We’ve followed C21 Investments ($CXXI) for awhile now, yet for the past 6 months, not much has been happening outside of the odd press release presenting updates that aren’t earth-shattering. And it’s no surprise.

As detailed last time, we believe that there’s a lack of cash flow to support Sonny’s interest payments, Oregon’s bleedout, and $CXXI’s capital structure – all at the same time. The company’s (and CB1/8 Capital’s) current pitch is that they simply need some money to build out the brands, put up a sufficient cash cushion to service the business’ needs for working capital & dreams of expansion – and BOOM! – another $TRUL-level MSO will arise above all others – and shareholders will rejoice.

Well, at least that’s been the sell story of the past few months. And…..shareholders have been waiting to rejoice for that time. It’s close….so close…..almost there…..(you get the idea).

Let’s have a look at their second quarter’s performance of this new fiscal year, and see how Sonny’s clean up of the shop is progressing (he’s done some heavy lifting on the cost of operations, improving them markedly).

To the financials!

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• Cash remains flat at $3MM. Indeed, current assets (at $11MM) is pretty much also flat over the two past quarters as tight working capital management and inventory levels are run as thin as possible. Good looking management of the numbers given throughput.
• Too bad the reason for that is to manage Sonny’s payment obligations rather than cash build.
• Sales up a bit to $9.3MM in the quarter (from $8.1MM previous). Crisp 50% margin too. All adds up to a total $38k loss in the quarter. Bullseye. Because that ‘bullseye’ is the target that running a shop like this means: by running breakeven – it implies it exists to serve lender(s)….not shareholders. At least to myself.
• And hey – that crisp margin? $CXXI claims over 700 SKUs in each Nevada store. If one can run a shop this lean with a product array and inventory that tight? It means to myself that they’re running it well.
• G&A is ridiculously lean, SBC actually reported at $27k for the quarter. Boy, nothing gets by Sonny.
• Note 15 (LEASE LIABILITIES AND RIGHT-OF-USE ASSETS) shows activity, they struck an option to buy one of the dispensary buildings (IIRC, Sonny owned them both, and optioned a purchase to $CXXI when he sold them his business). They also cancelled a lease they’d had on the books for awhile (as a guess…I’d say it was one of their dispensaries in Oregon…last time I was able to get a glimpse of one via acquisition…..it was losing about $500k/yr).
• Although Account Payables is a modest $3.6MM (A/R is at $200k, that’s really lean, and may mean they aren’t getting credit extended). They do owe some $5MM in income taxes. Those people take cash only.
• Long-term debt is also lean, with only $500k left on a mortgage, and $120k in vehicles. That’s great.
• Note 17…. not so great. That’s where Sonny’s $18MM in convertibles sits, and also a current liability is on the balance sheet. It’s due and payable January 1st, 2021. More below.
• They still owe $850k on the Swell acquisition. That gem cost $19MM, and within some 18 months….was written down to $0. Payouts and such under the agreement have already been amended once, and cash swapped into paper in some cases – still owing money on it must suck.
• Oregon continues to bleed, running at a negative gross margin. They’ve put all locations and ops up for sale, and farmed them out to 3rd party operators. Only Phantom remains (an 80k sqft greenhouse and 3 indoor grow rooms), and it’s been written down to zero. It ate $1.6MM in restructuring charges this year as well.
• A reminder (in Note 19) that they have un-reclaimed oil wells in Alberta they’ll need to remediate. No estimate as to cost, but a look into the nature of how equity listings arise, and how the RTO that brought them into existence began in another sector. I doubt it’s keeping them up at night.

Well, Sonny’s got a dandy 2 dispensary business there.

Despite shopping around for capital the last 2 quarters, they’ve been touting increasingly optimistic language on a term debt facility:

• June29: “…….we are optimistic C21 will soon secure a favourable, NDDF arrangement.”
• Aug4: “……continue to make progress in establishing our debt facility.”
• Sep24 “…..continue to advance through the process of finalizing our debt facility.”

And therein lies the value proposal in investing in $CXXI. Once they secure that facility, it’ll free Sonny’s mind up from getting paid back….and he can go on to build the next best MSO ever. I’m guessing. In focusing on a debt facility, it implies a lack of ability to raise capital via equity.

The reader should note that this situation reveals a hard bias of mine.

I believe that – as an investor – creditors should not be be running their company. Your views may be different. I had a lively conversation with an analyst about the prospects of a financing having an impact on the share price – that person thought it was a great path for all involved. Myself, I see it as no additional equity wanting to come in (perhaps internally driven), and debt being the best way to serve Sonny’s interests with the least risk. Tie up the assets, and keep a leash on them.

Either or, I think it can be said that however Sonny negotiates with himself, the cows are still going to get milked, this company will continue to operate at break even until Sonny gets tired of milk, (or, gets the amount of milk he’s owed). I strongly suspect his negotiations will be successful (whatever they may be over), because I believe he’s got a great relationship with his counterpart.

No movement in Oregon’s dials. C21 has been claiming that the ‘Swell’ brand is a best seller in their Nevada dispensaries. Considering ‘Swell’ – like Phantom – has been written down to zero, it looks like there is little interest in the brand beyond Sonny’s stores.

The larger reality is that an annual gross margin of $25MM will have a hard time supporting 130MM shares of a public float. At least at the price the stock’s at now (~=$0.80).

As to the ‘why’ capital demand for equity isn’t breaking down the door at the moment, a look back over the past 5 quarters tells us that those two dispensaries have always done exactly what they’re doing right now – all along. There has been some positive movement in sales – one can say COVID’s been pretty good to C21 really. How do I know?

They’ve recently got this thing for reporting on a dollar per transaction basis, having introduced it over the summer to use to tout sales increases. Remember, they are on the hunt for cash. I think it’d be an interesting metric to see published by other companies and in other regions….(this is Nevada only), but don’t expect to see it anywhere. I also doubt this reporting will last long……this kind of information is typically locked down. If they get the debt they’re looking for…..I predict it’ll be gone:

The licensing process has opened up again in Nevada (Of licences that were granted in Nevada awhile back, a group of applicants that were denied licenses at the time….sued the state, which resulted in a moratorium on new stores. The process has been re-opened, but, it’s pretty much certain to head back to the courts again). Litigious as heck, but the end of a moratorium on licenses will come to an end. Nevada’s existed as a bit of a moat for early arrivers. It’ll be interesting to see how they manage licenses go-forward.

Other than that, this company is incredibly boring. It’s well run, as any 2 cow stable should be. And it is relatively consistent QoQ now that Sonny’s gone through the place (several legal proceedings remain in front of the courts, the results of Sonny’s aforementioned house cleaning). Nothing has changed in 2 quarters. And in the absence of a catalyst, nothing will. They’ve got no money to pay their creditor, Oregon continues to bleed, no cash to acquire/build, and January 1st, 2021 coming up fast.

At any rate, a material disclosure was presented in their MD&A – which perfectly encapsulates why I pack a bias about creditors running assets. And a shareholder in this outfit would be wise to read it.

Unless or until Sonny is finally paid, this thing is going to be a company frozen in amber. Look for some sort of gyrations in the next month or two. That January due date needs to be dealt with, and the financing taking as long as it has means to me that Sonny’s not getting offered what he wants, and may need to add some water to his wine.

There would be no lack of irony if Sonny is subjected to debt covenants….and has to deal with a lender keeping tabs on him.

The thought of that just gave me a good chuckle.

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.