when thinking about applying to Tier one you have to really trust the person if you’re if you want to give them control of your company quite frankly if you don’t know the person I don’t think it’s the sound thing to do just because you have no idea what they’re gonna do and you have no idea how compliance focused they are tier two is a little bit more interesting such that they only need to have a thirty three and a half percent ownership in the company again it’s a huge chunk of your company so you have to really vet the person out and determine if you think that there will be a good long-term fit Tier three however that’s my personal favorite one you have to show compliance that you’re gonna do something good for the community so say for example you can rent out free office space to cannabis operators you can host annual compliance summaries you can do let’s say technical training and manufacturing you know there’s a lot of different things that you could do to give back to the community to show compliance with the social equity program without having to give up control of your company but I would definitely say that most people can’t apply as a phase-three applicant you just have to figure out how you want to do social good so generally the cannabis licensing fees will will generally range from anywhere between eight thousand eleven thousand based on what application type you’re going after so retail licensing is at ninety three hundred where other licensing fees are set at eleven thousand dollars if you don’t get your license you can do an appeal fee so you pay five thousand bucks to try them again there are violations for non-compliance so the zoning maps are really important to look at when you’re thinking about where to set up your business there are ten specific zones in the City of LA that you should definitely be aware of some things that take into consideration is how close it is schools public parks recovery centers or day centers and of course if you’re pre IC o—- there’s a lot of grandfather rules that may apply to you so these are the different types of zoning regulations for the different types of licensing types so specifically for manufacturers whether it be type six

type and type P there for zones that you want to be aware of if your level two manufacturing type so let’s say type seven there’s another zone that you have to be aware of and then for indoor cultivation there’s obviously a different zone that you have to be aware of so there’s a lot of operational violations and penalties that you have to be aware of so it’s really important that you either have someone on your team specifically dedicated to compliance or your outsource that function well we’re starting to see in Colorado Washington Oregon State that have been around for quite a while is that they’re going back to 2013 2014 to cannabis companies what’s really sad about that is that if these companies have not been in compliance with their 280e non-deductible allocations the IRS will assess such a big amount and then tack on penalties and interest on top of that to really push the company out of business so it’s really important that you make sure that you’re aware of all the applicable taxes that you have to pay and you make sure that you’re making those payments on the timely manner otherwise the potential penalties plus interest could be really detrimental to your business and of course here are some specific operating procedures and then various other violation alehna teas and things that you have to be aware of here’s some serious offenses only use the name and businesses stated on the license you know make sure that you know if you do have DBAs that it’s well established you know that you don’t set up as a certain entity and then you operate it’s another do not sublet any of the premises without written approval from the DCR one of the things that’s really important for phase 2 applicants is that if you apply with your license type and you don’t get it the city has authority to shut you down this is kind of gambled phase 2 such that you want to come clean you want to apply but all of a sudden but you go for the license you throw yourself out there and they say hey this is not zone this is not done correctly they have authority at that time to shut you down so just make sure when you’re going to apply that whomever you’re working with understands all the rules to make sure that if you don’t get it it doesn’t financially crippled your business so with that here’s our website we are green growth CPAs for those of you been following our content we were historically called California cannabis CPA but we had to do name brand because we started getting a lot of clients outside of California so we’re now called green growth CPAs so with that I know that was a lot of information and I know that there’s a lot of