Why a Canadian cannabis conglomerate can't make money in Oregon

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Over the past year and a half, as it moved to roll up several Oregon businesses into a vertically integrated enterprise, C21 Investments Inc. stood out on the state’s cannabis landscape. But Oregon — “America’s incubator of cannabis brands,” as former CEO Robert Cheney once termed it — is proving to be a daunting market.

A new CEO, Sonny L. Newman, is now trying to shore up money-losing operations in Oregon while turning to his home state of Nevada as C21’s best growth opportunity.

“Oregon’s saturated market continues to be a challenge (and) right-sizing and integrating our operations there will be our top priority over the next quarter,” Newman said in a July letter to shareholders. “Eliminating noncritical expenses, reallocating assets, and aligning our human capital are happening now and will continue until our Oregon operations are stabilized.”

C21's assets in Oregon consist of Phantom Farms, a Bend-based grower and processor; Canby grower Eco Firma Farms; Portland processor Swell; and Portland retailer Pure Green. Grön Chocolate was also an acquisition target, but the Portland company backed away from a tentative deal.

C21 isn’t alone in running into trouble in Oregon after leveraging a listing on the Canadian Securities Exchange to buy up businesses in the state. Golden Leaf Holdings Ltd., owner of the Chalice Farms retail outlets, has cut costs, restructured debt and tried a succession of CEOs in its own turnaround effort.

Their struggles partly reflect wider trends in a cannabis sector that got ahead of itself; the research firm New Frontier Data noted this week that “launch stumbles with licensing delays, supply-chain disruptions, and stalled political reform … have led to a pull-back in share prices across the legal cannabis sector, shaving significant value from North America’s leaders.”

C21's stock, after hitting a peak of $2.45 Canadian in late March, was trading at $0.68 on Monday.

But amid the gloom, the company is enthusiastic about its operations in Nevada, home to its biggest asset, Silver State. It's a grower, producer and retailer started by Newman, who in 2000 founded EE Technologies Inc., a privately held contract manufacturer with a specialty in circuit board assemblies that has operations in Reno and Mexico.

Silver State appears to be enjoying the advantages of being an early license holder in a state that didn’t swing the doors open to all comers the way Oregon did.

“I am most excited about the long-term potential of the Nevada market,” Newman said in that July letter to shareholders. “With a state-mandated limit on retail locations, Nevada remains an attractive market for the foreseeable future.”

C21 said it had an operating profit of nearly $3.1 million in Nevada on revenue of almost $15.4 million in the first half of the year.

By contrast, the company reported a loss of $1.6 million in Oregon in the first six months of the year.

In that same filing, C21 said it had “implemented a significant cost-cutting program ... which will save over $5.4 million of ongoing annual run rate costs.”

Oregon cuts weren’t specified, but the three founders of Swell — including Eric Shoemaker, who had been named head of C21's U.S. operations for C21 late last year — left after C21 completed its acquisition of the company earlier this summer.

C21 said the parties agreed to restructure future obligations to the former owners, extending the due date of an $850,000 cash payment from September to mid-November, and converting a $7.35 million payment due by May 2021 that could have included up to $5 million cash exclusively to shares.

“Some positions became redundant post-acquisition and some people simply exited after selling their companies,” Sky Pinnick, chief marketing officer at C21 and a member of its board, said in an email.

The company reported having 170 employees at its operations in Nevada and Canada, but didn't give a breakdown. It said it has 10 corporate staff in the U.S. and Canada, where it is technically headquartered.

Pinnick, a founder of Phantom Farms, reiterated Newman’s remarks about the company’s current strategy.

“Ultimately, the streamlining is making for healthier operations for C21 at large, and specifically in Oregon,” Pinnick said. “We will continue to scale the Oregon operations to meet the demand of the market, which has been increasing month over month. Nevada is where we are currently focused on growing through acquisition.”

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