Q&A with Bruce Macdonald, Chairman of C21 Investments

Multi-state operators (MSOs) are on the rise in the USA, navigating complicated regulatory frameworks to drive profitability by economies of scale and scope. C21 Investments is a vertically built-in hashish firm with operations in Nevada and Oregon; traded on the Canadian Inventory Change (CXXI) and on the OTCQX (CXXIF). The corporate just lately secured a dedication from Wasatch International Buyers, JW Asset Administration (Jason Wild/TerrAscend) and CB1 Capital Administration (Todd Harrison) who, along with C21’s CEO, supplied an fairness dedication for reimbursement of all convertible debt.

We spoke with Bruce Macdonald, Chairman of C21 Investments. Bruce joined C21 in 2018 after reviewing the corporate as a private funding and attending to know the senior administration staff. Previous to C21, Bruce had a protracted and profitable profession in finance and capital markets at one among Canada’s largest banks.

Aaron Inexperienced: Are you able to give a short overview of C21?

Bruce MacDonald: C21 is a hashish firm that has operations in each Nevada, and in Oregon. Oregon is basically a wholesale enterprise, and we just lately introduced a divestment of some non-core property within the state. Our money cow and the place we at present see our greatest alternative for future development is our Nevada operations. We run a seed-to-sale enterprise within the state with two dispensaries doing about $35M a yr in income, with a 40% EBITDA Margin, and servicing 600,000 prospects.

Aaron: Are you able to inform me about a bit bit about your background and the way you bought concerned in a hashish firm?

Bruce: I spent 37 years working for RBC within the capital markets enterprise. I began as a ground dealer, again when there was such a factor as a ground, and over time held a lot of positions, in the end working my method as much as Chief Working Officer of the financial institution’s international capital markets division. All through my time, I constructed plenty of companies, which was why C21 and this chance was so attention-grabbing to me.

My involvement within the hashish sector was a little bit of an accident, however it’s was a ardour. It really discovered me. I used to be an investor within the C21 IPO. I sat down with administration to know the funding and given my expertise, they requested if I might take into account turning into a member the Board. Since becoming a member of the Board, my involvement has been primarily targeted on technique and the financing facet of the enterprise. Whereas I definitely didn’t anticipate it, it’s was a 24/7 gig and a problem I’m totally having fun with.

Aaron: Are you able to inform me concerning the historical past of C21 turning into a MSO? Did you begin in a single state?

Bruce: Whereas this historical past predates my time on the firm, my understanding is that as a Canadian firm, we had first mover benefit to have the ability to entry public funding and get established within the US hashish area. As a part of that, the staff at the moment reviewed roughly 100 completely different properties. As a result of we had been based mostly out of Vancouver, the main focus was primarily the Western states like Washington, Oregon, Nevada and California. Arizona wasn’t within the recreation but. The primary transaction C21 did was in Oregon, with an organization known as Eco Firma. In all, there have been 4 acquisitions in Oregon, and one in Nevada. In reality, it was the funding in Silver State (Nevada) that was by far essentially the most significant. So far as our Oregon property are involved, we’ve got labored laborious to combine and streamline them into an environment friendly operation.

So, after I joined the Board, we had been simply finishing the paperwork on the acquisitions, and finalizing our technique and marketing strategy to go ahead.

Aaron: At this time there are a variety of MSOs. How does this extra crowded market influence your worth proposition; how do you concentrate on gaining and sustaining strategic benefit?

Bruce: It’s vital first to start out with technique. From a strategic perspective, we had the benefit of being the primary operator in Nevada with Silver State. Sonny Newman, our CEO, began the enterprise again in 2013. We run a seed-to-sale enterprise so we’ve got a deep information of all points of the operation and actually know the Nevada market. In reality, 70% on a greenback quantity foundation of the 700 SKUs that we promote are merchandise that we manufacture. It’s a essential piece of our strategic benefit.  

What I might say is our most vital strategic benefit is the truth that C21 is a steady, self-sustaining operator. What I imply by that’s we’re one of many few companies that really makes cash. That is what actually permits us to be strategic and disciplined in our method to development. For instance, it’s been greater than 18 months since we did our final capital increase and that’s by selection. Each choice we make is thru the shareholder lens and specializing in delivering worth to prospects and shareholders.

our price proposition, merely put, it comes all the way down to 4 issues – the appropriate merchandise, on the proper worth, in the appropriate location, with the appropriate atmosphere. Some individuals would possibly name this motherhood, however there’s plenty of work that goes behind every of them. 

Nice high quality merchandise, that’s desk stakes. You need to be a top-notch grower and generate high quality merchandise that individuals demand if you wish to construct a loyal buyer base. Proper worth – to some it feels like simply placing the appropriate sticker on the package deal – it’s not. It’s all about ensuring you’re environment friendly in your operations as a result of to be worthwhile, you need to be a low-cost producer to ship on a cheaper price promise. Tons of labor has gone into our operation round being a “proper worth” enterprise. 

Proper location is one other vital component of our price proposition. We wished to construct a loyal buyer base which for us meant focusing extra on locals than on vacationers. That is why Sonny positioned the dispensaries on commuter paths.

The final key issue is having the appropriate atmosphere to promote our merchandise. In Nevada, the corporate ended up constructing fit-for-purpose dispensaries relatively than becoming ourselves in a strip mall. We cater to over 600,000 shoppers a yr. Now we’re doing 10,000 curbside pickups a month. With that sort of quantity, logistically talking you want ample parking, a well-lit exterior so individuals really feel secure, and naturally, nice curb enchantment. These elements are important in sustaining a loyal buyer base.

Aaron: Inform me extra about Silver State Reduction and why it has been so profitable?

Bruce: I feel what you’re actually asking for is: what’s Sonny’s secret sauce? There are a number of components that go into it. As I highlighted, it was a purposeful choice to construct a enterprise with a loyal buyer base targeted totally on locals. That wants product, worth, and comfort. Sonny lives within the Reno space, which is among the foremost causes Silver State is situated up North.  

Essential to success has been the tradition of the group. Let’s begin with the corporate being nimble and I’ll offer you an instance. The early days of the pandemic included the entire shutdown of dispensaries. We went from serving over 1500 prospects a day in our shops to the subsequent day being advised that we may supply supply solely. Inside per week, we had been capable of pivot and had lockboxes, regulatory approvals and a supply functionality. Whenever you have a look at our Nevada operation, we ended up with only a 10% dip in our revenues for the quarter, though we needed to stay by six weeks of delivery-only after which a part of curbside-only.

One other key component of the tradition is our laser concentrate on price administration. We’ve talked a bit about price administration, however it’s completely essential, particularly within the context of the excessive price of capital that we see on this sector. Add to that the punitive tax influence of 280e the place federal tax is utilized to gross margins which implies SG&A and curiosity are non-deductible bills for tax functions. So, to boost our profitability, we’re intent on having the bottom SG&A of the general public hashish firms. We’re additionally among the many lowest in curiosity expense. That entire drive for effectivity has given us a components and a mantra that has allowed us to have a steady enterprise with vital money movement. We get to make strategic selections — not hasty or determined ones — and concentrate on what’s good for the shareholder.

Aaron: How was C21 capitalized?

Bruce: We did a $33M increase on the RTO of a listed shell firm. That was how C21 was established, after which signed contracts with the Oregon and Nevada properties.

Aaron: I just lately noticed a press launch about increasing the Nevada cultivation. Are you able to give me some extra particulars? 

Bruce: We introduced that we’re tripling our capability inside our present 100,000 sq. foot warehouse amenities. We’re going to construct out one other 40,000 sq. ft, and we at present use 20,000. That’s the tripling. Increasing our cultivation was clearly the subsequent logical step in our development story. This could yield us a further 7,500 kilos of high-quality flower. We are able to do that very affordably with about $6M in capex, and we anticipate funding the venture internally. We’ll nonetheless depart one other 40,000 sq. ft of enlargement capability as market wants justify.

This announcement was vital, however I don’t suppose it was absolutely understood by the market. Simply to play with some numbers, 7,500 kilos of flower has a wholesale market worth right this moment of about $17M. It would price us roughly $2M in incremental working expense so as to add these further develop rooms. We already pay the lease, so we simply must pay for the individuals, energy, fertilizer and product testing. Whenever you do the easy math, we see this as a giant win for shareholders and intensely accretive on an after-tax foundation. 

Traditionally, we all the time used to develop greater than we would have liked, however with the rise in demand that’s happening out there, we now run at a flower deficit. Within the close to time period, this build-out will permit is to fulfill our present retail wants, with the stability that we are going to promote on the wholesale market. In the end, this positions us effectively on a seed-to-sale foundation to help our plans to increase our retail footprint in Nevada. 

Aaron: It feels like the choice was made based mostly on each income development and provide chain consolidation?

Bruce: Sure, and simply the pure profitability of it! You’ll be able to’t get an even bigger, higher bang to your buck from spending $6M to generate $17M with ongoing working prices of $2M.

Aaron: The following query right here is concerning the latest word restructuring and, and the way the debentures was restructured. How’d that come about and what’s the benefit now of getting gone by that course of? 

Bruce: This all matches into our medium-term development technique. For C21, the very first thing we targeted on was getting our home as a way to be sure that we had been environment friendly and worthwhile. We knew we would have liked to have a scalable machine to develop. The second step, which the debt restructuring pertains to, was round fortifying our stability sheet. To help our development plans, we would have liked to have a strong basis.

Our stability sheet had two issues that wanted fixing. One was that we had an $18M obligation coming on account of our CEO. The impact of the restructuring prolonged this obligation over the subsequent 30 months at favorable phrases. Moreover, $6.5M of convertible debentures had been reaching maturity in January of 2021. And whereas the debentures had been within the cash and theoretically would convert to shares, we didn’t need to take the danger that our inventory worth may drift a bit and abruptly there might be vital money required for redemptions. We’ve seen plenty of firms endure vital undesirable dilution when their debentures get uncontrolled. So, we approached Wasatch, Jason Wild’s JWAM and CB1 Capital, three seasoned traders, who supplied a backstop whereby they might buy any shares not taken up by individuals although the conversion of their debentures, in order that we might be capable of pay any debenture holders again money with the cash we might obtain because the traders took shares. In trade for offering this backstop, C21 gave them an upside participation within the type of warrants. I feel it was completely essential to get this in place. And it’s phenomenal to have these three names in our nook. We couldn’t think about higher companions.

Aaron: So, what’s subsequent for C21? 

Bruce: I hope you’re getting the sensation that right here at C21 our goal is to play the lengthy recreation. Meaning we make measured selections with the curiosity of shareholders prime of thoughts. We’ve labored laborious in 2020 to get our home so as, fortify our stability sheet, and generate vital money movement. I feel we’re clocking in at round $12M in trailing annual money movement, which curiously, is about the identical quantity that Planet 13 is doing. That’s clearly a implausible outcome for an organization with $150M of market cap.

“We’re working with urgency to interrupt the again of those sector economics.”Once we take into consideration our medium-term development technique, we’ll proceed to make our selections by a money movement and earnings lens relatively than hype and flash. Whereas we’ll stay opportunistic with respect to strategic alternate options, the core of our enlargement goes to concentrate on the place we have already got a confirmed monitor document: Nevada. We’re huge believers that to realize long run success, you need to personal your house market. And what I imply by that’s right this moment we’re about 5% of the Nevada market. Proudly owning your house market appears to be like extra like a 15% share. That’s our focus. I feel we’ve proven that our disciplined method delivers outcomes – outcomes equivalent to having prime 5 metrics in Web Earnings, Money Move and EBITDA Margin, throughout the vary of public firms that we are able to see.

I feel it’s key we’re getting seen. We talked concerning the strategic traders, however we’re additionally one of many 17 plant-touching firms that’s within the MSOS ETF. So, we’re going to comply with our clear development trajectory, targeted on the underside line and delivering for shareholders. In the event you look below the hood proper now, you see a ten% money flowing firm, which is a reasonably uncommon fowl in our trade. We’re enthusiastic about the place we’re.

One factor I haven’t touched on in nice element is our plans for increasing our retail footprint. How do you develop within the dispensary area? Aaron, I feel what’s key right here is trying on the anticipated return relative to the price of capital. For instance, if you happen to focused shopping for a dispensary with $20M in revenues, and are in a position as we’re, to generate 25% in after-tax money based mostly on these revenues, then as soon as optimized, it will generate $5M in earnings. An asset like that is going to commerce at roughly one and a half occasions revenues. So, you’re going to should pay $30M. For the individuals which have been going out and borrowing cash at 15%, their annual price can be $4.5M. We’re not going to offer 4 and a half to the moneylenders, it simply doesn’t make sense for shareholders. We’re working with urgency to interrupt the again of those sector economics. It’s one thing we imagine might be afforded to firms with steady earnings and profitability equivalent to ours. After all, no deal’s a deal till it’s on the tape, however we’re very hopeful that we’ve got cracked the code forward of SAFE Banking to get capital prices down. That is just a bit little bit of an inside look into our thought processes.   

Aaron: Okay, superior. All proper. That concludes the interview.