Following the story behind C21 is interesting – and a Sunday night drop of financials in the middle of Xmas and New Years isn’t something one sees very often. Those who’ve been with us for awhile know about C21’s travails well. The aggressive spend on self-marketing the company to investors has wound down – at least over the past couple of quarters. 

Yet, with this reporting of ‘record’ revenues ($10.6MM) and an announcement last month that claims their debt has been restructured – many of the same bullhorns that were shouting about this thing are now back. And they are loud.

Let’s check in with this, and see if Sonny (the ‘new’ CEO and primary creditor) is doing what the last guy couldn’t seem to, and run a business.

To the financials!

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• Assets down, liabilities up. Cash levels still at $2MM. 
• Sales up $700k on the quarter, likely reflective of seasonality. They caught all of Aug-Oct in these, look for sales to back up slightly next one. If not, they’ll be demonstrating organic growth, which is good.
• Six month vape ban in Nevada has come into effect in early October. We may see the impact of that next financials.
• Reported losses of $5.1MM this quarter. 
• Impaired $4MM in assets as well (good ‘ol Oregon). 25% of the total btw. Operations of it brought a negative gross margin of $800k on $4MM in sales. Yikes.
• Add that $4MM impairment to $5MM previously written down on it.
• Margin in Nevada at 46% and holding steady.
• Corporate allocations $8.2MM. Head offices being expensive is a feature we’ve seen in a couple of other companies. I suspect this is where Sonny will go with his knife next.
• SBC under a $100k. 
• Aside from impairment, expenses are down almost everywhere. Employees probably need Sonny’s sign off to issue a postage stamp.
• Only thing that went up was accretion expenses due to debt. Which, they’ve informed us they’ll deal with once they’ve dealt with operating expenses.
• There’s a story in ‘Transaction Costs’ – which went from $192k to $24k QoQ. Perhaps some sort of payment processing thing – getting paid in the US can be problematic due to the nature of federal versus state banking laws. Immaterial and simply errata.
• Annual revenue run rates look to be holding to what I heard at MJBizCon – that a good outlet can have revenue north of $17MM/yr. If sales hold, they’ll be at $20MM/store in Nevada.

Ok. 

Calling this an ‘MSO’ might be technically correct, but, that’s like calling a half acre homestead with 2 cows a ‘cattle ranch’.

All in all, looking at the non-mutts in this, it’s a business that would generate about $5-8MM/year without a debt load, packing a 110MM in warrants. The latter being somewhat meaningless – as they are not only out of the money, but I doubt Sonny wants to see anyone but himself get paid first.

There’s a lot of crap left in this outfit – to wit: the entire operation in Oregon. Nevada is the only reason this thing is above water at all. 

It’s ultimately in the details we find out how this outfit is being run, and it’s definitely a one man show. In November, Sonny dropped the interest rate on debt owned to him to 9.5% from 10%, and reduced monthly payments from $800k to $600k. He’s also collapsing the Swell Brands buy by delaying the payment of shares and is in ‘negotiations’ about a cash obligation tied to the acquisition. 

The big question is if more operations are able to be opened where they can make money, or, if this is a two dispensary pony. I have little doubt that the new guy is shrewd – he was the one that built the profitable dispensaries up and sold them for $70MM. 

This also boils down to 2 people: the last guy and the new guy. The last guy made out pretty well while almost sinking the company. The new guy? The question is if he can do more than simply run a couple of storefronts using elbows and knees to make sure he gets paid. Outside of those 2 dispensaries in Nevada – It’s a mess, with litigation and such around ORE’s money losing assets – and what looks to be some hard bargaining being done by Sonny. 

He’s superior to a traditional creditor in some ways, inasmuch as viability of the outfit is in his best interest, rather than liquidation. As a large shareholder and largest creditor in the outfit he’s actually in a bit of a bind: he could get the cash owed to him via sale of the Nevada dispensaries. But, if he did, then his stake in C21 would become virtually worthless. I hold the same reservations as last time: that his interests lay as far as getting paid and making as much money as possible. I think it’s doubtful he wanted to spend a couple of years restructuring a public company that he sold 2 dispensaries to.

CB1 Capital and 8 Capital are both listed as advisors – and they’re probably living in his desk right now.

It’s definitely not a known whether he can run anything larger than what he built….which is the big question. That, and whether they can salvage anything around Oregon. They fluff the pillows hard about the branding they got there, but the company also touts some of the ‘lowest prices in Nevada’ as reason for their success.

I don’t see this thing worth a cent over $0.40 at the moment, without the debt. And share price fluctuations over the holidays make me hesitant to go anywhere near this thing. I’ll happily avoid it, and enjoy sleeping well too.

However one may characterize it, Sonny’s boat is firmly lashed to the bow of $CXXi, full steam ahead. It’s only taken 2 quarters to see the potential of Nevada’s dispensaries, and they look good. With little cash though, incremental acquisitions are out of reach for now. I’ve mused in the past a merger of some sort might be a path for them. I wouldn’t be surprised in the slightest – if once Sonny has this thing righted – that he could sell it all over again.

Don’t be surprised if he asks for all-cash up front though.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $CXXI