Q&A with Bruce Macdonald, Chairman of C21 Investments

Multi-state operators (MSOs) are on the rise in america, navigating complicated regulatory frameworks to drive profitability via 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 Trade (CXXI) and on the OTCQX (CXXIF). The corporate not too long ago secured a dedication from Wasatch World Buyers, JW Asset Administration (Jason Wild/TerrAscend) and CB1 Capital Administration (Todd Harrison) who, along with C21’s CEO, offered an fairness dedication for compensation 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 an extended and profitable profession in finance and capital markets at one in every of 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 essentially a wholesale enterprise, and we not too long ago introduced a divestment of some non-core belongings within the state. Our money cow and the place we at the moment see our greatest alternative for future progress is our Nevada operations. We run a seed-to-sale enterprise within the state with two dispensaries doing about $35M a 12 months in income, with a 40% EBITDA Margin, and servicing 600,000 clients.

Aaron: Are you able to inform me about a little 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 flooring dealer, again when there was such a factor as a flooring, and through the years held a variety of positions, in the end working my approach as much as Chief Working Officer of the financial institution’s international capital markets division. All through my time, I constructed a whole lot 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 become a ardour. It truly discovered me. I used to be an investor within the C21 IPO. I sat down with administration to grasp the funding and given my expertise, they requested if I might contemplate turning into a member the Board. Since becoming a member of the Board, my involvement has been primarily centered on technique and the financing facet of the enterprise. Whereas I definitely didn’t anticipate it, it’s become a 24/7 gig and a problem I’m completely 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 house. 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 target 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 referred to as Eco Firma. In all, there have been 4 acquisitions in Oregon, and one in Nevada. The truth is, it was the funding in Silver State (Nevada) that was by far probably the most significant. So far as our Oregon belongings are involved, now we have 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: Right this moment there are a selection of MSOs. How does this extra crowded market affect your worth proposition; how do you consider gaining and sustaining strategic benefit?

Bruce: It’s necessary first to begin 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 now we have a deep information of all facets of the operation and actually know the Nevada market. The truth is, 70% on a greenback quantity foundation of the 700 SKUs that we promote are merchandise that we manufacture. It’s a crucial piece of our strategic benefit.  

What I might say is our most necessary 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 truly makes cash. That is what actually permits us to be strategic and disciplined in our strategy to progress. For instance, it’s been greater than 18 months since we did our final capital increase and that’s by alternative. Each choice we make is thru the shareholder lens and specializing in delivering worth to clients and shareholders.

our price proposition, merely put, it comes right down to 4 issues – the proper merchandise, on the proper worth, in the proper location, with the proper surroundings. Some individuals may name this motherhood, however there’s a whole lot of work that goes behind every of them. 

Nice high quality merchandise, that’s desk stakes. It’s important 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 proper sticker on the bundle – it’s not. It’s all about ensuring you might be environment friendly in your operations as a result of to be worthwhile, it’s important to be a low-cost producer to ship on a cheaper price promise. Tons of labor has gone into our operation round being a “right price” enterprise. 

Proper location is one other necessary factor of our price proposition. We needed 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 proper surroundings 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 purchasers a 12 months. Now we’re doing 10,000 curbside pickups a month. With that kind of quantity, logistically talking you want ample parking, a well-lit exterior so individuals really feel protected, 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 couple of components that go into it. As I highlighted, it was a purposeful choice to construct a enterprise with a loyal buyer base centered totally on locals. That wants product, worth, and comfort. Sonny lives within the Reno space, which is among the major causes Silver State is positioned up North.  

Vital to success has been the tradition of the group. Let’s begin with the corporate being nimble and I’ll provide you with an instance. The early days of the pandemic included the whole shutdown of dispensaries. We went from serving over 1500 clients a day in our shops to the subsequent day being informed that we may provide 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 via six weeks of delivery-only after which a part of curbside-only.

One other key factor of the tradition is our laser concentrate on value administration. We’ve talked a little bit about value administration, however it’s completely crucial, particularly within the context of the excessive value of capital that we see on this sector. Add to that the punitive tax affect 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 reinforce our profitability, we’re intent on having the bottom SG&A of the general public hashish corporations. We’re additionally among the many lowest in curiosity expense. That complete drive for effectivity has given us a system and a mantra that has allowed us to have a steady enterprise with vital money move. We get to make strategic choices — 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 not too long ago 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 current 100,000 sq. foot warehouse amenities. We’re going to construct out one other 40,000 sq. toes, and we at the moment use 20,000. That’s the tripling. Increasing our cultivation was clearly the subsequent logical step in our progress story. This could yield us a further 7,500 kilos of high-quality flower. We are able to do that very cheaply with about $6M in capex, and we anticipate funding the venture internally. We’ll nonetheless depart one other 40,000 sq. toes of growth 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 should value us roughly $2M in incremental working expense so as to add these further develop rooms. We already pay the hire, so we simply must pay for the individuals, energy, fertilizer and product testing. Whenever you do the easy math, we see this as an enormous win for shareholders and very accretive on an after-tax foundation. 

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

Aaron: It feels like the choice was made based mostly on each income progress 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 observe restructuring and, and the way the debentures was restructured. How’d that come about and what’s the benefit now of getting gone via that course of? 

Bruce: This all suits into our medium-term progress technique. For C21, the very first thing we centered on was getting our home with the intention 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 steadiness sheet. To assist our progress plans, we would have liked to have a stable basis.

Our steadiness 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 wish to take the chance that our inventory worth may drift a bit and rapidly there could possibly be vital money required for redemptions. We’ve seen a whole lot of corporations endure vital undesirable dilution when their debentures get uncontrolled. So, we approached Wasatch, Jason Wild’s JWAM and CB1 Capital, three seasoned traders, who offered a backstop whereby they might buy any shares not taken up by individuals although the conversion of their debentures, in order that we’d have the ability to pay any debenture holders again money with the cash we’d obtain because the traders took shares. In change for offering this backstop, C21 gave them an upside participation within the type of warrants. I feel it was completely crucial 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 might be getting the sensation that right here at C21 our goal is to play the lengthy recreation. Which means we make measured choices with the curiosity of shareholders prime of thoughts. We’ve labored laborious in 2020 to get our home so as, fortify our steadiness sheet, and generate vital money move. I feel we’re clocking in at round $12M in trailing annual money move, which curiously, is about the identical quantity that Planet 13 is doing. That’s clearly a unbelievable consequence for a corporation with $150M of market cap.

“We are working with urgency to break the back of these sector economics.”After we take into consideration our medium-term progress technique, we are going to proceed to make our choices via a money move and earnings lens relatively than hype and flash. Whereas we are going to stay opportunistic with respect to strategic alternate options, the core of our growth goes to concentrate on the place we have already got a confirmed monitor file: Nevada. We’re large believers that to realize long run success, it’s important to personal your own home market. And what I imply by that’s right this moment we’re about 5% of the Nevada market. Proudly owning your own home market seems to be extra like a 15% share. That’s our focus. I feel we’ve proven that our disciplined strategy delivers outcomes – outcomes similar to having prime 5 metrics in Internet Earnings, Money Circulate and EBITDA Margin, throughout the vary of public corporations that we are able to see.

I feel it’s key we’re getting observed. We talked concerning the strategic traders, however we’re additionally one of many 17 plant-touching corporations that’s within the MSOS ETF. So, we’re going to observe our clear progress trajectory, centered on the underside line and delivering for shareholders. If you happen to look below the hood proper now, you see a ten% money flowing firm, which is a fairly uncommon hen 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 house? Aaron, I feel what’s key right here is trying on the anticipated return relative to the price of capital. For instance, should you focused shopping for a dispensary with $20M in revenues, and are ready as we’re, to generate 25% in after-tax money based mostly on these revenues, then as soon as optimized, it could generate $5M in earnings. An asset like that is going to commerce at roughly one and a half instances revenues. So, you’re going to need to pay $30M. For the individuals which have been going out and borrowing cash at 15%, their annual value could be $4.5M. We’re not going to present 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 can be afforded to corporations with steady earnings and profitability similar to ours. In fact, no deal’s a deal till it’s on the tape, however we’re very hopeful that now we have 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.