All good business plans require a financial projection. Creating a financial projection is both an art and science. A financial projection will include projected sales, budgeted expenses, a balance sheet, cash flow, and sources and uses of funds. Also, a financial projection will help determine how much funding will be needed and the projected return on the investment (ROI).

For most cannabis and hemp/CBD operators, the problem in creating a financial projection is they don’t have any historical data or industry benchmarks. If we were assisting a chemical manufacturer or construction company prepare a financial projection, we could obtain benchmark financial information from third party providers. Unfortunately, these third-party providers do not have any historical data on the cannabis or hemp/CBD industries. There are a few companies on the Canadian Stock Exchange; however, most of the companies are consolidated operations of vertical, distribution, and dispensaries making them difficult to analyze.

With the explosive growth of the cannabis and hemp/CBD industries has come the need for good financial projections. On nearly a weekly basis, we either review or help clients prepare a detailed sales forecast, budgeted expenses, build a balance sheet or a statement of operations and cash flow. One of the key advantages that we utilize in helping our clients build solid financial projections is the data that we have collected over the last ten years of serving the cannabis and hemp/CBD industries.

In addition, we have the information categorized by type of operator: vertical, cultivator, processor, distributor, delivery, dispensary, or retailer, which is very beneficial to our clients. We also have key data where markets range from limited competition to over-supply, such as Oregon and Colorado. As an example, we can help quantify the plant yield and cost per yield for a cultivator that grows indoor vs. greenhouse vs. hoop house vs. outdoor. These analyses are very useful and facilitate educated decision making and strategic planning.

Also, an important consideration is how much working capital is needed for inventory for each type of operator. In a projection, the most common error that we find is the amount of working capital needed; the working capital is typically under-estimated.

The financial projection should reflect five years of balance sheets, statement of operations, and cash flows. Generally, we recommend a detailed forecast of operating expenses by department for at least two years. This is built by working with management and the operators and then the budget becomes a measurement tool. We also analyze production or sales capacity of each unit to be grown, produced, or sold and review our findings with management.

Marakabei — Vast white greenhouses sit high up on the slopes of Lesotho’s Marakabei town, hidden from view. It’s not fruit or vegetables, however, growing under the 18 plastic covers, but thousands of cannabis plants.

The cannabis is grown legally by the Lesotho-based company Medigrow and is regulated by the government.

“We have three rows that contain 1,200 plants each. That’s 3,600 plants across the whole structure,” said Medigrow’s head of production Albert Theron, gazing proudly over the crop.

In 2017, the tiny landlocked kingdom of 2.1-million people decided to tap into the booming medical marijuana industry, becoming the first country in Africa to allow the cultivation of cannabis for medicinal purposes.

To meet legal standards, most traces of tetrahydrocannabinol (THC) — the main psychoactive constituent responsible for marijuana’s intoxicating effects — are removed from the seeds. The remaining medical version is primarily made of the non-psychoactive substance, cannabidiol (CBD), and can only be 0.03% THC.

Investing in ‘green gold’

Medigrow has invested $19.3m in cannabis-growing facilities around the capital, Maseru. A heliport is also being built to ensure the cannabis — commonly referred to as “green gold” — is shipped safely and swiftly, said head of operations Relebohile Liphoto.

The investment is spurred by the industry’s positive outlook. The global market for medical cannabis is now estimated at $150bn  and could reach $272bn in 2028, according to Barclays Bank.

“At the moment we have almost 2,000kg of biomass and we are going to produce more than 1,000 litres of CBD oil,” said Liphoto. “Depending on the market, we can sell cannabis oil at between $6,000 and $21,000 per litre.”

Mostly foreign companies

Nicknamed “Kingdom in the Sky”, Lesotho is the only country in the world whose entire territory sits higher than 1,400m above sea level.

Deputy health minister Manthabiseng Phohleli told AFP that the legalisation of cannabis presented “a huge opportunity for the country”, which enjoys 300 days of sunshine per year. “It attracts investors. So far we have about 10 businesses operating on the territory.”

Entirely surrounded by SA, Lesotho is also one of the poorest countries in the world, ranking 159 out of 189 in the latest UN human development index. Unemployment is high, public services are scant, and almost a quarter of the population is infected with HIV.

The government charges €30,000 for a one-year renewable licence to grow cannabis. But the cost is too steep for most locals, and the market is dominated by foreign companies, mainly from Canada and the US.

Basothos miss out

Mothiba Thamae has been growing apples, peaches and raisins on 7.5ha of land for over two decades. He cannot afford the “green gold” licence.

“We hoped the government would give small Basotho farmers the opportunity to cultivate [cannabis] legally,” he said, referring to Lesotho’s main ethnic group. “Unfortunately they did not.”

Year-long sunshine and fertile soils make Lesotho ideal for cannabis plants. Known as “matekoane” in Sesotho, the country’s national language, it has been grown for centuries in rural areas.

“The first historical trace of matekoane dates back to the 16th century,” said Laurent Laniel, a researcher at the European Monitoring Centre for Drugs and Drug Addiction. “The Koena people are believed to have settled in Lesotho around 1550 by buying land from San groups in exchange for marijuana.”

‘Cannabis money is a bonus’

To this day, cannabis remains an important source of revenue for many small-scale farmers. Shasha owns a corn field in the centre of the country, on which he has also been growing cannabis illegally for about 20 years.

“The vegetables feed my family. Cannabis money is a bonus,” said Shasha. “It allows me to survive and pay for my children’s education.”

He sells his matekoane to a network of dealers such as Jama, who smuggles up to 80kg of cannabis across the border to SA each month. “That yields between €400 and €500,” he said.

The UN office on drugs and crime estimates that 70% of marijuana consumed in SA is grown in Lesotho, making cannabis the country's third source of revenue.

The City of Los Angeles recently launched a massive crackdown on black market cannabis businesses, including cultivation operations, extraction labs, and delivery companies across the city. In Los Angeles, a charge of unlicensed commercial cannabis activity within the city carries a potential sentence of six months in jail and $1,000 in fines.

Los Angeles’ City Attorney Mike Feuer, who has a track record of going after illegal cannabis businesses within the city, summed up the city’s reasoning behind its recent enforcement actions succinctly, saying, “If they’re going to go through this process, it just cannot be the case that others that flout the rules are allowed to function. It’s bad for those who buy from them, it’s bad for the communities in which they’re located and, again, it threatens to undermine the viability of a system that’s predicated on lawful licensing.”

Although there are currently around 165 approved cannabis storefronts and delivery businesses in Los Angeles, there are many more operating without the necessary approvals, a problem that has plagued the city for years and will likely be an ongoing issue.

What the law says

“Commercial Cannabis Activity” includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products.

A current listing of the penalties of cannabis offenses in California can be found here. A quick check of the Federal rules found the following:

“Marihuana CSA Penalties

• 1000 kilograms or more or 1000 or more plants  $10/50 million 10 years to life
• 100 to 999 kilograms or 100 to 999 plants $5/25 million 5 to 40 years 
• 50 to 99 kilograms or 50 to 99 plants $1/5 million Up to 20 years
• Under 50 kilograms, 10 kilograms of hashish, 1 kilogram of hashish oil, or 1 to 49 plants $250,000/$1 million Up to 5 years”

How the law could be more effective

We truly have no desire to revive the “War on Drugs” however, we at the Cannabis Law Report can imagine a scenario where Penal Code Sec. 1170(h) is amended to adopt the Federal penalties for second and subsequent offense convictions for Illegal Commercial Cannabis Activity. We would be willing to bet that while “padlock” procedure might have a small impact, the possibility of up to 40 years of incarceration just might be sufficient to get a substantial number of the recalcitrant black market to come out from underground into the light.

It would certainly provide law enforcement with the tools they need to either stamp out a large portion of the black market or scare some of them straight. The authorities have telegraphed a willingness to charge felonies for environmental damage. It is truly unfortunate, but it might be just what is needed to destroy the black market.

It a reincarnation of the carrot and stick approach – you shove the carrot up their ass and beat them with the stick. As we think this through, it might be possible to implement something like this without requiring legislation. The state and local authorities could selectively turn offenders over to federal law enforcement for prosecution. A very similar approach was deployed in Virginia a number of years ago to deal with illegal firearms and it was incredibly successful.

A successful model in Project Exile?

Project Exile was a crime reduction strategy launched in 1997 in Virginia, by the U.S. Attorney’s Office, as a result of the spike in violent crime rates in the late 1980s and early 1990s. During these years, Richmond, Virginia consistently ranked among the top 10 U.S. cities in homicides per capita. Specifically, in 1994, Richmond was ranked 2nd for homicides per capita, with a homicide rate of 80 per 100,000 residents. Overall, the goal of the project was to deter felons from carrying firearms and decrease firearm-related homicides through both sentence enhancements for firearm-related offenses and incapacitating violent felons.

Essentially functioning as a sentence enhancement program, Project Exile targeted felons who were caught carrying firearms (i.e., felon-in-possession-of-a-firearm [FIP]) and prosecuted them in federal courts where they received harsher sentences, no option of bail, and no potential for early release. Prior to Project Exile, FIP cases could be processed in state courts. Through increasing the expected penalty for firearm-related offenses, Project Exile sought to deter both firearm carrying and criminal use. Additionally, through sentencing more violent offenders to longer prison sentences, the program sought to reduce crime through incapacitating violent felons.

In addition to incapacitating offenders, the program sought to deter would-be offenders. To make the public aware of the sentence enhancements surrounding firearms, a broad “outreach” campaign was implemented using media outlets. The public campaign was implemented to increase community involvement and to send a message of zero-tolerance for firearm offenses. The goal of the message was to indicate a “swift and certain” federal penalty for firearm offenses. Advertised in both electronic and print media outlets, the campaign was featured on city buses and business cards displaying a specific message: “an illegal gun will get you five years in federal prison” (Rosenfeld, Fornango, and Baumer 2005).

The program consisted of a number of distinct elements:

• A felon in possession [“FIP”]  of a firearm would be remanded and denied bail until trial.
• A conviction would result in a MINIMUM sentence of five years in federal prison.
• The convicted felon would be denied commissary, library and mail privileges for the duration of their sentence
• The incarceration would be in a facility AT least a thousand miles from the felon’s home

We think that a similar program would put some black market operators in a “world of hurt” 

NZ Yarn has announced it will soon begin installing hemp fibre processing equipment in a space at its factory in Burnside, Christchurch.

The new plant incorporates a decorticator that will separate hemp stalks into fibre and hurd. Hemp fibre can be used for many applications ranging from clothing to furniture coverings and flooring. Among its attributes, hemp fibre doesn’t require chemical processing or bleaching, is strong and durable, has good breathability and anti-bacterial properties.

The hurd (or shiv), is the woody core material of the hemp plant – it has applications as a fire retardant, in insulation and can be used to create paper and bioplastic products.

You can learn more about how hemp fibre is produced here.

The processing equipment, the first of its type to be used in New Zealand, is being imported from the UK in a couple of shipments. The facility is being established in a joint partnership between NZ Yarn and Hemp New Zealand Ltd. Last year Hemp New Zealand acquired a 15% interest in NZ Yarn.

The machinery is expected to be operational at the end of this year, after which commercial processing of hemp stalks into fibre will commence using crop material from the 2019 harvest.

“We’re expecting to be able to produce a very high quality fibre using efficient processing techniques,” said Dave Jordan, chief executive of Hemp New Zealand. “This will help place New Zealand at the forefront of hemp and natural fibre innovation globally”.

It’s a big jump from wool processing to hemp for NZ Yarn, but CEO Colin McKenzie is confident of success and sees hemp as being a good blend with its wool operations – quite literally.

“There are many, many potential uses for hemp and flax fibre in woven products and it has tremendously exciting potential across a variety of sectors,” he said. “Among the possible uses we are exploring are wool and hemp blends for use in soft flooring, and we know from conversations with our customers that there is already strong interest in this type of product.”

Hemp can be grown in New Zealand with licence from the Ministry of Health. A secure site is required, must be than 5 kilometres from a school and the growing area cannot be visible from a street.