Q&A with Bruce Macdonald, Chairman of C21 Investments

Multi-state drivers (MSOs) get on the increase in the USA, browsing complicated regulative structures to drive productivity via economic climates of range and also range. C21 Investments is an up and down incorporated cannabis business with procedures in Nevada and also Oregon; traded on the Canadian Stock Market (CXXI) and also on the OTCQX (CXXIF). The business just recently safeguarded a dedication from Wasatch Global Investors, JW Possession Monitoring (Jason Wild/TerrAscend) and also CB1 Funding Monitoring (Todd Harrison) that, along with C21’s Chief Executive Officer, offered an equity dedication for payment of all exchangeable financial obligation.

We consulted with Bruce Macdonald, Chairman of C21 Investments. Bruce signed up with C21 in 2018 after evaluating the business as an individual financial investment and also learning more about the elderly monitoring group. Before C21, Bruce had a lengthy and also effective job in financing and also resources markets at one of Canada’s biggest financial institutions.

Aaron Eco-friendly: Can you provide a short review of C21?

Bruce MacDonald: C21 is a cannabis business that has procedures in both Nevada, and also in Oregon. Oregon is basically a wholesale company, and also we just recently introduced a divestment of some non-core properties in the state. Our moneymaker and also where we presently see our finest possibility for future development is our Nevada procedures. We run a seed-to-sale company in the state with 2 dispensaries doing concerning $35M a year in earnings, with a 40% EBITDA Margin, and also maintenance 600,000 consumers.

Aaron: Can you inform me concerning a bit concerning your history and also just how you obtained associated with a cannabis business?

Bruce: I invested 37 years benefiting RBC in the resources markets company. I began as a flooring investor, when there was something as a flooring, and also for many years held a variety of placements, inevitably functioning my method as much as Principal Operating Policeman of the financial institution’s worldwide resources markets department. Throughout my time, I constructed a great deal of organizations, which was why C21 and also this possibility was so fascinating to me.

My participation in the cannabis industry was a little a mishap, yet it’s become an interest. It really located me. I was a capitalist in the C21 IPO. I took a seat with monitoring to recognize the financial investment and also offered my experience, they asked if I would certainly think about coming to be a participant the Board. Considering that signing up with the Board, my participation has actually been mostly concentrated on technique and also the funding side of business. While I definitely really did not expect it, it’s become a 24/7 job and also an obstacle I am extensively appreciating.

Aaron: Can you inform me concerning the background of C21 coming to be a MSO? Did you begin in one state?

Bruce: While this background precedes my time at the business, my understanding is that as a Canadian business, we had initial moving company benefit to be able to access public financing and also obtain developed in the United States cannabis room. As component of that, the group back then evaluated around 100 various buildings. Due to the fact that we were based out of Vancouver, the emphasis was mostly the Western states like Washington, Oregon, Nevada and also The golden state. Arizona had not been in the video game yet. The initial purchase C21 did remained in Oregon, with a business called Eco Firma. In all, there were 4 procurements in Oregon, and also one in Nevada. As a matter of fact, it was the financial investment in Silver State (Nevada) that was without a doubt one of the most significant. As for our Oregon properties are worried, we have actually striven to incorporate and also improve them right into an effective procedure.

So, when I signed up with the Board, we were simply finishing the documentation on the procurements, and also settling our technique and also company strategy to move forward.

Aaron: Today there are a variety of MSOs. Just how does this even more jampacked market effect your worth recommendation; just how do you consider getting and also preserving critical benefit?

Bruce: It is very important initially to begin with technique. From a calculated viewpoint, we had the benefit of being the initial driver in Nevada with Silver State. Sonny Newman, our Chief Executive Officer, began business back in 2013. We run a seed-to-sale company so we have a deep expertise of all elements of the procedure and also actually recognize the Nevada market. As a matter of fact, 70% on a buck quantity basis of the 700 SKUs that we market are items that we produce. It’s a vital item of our critical benefit.

What I would certainly state is our crucial critical benefit is the truth that C21 is a steady, self-reliant driver. What I indicate by that is we are just one of minority organizations that really generates income. This is what actually enables us to be critical and also disciplined in our technique to development. For instance, it’s been greater than 18 months because we did our last resources raising which’s on purpose. Every choice we make is via the investor lens and also concentrating on providing worth to consumers and also investors.

Checking out our worth recommendation, put simply, it boils down to 4 points– the appropriate items, at the appropriate cost, in the right place, with the appropriate atmosphere. Some individuals could call this being a mother, yet there’s a great deal of job that goes behind each of them.

Wonderful high quality items, that’s table risks. You need to be a superior cultivator and also produce high quality items that individuals require if you wish to construct a faithful consumer base. Right cost– to some it seems like simply placing the appropriate sticker label on the plan– it’s not. It’s everything about seeing to it you are reliable in your procedures due to the fact that to be successful, you need to be an inexpensive manufacturer to supply on a reduced cost guarantee. Lots of job has actually entered into our procedure around being a “appropriate cost” company.

Right place is one more crucial component of our worth recommendation. We intended to construct a faithful consumer base which for us implied concentrating a lot more on residents than on vacationers. This is why Sonny placed the dispensaries on traveler courses.

The last crucial element is having the appropriate atmosphere to market our items. In Nevada, the business wound up structure fit-for-purpose dispensaries as opposed to suitable ourselves in a shopping center. We satisfy over 600,000 customers a year. Currently we’re doing 10,000 curbside pick-ups a month. Keeping that sort of quantity, logistically talking you require adequate auto parking, a well-lit outside so individuals really feel risk-free, and also obviously, excellent visual allure. These elements are crucial in preserving a faithful consumer base.

Aaron: Inform me a lot more concerning Silver State Alleviation and also why it has been so effective?

Bruce: I believe what you’re actually requesting for is: what is Sonny’s secret sauce? There are a couple of active ingredients that enter into it. As I highlighted, it was a deliberate choice to construct an organization with a faithful consumer base concentrated mostly on residents. That requires item, cost, and also comfort. Sonny stays in the Reno location, which is among the primary factors Silver State is found up North.

Important to success has actually been the society of the company. Allow’s begin with the business being active and also I’ll provide you an instance. The very early days of the pandemic consisted of the full closure of dispensaries. We went from offering over 1500 consumers a day in our shops to the following day being informed that we might use distribution just. Within a week, we had the ability to pivot and also had lockboxes, regulative authorizations and also a shipment capacity. When you check out our Nevada procedure, we wound up with simply a 10% dip in our incomes for the quarter, although we needed to endure 6 weeks of delivery-only and after that a stage of curbside-only.

An additional crucial element of the society is our laser concentrate on expense monitoring. We have actually chatted a little concerning expense monitoring, yet it’s definitely essential, specifically in the context of the high expense of resources that we see in this industry. Contribute to that the vindictive tax obligation effect of 280e where government tax obligation is related to gross margins which implies SG&An as well as rate of interest are non-deductible expenditures for tax obligation objectives. So, to boost our productivity, we are bent on having the most affordable SG&A of the general public cannabis firms. We’re likewise amongst the most affordable in rate of interest cost. That entire drive for performance has actually offered us a formula and also a rule that has actually permitted us to have a steady company with considerable capital. We reach make critical choices– not rash or hopeless ones– and also concentrate on what benefits the investor.

Aaron: Just how was C21 exploited?

Bruce: We did a $33M raising on the RTO of a noted covering business. That was just how C21 was developed, and after that authorized agreements with the Oregon and also Nevada buildings.

Aaron: I just recently saw a news release concerning broadening the Nevada farming. Can you provide me some even more information?

Bruce: We introduced that we are tripling our ability within our existing 100,000 square foot storage facility centers. We’re mosting likely to construct out one more 40,000 square feet, and also we presently make use of 20,000. That’s the tripling. Broadening our farming was plainly the following sensible action in our development tale. This must produce us an added 7,500 extra pounds of top notch blossom. We can do this really expense efficiently with around $6M in capex, and also we expect moneying the job inside. We will certainly still leave one more 40,000 square feet of development ability as market requires validate.

This news was considerable, yet I do not believe it was totally comprehended by the market. Simply to have fun with some numbers, 7,500 extra pounds of blossom has a wholesale market price today of concerning $17M. It will certainly cost us around $2M in step-by-step operating budget to include these extra expand spaces. We currently pay the lease, so we simply require to spend for individuals, power, plant food and also item screening. When you do the easy mathematics, we see this as a big win for investors and also very accretive on an after-tax basis.

Historically, we constantly utilized to expand greater than we required, yet with the boost sought after that’s taking place out there, we currently perform at a blossom deficiency. In the close to term, this build-out will certainly enable is to fulfill our existing retail demands, with the equilibrium that we will certainly market on the wholesale market. Eventually, this placements us well on a seed-to-sale basis to sustain our strategies to prolong our retail impact in Nevada.

Aaron: It seems like the choice was made based upon both earnings development and also supply chain combination?

Bruce: Yes, and also simply the pure productivity of it! You can not obtain a larger, much better value from investing $6M to produce $17M with recurring operating expense of $2M.

Aaron: The following concern right here has to do with the current note restructuring and also, and also just how the bonds was reorganized. Just how would certainly that transpire and also what is the benefit currently of having undergone that procedure?

Bruce: This all suits our medium-term development technique. For C21, the initial point we concentrated on was obtaining our home in order to make certain that we were reliable and also successful. We understood we required to have a scalable device to expand. The 2nd action, which the financial obligation restructuring associates with, was around strengthening our annual report. To sustain our development strategies, we required to have a strong structure.

Our annual report had 2 points that required dealing with. One was that we had an $18M responsibility coming because of our Chief Executive Officer. The impact of the restructuring prolonged this responsibility over the following 30 months at positive terms. In addition, $6.5 M of exchangeable bonds were getting to maturation in January of 2021. And also while the bonds remained in the cash and also in theory would transform to shares, we really did not wish to take the threat that our supply cost might wander a little bit and also all of an abrupt there might be considerable cash money needed for redemptions. We have actually seen a great deal of firms experience considerable undesirable dilution when their bonds leave control. So, we came close to Wasatch, Jason Wild’s JWAM and also CB1 Funding, 3 skilled capitalists, that offered a backstop whereby they would certainly buy any kind of shares not used up by individuals though the conversion of their bonds, to ensure that we would certainly have the ability to pay any kind of bond owners back cash money with the cash we would certainly get as the capitalists took shares. For giving this backstop, C21 provided an upside involvement in the type of warrants. I believe it was definitely essential to obtain this in position. And also it’s sensational to have these 3 names in our edge. We could not visualize much better companions.

Aaron: So, what’s following for C21?

Bruce: I wish you are obtaining the sensation that right here at C21 our purpose is to play the lengthy video game. That implies we make gauged choices with the rate of interest of investors top of mind. We have actually striven in 2020 to obtain our home in order, strengthen our annual report, and also produce considerable capital. I believe we’re appearing at around $12M in tracking yearly capital, which remarkably, has to do with the very same number that World 13 is doing. That’s clearly a great outcome for a business with $150M of market cap.

” We are dealing with seriousness to damage the rear of these industry business economics.” When we consider our medium-term development technique, we will certainly remain to make our choices via a capital and also incomes lens as opposed to buzz and also flash. While we will certainly continue to be opportunistic relative to critical choices, the core of our development is mosting likely to concentrate on where we currently have a tested performance history: Nevada. We allow followers that to attain long-term success, you need to possess your residence market. And also what I indicate by that is today we have to do with 5% of the Nevada market. Having your residence market looks even more like a 15% share. That is our emphasis. I believe we have actually revealed that our self-displined technique supplies outcomes– outcomes such as having leading 5 metrics in Take-home pay, Capital and also EBITDA Margin, throughout the variety of public firms that we can see.

I believe it’s crucial we’re obtaining discovered. We spoke about the critical capitalists, yet we’re likewise among the 17 plant-touching firms that remains in the MSOS ETF. So, we’re mosting likely to follow our clear development trajectory, concentrated on the lower line and also providing for investors. If you look under the hood today, you see a 10% capital business, which is a rather uncommon bird in our market. We’re delighted concerning where we are.

Something I have not discussed in excellent information is our prepare for broadening our retail impact. Just how do you expand in the dispensary room? Aaron, I believe what’s trick right here is checking out the anticipated return about the expense of resources. For instance, if you targeted purchasing a dispensary with $20M in incomes, and also are able as we are, to produce 25% in after-tax cash money based upon those incomes, after that when enhanced, it would certainly produce $5M in incomes. A possession such as this is mosting likely to trade at about one and also a half times incomes. So, you’re mosting likely to need to pay $30M. For individuals that have actually been heading out and also obtaining cash at 15%, their yearly expense would certainly be $4.5 M. We’re not mosting likely to provide 4 and also a fifty percent to the lenders, it simply does not make good sense for investors. We are dealing with seriousness to damage the rear of these industry business economics. It is something our company believe will certainly be paid for to firms with steady incomes and also productivity such as ours. Obviously, no bargain’s an offer till it gets on the tape, yet we are really enthusiastic that we have actually split the code in advance of SAFE Financial to obtain resources expenses down. This is simply a bit of a within check out our mind.

Aaron: Okay, amazing. All right. That wraps up the meeting.