C21 Investments Inc 6-K, filed Aug 16, 2024
C21 Investments Inc. (CWLXF)
About this 6-K
C21 Investments Inc filed this 6-K on August 16, 2024.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 or 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of August 2024.
Commission File Number 000-55982
C21 INVESTMENTS INC.
(Translation of registrant’s name into English)
Suite 1900-855 West Georgia St
Vancouver BC, V6C 3H4
Canada
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| C21 INVESTMENTS INC. | |
| Date: August 16, 2024 | /s/ Michael Kidd |
| Michael Kidd | |
| Chief Financial Officer |
-2-
INDEX TO EXHIBITS
| Interim Condensed Consolidated Financial Statements | |
| For the three months ended June 30, 2024 and July 31, 2023 | |
| (Expressed in U.S. Dollars) | |
Notice of Disclosure of Non-auditor Review of the Interim Condensed Consolidated Financial Statements for the Three Months Ended June 30, 2024 and July 31, 2023.
Pursuant to National Instrument 51-102 Continuous Disclosure Obligations, part 4, subsection 4.3(3)(a) issued by the Canadian Securities Administrators, if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the interim financial statements have not been reviewed by an auditor.
The accompanying unaudited interim condensed consolidated financial statements of C21 Investments Inc. for the interim periods ended June 30, 2024 and July 31, 2023, have been prepared in accordance with accounting principles generally accepted in the United States of America and are the responsibility of the Company's management.
The Company's independent auditors, Davidson & Company LLP, have not performed a review of these interim condensed consolidated financial statements.
August 16, 2024
C21 INVESTMENTS INC.
Interim Condensed Consolidated Balance Sheets
(Expressed in U.S. dollars)
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash | 3,107,507 | 3,260,568 | ||||
| Receivables | 252,454 | 254,391 | ||||
| Inventory | 3,300,346 | 2,866,054 | ||||
| Prepaid expenses and deposits | 490,078 | 592,613 | ||||
| Assets classified as held for sale | 1,155,320 | 1,164,696 | ||||
| 8,305,705 | 8,138,322 | |||||
| Non-current assets | ||||||
| Property and equipment | 3,387,736 | 3,390,933 | ||||
| Right-of-use assets | 8,621,250 | 8,746,825 | ||||
| Intangible assets | 9,341,017 | 6,286,590 | ||||
| Goodwill | 28,541,323 | 28,541,323 | ||||
| Deferred tax asset | 121,843 | 121,843 | ||||
| Total assets | 58,318,874 | 55,225,836 | ||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | 3,388,654 | 2,593,195 | ||||
| Convertible promissory notes | 1,156,259 | 1,156,259 | ||||
| Convertible debentures - current portion | 497,300 | - | ||||
| Income taxes payable | 10,598,123 | 10,230,423 | ||||
| Deferred revenue | 289,386 | 287,560 | ||||
| Lease liabilities - current portion | 407,082 | 387,400 | ||||
| Liabilities classified as held for sale | 385,320 | 392,320 | ||||
| 16,722,124 | 15,047,157 | |||||
| Non-current liabilities | ||||||
| Convertible debentures | 1,542,379 | - | ||||
| Lease liabilities | 9,009,837 | 9,120,396 | ||||
| Derivative liability | 84,021 | 84,871 | ||||
| Total liabilities | 27,358,361 | 24,252,424 | ||||
| SHAREHOLDERS' EQUITY | ||||||
| Common stock, no par value; unlimited shares authorized; 120,047,814 and 120,047,814 shares issued and outstanding as of June 30, 2024 and March 31, 2024, respectively | 106,856,166 | 105,467,920 | ||||
| Commitment to issue shares | 628,141 | 628,141 | ||||
| Accumulated other comprehensive loss | (2,260,221 | ) | (2,271,248 | ) | ||
| Deficit | (74,263,573 | ) | (72,851,401 | ) | ||
| Total shareholders' equity | 30,960,513 | 30,973,412 | ||||
| Total liabilities and shareholders' equity | 58,318,874 | 55,225,836 |
Commitments (Note 17)
Contingencies (Note 20)
|
Approved and authorized for issue on behalf of the Board of Directors: |
|||
|
/s/ "Bruce Macdonald" |
Director |
/s/ "Michael Kidd" |
Director |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
C21 INVESTMENTS INC.
Interim Condensed Consolidated Statements of Loss and Comprehensive Loss
(Expressed in U.S. dollars, except number of shares)
|
|
Three months ended |
|
|
|
June 30, 2024 |
July 31, 2023 |
|
|
$ |
$ |
|
|
|
|
|
Revenue |
6,596,009 |
7,162,107 |
|
Cost of sales |
4,565,310 |
4,331,192 |
|
Gross profit |
2,030,699 |
2,830,915 |
|
|
|
|
|
Selling, general and administrative expenses |
2,870,955 |
2,620,099 |
|
|
|
|
|
Income (loss) from operations |
(840,256) |
210,816 |
|
|
|
|
|
Accretion expense |
(83,889) |
- |
|
Loss on disposal of assets |
(32,496) |
- |
|
Interest expense |
(52,863) |
(3,956) |
|
Other expense |
(9,244) |
(921) |
|
Net income (loss) from continuing operations before income tax expense |
(1,018,748) |
205,939 |
|
Income tax expense |
(367,700) |
(602,674) |
|
Net loss from continuing operations after income tax expense |
(1,386,448) |
(396,735) |
|
|
|
|
|
Net loss from discontinued operations after income tax expense |
(25,724) |
(19,351) |
|
|
|
|
|
Net loss |
(1,412,172) |
(416,086) |
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
Cumulative translation adjustment |
11,027 |
(3,124) |
|
Comprehensive loss |
(1,401,145) |
(419,210) |
|
|
|
|
|
Basic and diluted loss per share from continuing operations |
(0.01) |
(0.00) |
|
Basic and diluted loss per share from discontinued operations |
(0.00) |
(0.00) |
|
Basic and diluted loss per share |
(0.01) |
(0.00) |
|
Weighted average number of common shares outstanding - basic and diluted |
120,047,814 |
120,047,814 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
C21 INVESTMENTS INC.
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in U.S. dollars, except number of shares)
|
|
Number of |
Common |
Commitment |
Accumulated |
Deficit |
Total |
|
|
# |
$ |
$ |
$ |
$ |
$ |
|
Balance, April 30, 2023 |
120,047,814 |
105,451,299 |
628,141 |
(2,280,037) |
(69,942,757) |
33,856,646 |
|
Share-based compensation |
- |
5,595 |
- |
- |
- |
5,595 |
|
Net loss and other comprehensive income for the period |
- |
- |
- |
(3,124) |
(416,086) |
(419,210) |
|
Balance, July 31, 2023 |
120,047,814 |
105,456,894 |
628,141 |
(2,283,161) |
(70,358,843) |
33,443,031 |
|
Share-based compensation |
- |
11,026 |
- |
- |
- |
11,026 |
|
Net loss and other comprehensive income for the period |
- |
- |
- |
11,105 |
(2,418,154) |
(2,407,049) |
|
Balance, January 31, 2024 |
120,047,814 |
105,467,920 |
628,141 |
(2,272,056) |
(72,776,997) |
31,047,008 |
|
Net loss and other comprehensive income for the period |
- |
- |
- |
808 |
(74,404) |
(73,596) |
|
Balance, March 31, 2024 |
120,047,814 |
105,467,920 |
628,141 |
(2,271,248) |
(72,851,401) |
30,973,412 |
|
Warrants issued in private placement |
- |
966,028 |
|
|
|
966,028 |
|
Share-based compensation |
- |
422,218 |
- |
- |
- |
422,218 |
|
Net loss and other comprehensive income for the period |
- |
- |
- |
11,027 |
(1,412,172) |
(1,401,145) |
|
Balance, June 30, 2024 |
120,047,814 |
106,856,166 |
628,141 |
(2,260,221) |
(74,263,573) |
30,960,513 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
C21 INVESTMENTS INC.
Interim Condensed Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| OPERATING ACTIVITIES | ||||||
| Net loss from continuing operations after income tax expense | (1,386,448 | ) | (396,735 | ) | ||
| Adjustments to reconcile net loss to cash provided by operating activities: | ||||||
| Accretion expense | 83,889 | - | ||||
| Amortization of right-of-use assets | 125,575 | 130,289 | ||||
| Depreciation and amortization | 379,522 | 346,294 | ||||
| Foreign exchange gain | - | 133 | ||||
| Loss on disposal of assets | 32,496 | - | ||||
| Interest expense | 52,863 | 3,956 | ||||
| Share-based compensation | 422,218 | 5,595 | ||||
| Changes in operating assets and liabilities: | ||||||
| Receivables | 1,937 | 113,078 | ||||
| Inventory | (310,173 | ) | 597,234 | |||
| Prepaid expenses and deposits | 102,535 | 257,030 | ||||
| Accounts payable and accrued liabilities | 805,415 | 11,833 | ||||
| Income taxes payable | 367,700 | 602,674 | ||||
| Deferred revenue | 1,826 | 76,028 | ||||
| Lease liabilities | (90,877 | ) | (97,623 | ) | ||
| Cash provided by operating activities of continuing operations | 588,478 | 1,649,786 | ||||
| Cash (used in) provided by operating activities of discontinued operations | (27,477 | ) | 36,400 | |||
| INVESTING ACTIVITIES | ||||||
| Purchases of property and equipment | (169,660 | ) | (202,181 | ) | ||
| Purchases of intangible assets | (3,413,647 | ) | - | |||
| Proceeds from termination of sales-type lease and disposal of licenses | 1,500 | - | ||||
| Cash used in investing activities of continuing operations | (3,581,807 | ) | (202,181 | ) | ||
| Cash used in investing activities of discontinued operations | - | - | ||||
| FINANCING ACTIVITIES | ||||||
| Proceeds from issuance of debenture units | 2,920,562 | - | ||||
| Principal repayments on promissory note payable | - | (1,013,333 | ) | |||
| Interest paid in cash | (52,863 | ) | (11,868 | ) | ||
| Cash provided by (used in) financing activities of continuing operations | 2,867,699 | (1,025,201 | ) | |||
| Cash used in financing activities of discontinued operations | (11,387 | ) | (11,388 | ) | ||
| Effect of foreign exchange on cash | 11,433 | (1,668 | ) | |||
| Change in cash during the period | (153,061 | ) | 445,748 | |||
| Cash, beginning of period | 3,260,568 | 1,827,829 | ||||
| Cash, end of period | 3,107,507 | 2,273,577 | ||||
| Supplemental disclosure of cash flow information: | ||||||
| Income tax paid in cash | - | - | ||||
| Interest paid in cash | 52,863 | 11,868 | ||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
1. NATURE OF OPERATIONS
C21 Investments Inc. (the "Company" or "C21") was incorporated January 15, 1987, under the Company Act of British Columbia. The Company is a publicly traded company with its registered office is 170-601 West Cordova Street, Vancouver, BC, V6B 1G1. The Company is listed on the Canadian Securities Exchange under the symbol CXXI and on the OTCQB® Venture Market under the symbol CXXIF.
The Company is a cannabis operator in Nevada, USA and is engaged in the cultivation of and manufacturing of cannabis flower products, vape products and extract products for wholesale and retail sales. The Company initially also had operations in the state of Oregon. During the year ended January 31, 2022, the Company made a strategic decision to cease operations in Oregon. The results of the Company's Oregon operations are presented as discontinued operations.
As at June 30, 2024, the Company had a working capital deficiency of $8,416,419 (March 31, 2024 - $6,908,835) and an accumulated deficit of $74,263,573 (March 31, 2024 - $72,851,401). However, the Company has been generating positive cash flows from operations. During the three months ended June 30, 2024 and July 31, 2023, cash provided by operating activities was $561,001 and $1,686,186, respectively.
At the federal level, cannabis currently remains a Schedule I controlled substance under the Federal Controlled Substances Act of 1970. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. As such, even in those states in which marijuana is legalized under state law, the manufacture, importation, possession, use or distribution of cannabis remains illegal under U.S. federal law. This has created a dichotomy between state and federal law, whereby many states have elected to regulate and remove state-level penalties regarding a substance which is still illegal at the federal level. There remains uncertainty about the US federal government's position on cannabis with respect to cannabis-legal status. A change in its enforcement policies could impact the ability of the Company to continue as a going concern.
2. BASIS OF PREPARATION
a) Basis of presentation
These unaudited interim condensed consolidated financial statements for the three months ended June 30, 2024 and July 31, 2023 ("consolidated financial statements") are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These consolidated financial statements have been prepared on an accrual basis and are based on historical costs, except for certain financial instruments classified as fair value through profit or loss.
These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due.
Failure to arrange adequate financing on acceptable terms and/or achieve profitability may have an adverse effect on the financial position, results of operations, cash flows and prospects of the Company. These consolidated financial statements do not give effect to adjustments to assets or liabilities that would be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.
b) Functional and reporting currency
The functional currency of the Company is Canadian dollars ("C$"), and the functional currency of the Company's subsidiaries is U.S. dollars ("US$"). C21 has determined that the US$ is the most relevant and appropriate reporting currency as the Company's operations are conducted in US$ and its financial results are prepared and reviewed internally by management in US$. The consolidated financial statements are presented in US$ unless otherwise noted.
c) Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and all the entities in which the Company has a controlling voting interest and is deemed to be the primary beneficiary. All consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements from the date of acquisition. All intercompany balances and transactions are eliminated upon consolidation.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
2. BASIS OF PREPARATION (continued)
A summary of the Company's subsidiaries included in these consolidated financial statements as at June 30, 2024 is as follows:
| Name of subsidiary (1) | Principal activity |
| 320204 US Holdings Corp. | Holding Company |
| 320204 Oregon Holdings Corp. | Holding Company |
| 320204 Nevada Holdings Corp. | Holding Company |
| 320204 Re Holdings, LLC | Holding Company |
| Eco Firma Farms LLC (2) | Cannabis producer |
| Silver State Cultivation LLC | Cannabis producer |
| Silver State Relief LLC | Cannabis retailer |
| Phantom Brands, LLC (2) | Holding Company |
| Phantom Distribution, LLC (2) | Cannabis distributor |
| Workforce Concepts 21, Inc. | Payroll and benefits services |
(1) All subsidiaries of the Company were incorporated in the USA, are wholly owned and have US$ as their functional currency.
(2) Operations have been discontinued and results are included in discontinued operations.
d) Change in financial year
In May 2024, the Company changed its financial year end from January 31 to March 31 as approved by the Canadian Securities Exchange. The change will allow more capacity to complete annual financial statements in a timely and cost-efficient manner. The Company elected to have transition year of two months from February 1, 2024 to March 31, 2024. The Company's first full financial year under the new schedule covers the twelve months ended March 31, 2025.
In accordance with Section 4.8 of National Instrument 51-102 Continuous Disclosure Obligations, the comparative interim period presented in these consolidated financial statements is the three months ended July 31, 2023.
3. ACCOUNTING POLICIES
The Company's significant accounting policies are fully described in Note 3 to the consolidated financial statements for the years ended March 31, 2024 and January 31, 2024. There have been no material changes to the Company's significant accounting policies.
a) Significant accounting judgement, estimates and assumptions
The preparation of the Company's consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates and judgments.
Areas requiring a significant degree of judgement and estimation relate to the assessment of the transactions as business combinations or asset acquisitions, the determination of recoverability of goodwill, recoverability of intangible assets, fair value less costs to sell of assets classified as held for sale, estimates used in valuation and costing of inventory, impairment of long-lived assets and inventory, fair value measurements, useful lives, depreciation and amortization of property, equipment and intangible assets, the recoverability and measurement of deferred tax assets and liabilities, share-based compensation, and fair value of derivative liability.
b) Recently issued accounting pronouncements
Recent accounting pronouncements issued by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants and the U.S. Securities and Exchange Commission did not or are not believed by management to have a material effect on the Company's present or future financial statements.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
4. ACQUISITION
On June 7, 2024, the Company completed the acquisition of a 6,500 square-foot, purpose-built, operational retail cannabis dispensary located in South Reno, Nevada. The dispensary acquisition was completed pursuant to the terms of an asset purchase agreement with Deep Roots Harvest, Inc. The acquisition involved the purchase of certain assets including applicable licenses. The purchase price in connection with the dispensary acquisition was $3,500,000 and was fully paid to Deep Roots Harvest, Inc. during the three months ended June 30, 2024. On June 26, 2024, the South Reno dispensary opened for business under the Silver State branding.
The acquisition of the new dispensary is accounted for as an asset acquisition due to the absence of identifiable processes and the inability of the acquired assets alone to operate as a business. The allocation of the purchase price to the acquired assets is as follows:
| $ | |||
| Total consideration transferred | 3,500,000 | ||
| Assets acquired: | |||
| Property and equipment | 86,353 | ||
| Licenses | 3,413,647 | ||
| 3,500,000 |
5. DISCONTINUED OPERATIONS
As a result of non-profitable operations in the Oregon reporting unit, the Company began to wind down operations in Oregon beginning in the year ended January 31, 2021. By January 31, 2022, the Company made the decision to cease all growing, manufacturing, and processing activities in Bend, Oregon. As the Oregon reporting unit comprises the assets of multiple components in distinct geographic locations, management anticipates completing the sale on a piecemeal basis. Management is engaged in an active program to seek buyers for the major classes of assets and liabilities in Oregon in order to complete a sale.
Property and equipment include a building and fixtures previously used for cannabis operations. Long-term debt consists of a mortgage on the building held for sale, which was secured on February 1, 2015, and matures on January 1, 2025. The mortgage carries a fixed interest rate of 4.5% with monthly payments. For the three months ended June 30, 2024 and July 31, 2023, interest expense on long-term debt was $4,387 and $4,670, respectively. During the three months ended June 30, 2024 and July 31, 2023, repayments of $11,387 and $11,388 were made towards the long-term debt.
A summary of major classes of assets and liabilities of the discontinued Oregon operation that are classified as held for sale in the consolidated balance sheets is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Carrying amounts of the major classes of assets included in discontinued operations: | ||||||
| Prepaid expenses and deposits | 15,803 | 25,179 | ||||
| Property and equipment | 1,139,517 | 1,139,517 | ||||
| Total assets classified as held for sale | 1,155,320 | 1,164,696 | ||||
| Carrying amounts of the major classes of liabilities included in discontinued operations: | ||||||
| Long-term debt | 385,320 | 392,320 | ||||
| Total liabilities classified as held for sale | 385,320 | 392,320 |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
5. DISCONTINUED OPERATIONS (continued)
A summary of the Company's net loss from discontinued operations is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| Expenses | ||||||
| Selling, general and administrative expenses | 21,337 | 14,681 | ||||
| Interest expense | 4,387 | 4,670 | ||||
| Net loss from discontinued operations before income tax expense | (25,724 | ) | (19,351 | ) | ||
| Income tax recovery | - | - | ||||
| Net loss from discontinued operations after income tax expense | (25,724 | ) | (19,351 | ) | ||
A summary of the Company's cash flows from discontinued operations is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Net cash (used in) provided by operating activities of discontinued operations | (27,477 | ) | 36,400 | |||
| Net cash used in investing activities of discontinued operations | - | - | ||||
| Net cash used in financing activities of discontinued operations | (11,387 | ) | (11,388 | ) | ||
6. RECEIVABLES
A summary of the Company's receivables is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Taxes receivable | 26,274 | 16,368 | ||||
| Trade receivables | 226,180 | 238,023 | ||||
| 252,454 | 254,391 |
There was no provision for expected credit losses on trade receivables as at June 30, 2024 and March 31, 2024.
7. INVENTORY
A summary of the Company's inventory is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Finished goods | 1,843,933 | 1,549,425 | ||||
| Work in process | 1,274,048 | 1,136,096 | ||||
| Raw materials | 182,365 | 180,533 | ||||
| 3,300,346 | 2,866,054 |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
8. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS
a) Property and equipment
A summary of the Company's property and equipment is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Land | 500,000 | 500,000 | ||||
| Leasehold improvements | 2,107,228 | 2,057,964 | ||||
| Furniture and fixtures | 416,284 | 361,580 | ||||
| Computer equipment | 6,659 | 6,659 | ||||
| Machinery and equipment | 2,454,357 | 2,419,927 | ||||
| 5,484,528 | 5,346,130 | |||||
| Less: Accumulated depreciation | (2,096,792 | ) | (1,955,197 | ) | ||
| 3,387,736 | 3,390,933 |
In June 2024, as part of the acquisition of the new dispensary store (Note 4), the Company acquired machinery and equipment, furniture and fixtures, and leasehold improvements with a fair value of $86,353.
Total depreciation of property and equipment for the three months ended June 30, 2024 was $144,422 (three months ended July 31, 2023 - $134,525). During the three months ended June 30, 2024, $121,846 (three months ended July 31, 2023 - $118,686) of the total depreciation was allocated to inventory.
During the three months ended June 30, 2024, the Company disposed of equipment with total cost of $36,822 and accumulated depreciation of $2,826, receiving $1,500 in cash. As a result, the Company recorded $32,496 as loss on disposal of assets.
b) Right-of-use assets
The Company's right-of-use assets result from its operating leases (Note 12) and consist of land and buildings used in the cultivation, processing, and warehousing of its products.
9. INTANGIBLE ASSETS AND GOODWILL
a) Intangible assets
A summary of the Company's intangible assets subject to amortization is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Licenses | 15,423,919 | 12,010,274 | ||||
| Brands | 644,800 | 644,800 | ||||
| Customer relationships | 1,540,447 | 1,540,447 | ||||
| 17,609,166 | 14,195,521 | |||||
| Less: accumulated amortization | (8,268,149 | ) | (7,908,931 | ) | ||
| 9,341,017 | 6,286,590 |
In June 2024, as part of the acquisition of the new dispensary store (Note 4), the Company acquired two licenses with total fair value of $3,413,647.
During the three months ended June 30, 2024, the Company recognized amortization expense on intangible assets of $359,219 (three months ended July 31, 2023 - $332,722). Of the total amortization expense, $2,273 (three months ended July 31, 2023 - $2,267) was allocated to inventory.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
9. INTANGIBLE ASSETS AND GOODWILL (continued)
b) Goodwill
As at June 30, 2024 and March 31, 2024, the Company had goodwill of $28,541,323 and $28,541,323, respectively, which was allocated to the Nevada reporting unit. There was no impairment on goodwill identified during the three months ended June 30, 2024 and July 31, 2023.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A summary of the Company's accounts payable and accrued liabilities is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Accounts payable | 2,075,363 | 1,456,637 | ||||
| Accrued liabilities | 700,791 | 524,058 | ||||
| EFF settlement accrual (Note 20) | 612,500 | 612,500 | ||||
| 3,388,654 | 2,593,195 |
11. CONVERTIBLE DEBENTURES
On May 6, 2024, the Company closed a non-brokered private placement, issuing 4,000 debenture units for aggregate proceeds of $2,920,562 (C$4,000,000). Each unit contains one convertible debenture and 1,000 common share purchase warrants. Each convertible debenture has a principal of C$1,000, maturing 30 months from the issue date, with interest accruing at 12% per annum, payable quarterly in cash. The principal and accrued interest may be converted into common shares at a price of C$0.45 per share at the holder's option any time before maturity.
The proceeds from the private placement were allocated to convertible debentures and warrants using the relative fair value method. Accordingly, $1,954,534 was allocated to convertible debentures and $966,028 to warrants. The Company accounts for the convertible debenture as a financial liability in its entirety, as the conversion feature does not require bifurcation and recognition as derivative liability.
A summary of the Company's convertible debentures is as follows:
| $ | |||
| Balance, March 31, 2024 | - | ||
| Additions from private placement | 1,954,534 | ||
| Accretion | 83,889 | ||
| Interest | 52,863 | ||
| Repayment | (52,863 | ) | |
| Effect of foreign exchange | 1,256 | ||
| Balance, June 30, 2024 | 2,039,679 |
12. LEASE LIABILITIES
The Company's leases consist of land and buildings used in the cultivation, processing, and warehousing of its products. All leases were classified as operating leases in accordance with ASC 842 Leases. A summary of the Company's active leases under contract as at June 30, 2024 is as follows:
| Lessee | Asset | Remaining lease term (years) | Type |
| Silver State Cultivation LLC | Land and building | 8.43 | Operating lease |
| Silver State Relief LLC (Sparks) | Land and building | 12.43 | Operating lease |
| Silver State Relief LLC (Fernley) | Land and building | 12.43 | Operating lease |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
12. LEASE LIABILITIES (continued)
On February 1, 2023, the Company entered into amended agreements for the Sparks and Fernley leases, extending the lease terms from their original end date in 2025 to 2029, with three renewal periods of seven years each. The Company opted for one renewal term under the amended contracts, extending the lease terms until December 31, 2036. Accordingly, during the year ended January 31, 2024, the carrying amounts of right-of-use assets and lease liabilities were remeasured, resulting in an increase of $528,067 in the right-of-use asset and lease liabilities for the Sparks lease, and $396,038 for the Fernley lease.
For the three months ended June 30, 2024, and July 31, 2023, the Company incurred operating lease costs of $362,517 and $350,936, respectively. Of these amounts, $203,092 and $203,092 were allocated to inventory.
A summary of the Company's weighted average discount rate used in calculating lease liabilities and weighted average remaining lease term is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| Weighted average discount rate | 10% | 10% | ||||
| Weighted average remaining lease term (years) | 10.37 | 10.61 |
A summary of the maturity of contractual undiscounted liabilities associated with the Company's operating leases as at June 30, 2024 is as follows:
| Year ending March 31, | $ | ||
| 2025 | 993,289 | ||
| 2026 | 1,360,740 | ||
| 2027 | 1,401,562 | ||
| 2028 | 1,443,609 | ||
| 2029 | 1,486,918 | ||
| Thereafter | 8,985,938 | ||
| Total undiscounted lease liabilities | 15,672,056 | ||
| Effects of discounting | (6,255,137 | ) | |
| Total present value of minimum lease payments | 9,416,919 | ||
| Current portion of lease liability | 407,082 | ||
| Lease liabilities | 9,009,837 |
As at June 30, 2024, the Company has total undiscounted lease liabilities of $15,672,056 (March 31, 2024 - $15,999,875) pertaining to lease liabilities.
13. DERIVATIVE LIABILITY
A summary of the Company's derivative liability is as follows:
|
|
Earn out shares |
|
|
$ |
|
Balance, January 31, 2024 |
108,233 |
|
Gain on change in fair value of derivative liability |
(22,189) |
|
Effect of foreign exchange |
(1,173) |
|
Balance, March 31, 2024 |
84,871 |
|
Effect of foreign exchange |
(850) |
|
Balance, June 30, 2024 |
84,021 |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
13. DERIVATIVE LIABILITY (continued)
Upon the May 24, 2019 acquisition of Swell Companies, the vendors can earn up to 6,000,000 'earn out' shares over a period of seven years. The conditions were based on the Company's common shares exceeding certain share prices during the period. Additionally, 50% of the earn out shares are earned upon a change of control of the Company. The fair value of the derivative liability is derived using a Monte Carlo simulation.
In February 2023, the Company settled the obligation to issue 4,792,800 common shares by making cash payments of $575,136. As at June 30, 2024, the total number of remaining earn out shares is 1,207,200 (March 31, 2024 - 1,207,200).
14. SHARE CAPITAL
Share capital consists of one class of fully paid common shares, with no par value. The Company is authorized to issue an unlimited number of common shares. All shares are equally eligible to receive dividends and repayment of capital and represent one vote at the Company's shareholders' meetings.
A summary of the Company's share capital is as follows:
| Number of shares |
Common stock |
|||||
| # | $ | |||||
| Balance, March 31, 2024 and January 31, 2024 | 120,047,814 | 105,467,920 | ||||
| Warrants issued in private placement | - | 966,028 | ||||
| Share-based compensation | - | 422,218 | ||||
| Balance, June 30, 2024 | 120,047,814 | 106,856,166 |
a) Commitment to issue shares
In connection with the acquisition of EFF on June 13, 2018, the Company issued a promissory note payable to deliver 1,977,500 shares to the vendors of EFF in the amount of $1,905,635, without interest, any time after October 15, 2018. As at June 30, 2024, shares issued pursuant to this commitment total 1,184,407 shares (March 31, 2024 - 1,184,407 shares).
b) Warrants
A summary of the Company's warrant activity is as follows:
| Number of warrants |
Weighted average exercise price |
Weighted average remaining life |
|||||||
| # | C$ | Years | |||||||
| Balance, January 31, 2024 | 1,200,000 | 1.50 | 0.31 | ||||||
| Balance, March 31, 2024 | 1,200,000 | 1.50 | 0.15 | ||||||
| Issuance from private placement | 4,000,000 | 0.55 | 2.35 | ||||||
| Expired | (1,200,000 | ) | 1.50 | - | |||||
| Balance, June 30, 2024 | 4,000,000 | 0.55 | 2.35 |
On May 6, 2024, the Company closed its debenture unit private placement and issued 4,000,000 warrants. Each warrant is exercisable for one common share at a price of C$0.55 per share for a period of 30 months from the issuance date. The allocated value of these warrants is $966,028.
A summary of the Company's outstanding and exercisable warrants as at June 30, 2024, is as follows:
| Expiry date | Exercise price | Number of warrants outstanding |
||||
| C$ | # | |||||
| November 6, 2026 | 0.55 | 4,000,000 |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
14. SHARE CAPITAL (continued)
As at June 30, 2024 and March 31, 2024, outstanding and exercisable warrants had intrinsic values of $nil and $nil, respectively.
c) Stock options
The Company is authorized to grant options to executive officers and directors, employees, and consultants, enabling them to acquire up to 10% of the issued and outstanding common shares of the Company. The exercise price of each option equals the market price of the Company's shares as calculated on the date of grant. The options can be granted for a maximum term of 10 years. Vesting is determined by the Board of Directors.
A summary of the Company's stock option activity is as follows:
| Number of options |
Weighted average exercise price |
Weighted average remaining life |
|||||||
| # | C$ | Years | |||||||
| Balance, January 31, 2024 | 1,100,000 | 0.84 | 0.88 | ||||||
| Balance, March 31, 2024 | 1,100,000 | 0.84 | 0.71 | ||||||
| Granted | 5,425,000 | 0.53 | 2.87 | ||||||
| Balance, June 30, 2024 | 6,525,000 | 0.58 | 2.46 |
On May 13, 2024, the Company granted 5,425,000 stock options to certain officers, directors, and employees. Each stock option entitles the holder to acquire one common share of the Company at an exercise price of C$0.53, expiring on May 13, 2027. Of the options granted, one-third vests immediately, with the remaining two-thirds vesting in equal parts every twelve months thereafter. The fair value of these options was $1,544,676.
A summary of the Company's stock options outstanding and exercisable as at June 30, 2024, is as follows:
| Expiry date | Exercise price | Number of options outstanding |
Number of options exercisable |
||||||
| C$ | # | # | |||||||
| October 9, 2024 | 1.00 | 500,000 | 500,000 | ||||||
| February 10, 2025 | 0.70 | 600,000 | 600,000 | ||||||
| May 13, 2027 | 0.53 | 5,425,000 | 1,808,333 | ||||||
| 0.58 | 6,525,000 | 2,908,333 |
As at June 30, 2024 and March 31, 2024, outstanding and exercisable stock options had intrinsic values of $nil and $nil, respectively.
During the three months ended June 30, 2024 and July 31, 2023, the Company recorded share-based compensation expense on vesting of stock options of $422,218 and $5,595, respectively.
The Company used the following inputs in the Black-Scholes option pricing model to determine the fair value of options granted during the three months ended June 30, 2024:
| Stock price | C$0.53 | ||
| Exercise price | C$0.53 | ||
| Risk-free interest rate | 4.37% | ||
| Expected life | 2.00 years | ||
| Expected volatility | 100.09% | ||
| Expected annual dividend yield | 0.00% |
For non-employee options, the expected term is the contractual life, while for employees and directors, it is the estimated period the options are expected to be outstanding, using the 'simplified' method for 'plain vanilla' employee options. Expected volatility is based on historical volatilities of similarly positioned public companies over a period equivalent to the expected life of the options. The risk-free interest rate is derived from the Treasury zero-coupon bond yields with a term matching the expected life of the options.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
15. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
A summary of the Company's selling, general and administration expenses is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Accounting and legal | 150,002 | 359,609 | ||||
| Depreciation and amortization | 379,522 | 346,294 | ||||
| License fees, taxes, and insurance | 370,311 | 441,770 | ||||
| Office facilities and administrative | 138,584 | 112,051 | ||||
| Operating lease costs | 159,425 | 147,844 | ||||
| Other expenses | 52,821 | 350,283 | ||||
| Professional fees and consulting | 151,727 | 110,122 | ||||
| Salaries and wages | 984,664 | 731,026 | ||||
| Sales, marketing, and promotion | 39,760 | 17,284 | ||||
| Share-based compensation | 422,218 | 5,595 | ||||
| Shareholder communications | 7,481 | 2,845 | ||||
| Travel and entertainment expense (recovery) | 14,440 | (4,624 | ) | |||
| 2,870,955 | 2,620,099 | |||||
16. SEGMENTED INFORMATION
The Company defines its major geographic operating segments as Oregon and Nevada. Due to the jurisdictional cannabis compliance issues ever-present in the industry, each state operation is by nature operationally segmented.
Key decision makers primarily review revenue, cost of sales expense, and gross margin as the primary indicators of segment performance. As the Company continues to expand via acquisition, the segmented information will expand based on management's agreed upon allocation of costs beyond gross margin.
A summary of the Company's segmented operational activity and balances from continuing operations for the three months ended June 30, 2024 is as follows:
| Nevada | Corporate | Total | |||||||
| $ | $ | $ | |||||||
| Total revenue | 6,596,009 | - | 6,596,009 | ||||||
| Gross profit | 2,030,699 | - | 2,030,699 | ||||||
| Operating expenses: | |||||||||
| General and administration | (1,225,930 | ) | (644,100 | ) | (1,870,030 | ) | |||
| Sales, marketing, and promotion | (39,760 | ) | - | (39,760 | ) | ||||
| Operating lease cost | (159,425 | ) | - | (159,425 | ) | ||||
| Depreciation and amortization | (356,493 | ) | (23,029 | ) | (379,522 | ) | |||
| Share-based compensation | - | (422,218 | ) | (422,218 | ) | ||||
| Interest expense and others | (22,456 | ) | (156,036 | ) | (178,492 | ) | |||
| Net income (loss) from continuing operations before income tax expense | 226,635 | (1,245,383 | ) | (1,018,748 | ) |
Segmented information pertaining to discontinued operations (Oregon) is contained within Note 5.
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
16. SEGMENTED INFORMATION (continued)
A summary of the Company's segmented operational activity and balances from continuing operations for the three months ended July 31, 2023 is as follows:
| Nevada | Corporate | Total | |||||||
| $ | $ | $ | |||||||
| Total revenue | 7,162,107 | - | 7,162,107 | ||||||
| Gross profit | 2,830,915 | - | 2,830,915 | ||||||
| Operating expenses: | |||||||||
| General and administration | (1,278,963 | ) | (824,119 | ) | (2,103,082 | ) | |||
| Sales, marketing, and promotion | (17,284 | ) | - | (17,284 | ) | ||||
| Operating lease cost | (147,844 | ) | - | (147,844 | ) | ||||
| Depreciation and amortization | (323,265 | ) | (23,029 | ) | (346,294 | ) | |||
| Share-based compensation | - | (5,595 | ) | (5,595 | ) | ||||
| Interest expense and others | (1,051 | ) | (3,826 | ) | (4,877 | ) | |||
| Net income (loss) from continuing operations before income tax expense | 1,062,508 | (856,569 | ) | 205,939 |
Segmented information pertaining to discontinued operations (Oregon) is contained within Note 5.
Entity-wide disclosures
All revenue for the three months ended June 30, 2024 and July 31, 2023 was earned in the United States.
For the three months ended June 30, 2024 and July 31, 2023, no customer represented more than 10% of the Company's net revenue. As at June 30, 2024 and March 31, 2024, no customer represented more than 10% of the Company's receivables.
A summary of the Company's the long-lived tangible assets disaggregation by geographic area is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Nevada | 11,508,986 | 11,637,758 | ||||
| Discontinued operations (Oregon) | 500,000 | 500,000 | ||||
| 12,008,986 | 12,137,758 |
17. COMMITMENTS
The Company and its subsidiaries are committed under lease agreements with third parties and related parties, for land, office space, and equipment in Nevada. A summary of the Company's future minimum payments as at June 30, 2024 is as follows:
| Year ending March 31, | Third parties |
Related parties |
Total | ||||||
| $ | $ | $ | |||||||
| 2025 | 349,210 | 445,549 | 794,759 | ||||||
| 2026 | 614,225 | 785,313 | 1,399,538 | ||||||
| 2027 | 631,286 | 808,872 | 1,440,158 | ||||||
| 2028 | 648,858 | 833,138 | 1,481,996 | ||||||
| Thereafter | 3,561,898 | 4,473,245 | 8,035,143 | ||||||
| 5,805,477 | 7,346,117 | 13,151,594 |
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
18. RELATED PARTY TRANSACTIONS
A summary of the Company's related balances included in accounts payable and accrued liabilities, and promissory note payable is as follows:
| June 30, 2024 |
March 31, 2024 |
|||||
| $ | $ | |||||
| Lease liabilities due to a company controlled by the CEO | 4,849,723 | 4,917,482 | ||||
| Due to the CFO | 699 | 770 | ||||
| 4,850,422 | 4,918,252 |
Due to the CFO consists of reimbursable expenses incurred in the normal course of business.
A summary of the Company's transactions with related parties including key management personnel is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Consulting fees paid to a director | 15,000 | - | ||||
| Amounts paid to CEO or companies controlled by CEO for leases | 190,134 | 292,808 | ||||
| Amounts paid to CEO or companies controlled by CEO for repayments of promissory note | - | 1,025,202 | ||||
| Amounts paid to CEO or companies controlled by CEO for remuneration | 46,154 | 46,154 | ||||
| Salary paid to directors and officers | 105,616 | 97,583 | ||||
| Share-based compensation | 249,050 | 5,596 | ||||
| 605,954 | 1,467,343 | |||||
On June 5, 2023, the company controlled by the CEO sold its interest in the Silver State Relief LLC (Sparks) property. The Company continues to lease this facility from a third party.
On August 19, 2023, the company controlled by the CEO sold its interest in the Silver State Relief LLC (Fernley) property. The Company continues to lease this facility from a third party.
19. EARNINGS PER SHARE
A summary of the Company's calculation of basic and diluted earnings per share is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Net loss from continuing operations after income taxes | (1,386,448 | ) | (396,735 | ) | ||
| Net loss from discontinued operations after income taxes | (25,724 | ) | (19,351 | ) | ||
| Net loss | (1,412,172 | ) | (416,086 | ) | ||
| Weighted average number of common shares outstanding | 120,047,814 | 120,047,814 | ||||
| Dilutive effect of warrants and stock options outstanding | 793,093 | 2,833,093 | ||||
| Diluted weighted average number of common shares outstanding | 120,840,907 | 122,880,907 | ||||
| Basic and diluted loss per share, continuing operations | (0.01 | ) | (0.00 | ) | ||
| Basic and diluted loss per share, discontinued operations | (0.00 | ) | (0.00 | ) | ||
| Basic and diluted loss per share | (0.01 | ) | (0.00 | ) | ||
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
19. EARNINGS PER SHARE (continued)
The computation of diluted earnings per share excludes the effect of the potential exercise of warrants and stock options when the average market price of the common stock is lower than the exercise price of the respective warrant or stock option and when inclusion of these amounts would be anti-dilutive. For the three months ended June 30, 2024 and July 31, 2023, the number of warrants excluded from the computation was nil and 1,200,000, respectively. For the three months ended June 30, 2024 and July 31, 2023, the number of stock options excluded from the computation was 2,908,333 and 4,409,998 respectively. In addition, for the three months ended June 30, 2024 and July 31, 2023, the computation of diluted earnings per share excludes the potential issuance of 1,207,200 remaining earn out shares (Note 13) as the market price of the common shares has not been high enough to trigger an earn out event.
20. CONTINGENCIES
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. Management is of the opinion that disposition of any current matter will not have a material adverse impact on the Company's financial position, results of operations, or the ability to carry on any of its business activities.
Legal proceedings
Oregon Action: A complaint was filed in the Oregon State Circuit Court for Clackamas County, on April 29, 2019, by two current owners of Proudest Monkey Holdings, LLC (the former sole member of EFF) (the "Plaintiffs"), alleging contract, employment, and statutory claims, alleging $612,500 in damages (as amended), against the Company, its wholly-owned subsidiaries 320204 US Holdings Corp, EFF, Swell Companies Limited, and Phantom Brands LLC, in addition to three directors, two officers, and one former employee (the "Oregon Action"). The Company and the other defendants wholly denied the allegations and claims made in the lawsuit and is defending the lawsuit. On June 21, 2019, the Company filed Oregon Rule of Civil Procedure ("ORCP") 21 motions to dismiss all of the Plaintiffs' claims against it, its wholly owned subsidiaries, and other defendants. On December 30, 2019, the Plaintiffs filed an amended complaint dismissing the Company (and some of its directors and subsidiaries) from the case and reducing the amount in controversy in the Oregon Action. On May 6, 2020, the court granted the Company's ORCP 21 motions in its entirety to dismiss all of Plaintiffs' claims against the remaining defendants. The judgment of dismissal was entered by the Clackamas County court on or about October 14, 2020.
On October 22, 2020, the Company submitted a petition to recover the costs and attorney fees incurred by the Company as the prevailing party in the Oregon Action. On January 20, 2021, the Court ruled in the Company's favor, awarding the Company and its subsidiaries $68,195 in attorney's fees, $1,252 in costs, and a statutory prevailing party fee of $640, through a supplemental judgment, entered on February 2, 2021. The judgment in favor of the Company remains unpaid and continues to collect interest at the statutory rate of 9% per annum.
On November 12, 2020, the Plaintiffs appealed the order dismissing the claims alleged in their amended complaint. On March 2, 2021, the Plaintiffs amended their appeal to appeal the award of attorney fees and costs.
On October 26, 2022, the Court of Appeals issued its decision, reversing the general and supplemental judgments in favor of the Company and remanding the case to the trial court for further proceedings. The Company filed a petition for reconsideration of the Court of Appeals decision on December 7, 2022, which was denied. On April 19, 2023, the Company filed a petition for review in the Oregon Supreme Court, which was denied. On November 1, 2023, the Court of Appeals issued the appellate judgement that reversed the October 2023 dismissal as well as the judgement for attorney fees and remanded the case against Phantom Brands, LLC, Swell Companies Limited, and two former employees. On December 21, 2023, the Plaintiffs filed a second amended complaint.
On April 2, 2024, the court confirmed dismissal of the Company and other defendants no longer named. The Company has filed a motion for costs and attorney fees totaling $108,876. Additionally, a settlement conference is set for October 22, 2024, and a twelve-person jury trial is scheduled for November 19, 2024.
British Columbia Action: On or about September 13, 2019, the Company delivered a notice to the above-mentioned Plaintiffs of alleged breach and default under the EFF purchase and sale agreement, due to alleged unlawful, intentional acts and material misrepresentations by the Plaintiffs before and after the completion of the purchase. As a result of such breach, the Company denied the Plaintiffs' tender of their share payment notes in connection with the agreement. On or about October 14, 2019, Proudest Monkey Holdings, LLC and one of its current owners, sued the Company in the Supreme Court of British Columbia to compel the issuance and delivery of the subject shares, including interests and costs (the "British Columbia Action").
| C21 INVESTMENTS INC. Notes to the Interim Condensed Consolidated Financial Statements For the three months ended June 30, 2024 and July 31, 2023 (Expressed in U.S. dollars, except as noted) |
20. CONTINGENCIES (continued)
On November 8, 2019, the Company responded and counterclaimed for general, special and punitive damages, including interest and costs, related to breach of contract, repudiation of contract, breach of indemnity and fraudulent and negligent misrepresentation by the Plaintiffs. The Plaintiffs filed a response to the Company's counterclaims on or about June 5, 2020, and the parties stipulated to a form of amended pleading which included the joinder of additional parties, an owner of Proudest Monkey Holdings, LLC and EFF, and additional contract and equitable claims and damages, partially duplicative to those alleged by the Plaintiffs in the Oregon Action (breach of contract, indemnity, unjust enrichment and wrongful termination claims). Plaintiffs allege $2,774,177 in damages (as amended), plus unquantified additional damages, interest and costs, of which amounts are partially duplicative of the Oregon Action. This action remains in the discovery stage. The trial date was removed due to lack of prosecution by Plaintiffs. It is too early to predict the resolution of the claims and counterclaims.
21. INCOME TAXES
A summary of the Company's income tax expense and effective tax rate is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Net income (loss) from continuing operations before income taxes | (1,018,748 | ) | 205,939 | |||
| Income tax expense | 367,700 | 602,674 | ||||
| Effective tax rate | -36% | 293% | ||||
The Company is subject to income taxes in the United States and Canada. The Company has computed its provision for income taxes based on the actual effective tax rate for the quarter as management believes this is the best estimate for the annual effective tax rate. Significant judgment is required in evaluating the Company's uncertain tax position and determining the provision for income taxes.
22. FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments classified as fair value through profit or loss and their classification in the fair value hierarchy is as follows:
| Fair value measurements at June 30, 2024 using: | Level 1 | Level 2 | Level 3 | Total | ||||||||
| $ | $ | $ | $ | |||||||||
| Financial liabilities: | ||||||||||||
| Earn out shares (Note 13) | - | - | 84,021 | 84,021 |
| Fair value measurements at March 31, 2024 using: | Level 1 | Level 2 | Level 3 | Total | ||||||||
| $ | $ | $ | $ | |||||||||
| Financial liabilities: | ||||||||||||
| Earn out shares (Note 13) | - | - | 84,871 | 84,871 |
The fair value of the derivative liability associated with the earn out shares was derived using a Monte Carlo simulation using non-observable inputs, and therefore represents a Level 3 measurement.
C21 INVESTMENTS INC.
|
|
Management's Discussion and Analysis For the three months ended June 30, 2024 (Expressed in U.S. Dollars) |
GENERAL
C21 Investments Inc. (the "Company", "C21", "we", "us" and "our") was incorporated in the Province of British Columbia under the Company Act (British Columbia) on January 15, 1987 as Empire Creek Mines Inc. On May 11, 1987, the Company changed its name to Curlew Lake Resources Inc. Effective November 24, 2017, the Company changed its name to C21 Investments Inc. On June 15, 2018, the Company's common shares (the "Common Shares") were delisted from the TSX Venture Exchange and on June 18, 2018, the Common Shares commenced trading on the Canadian Securities Exchange ("CSE") under the symbol CXXI. The Company registered its Common Shares in the United States ("U.S.") and on May 6, 2019, its Common Shares were cleared by the Financial Industry Regulatory Authority for trading on the OTC Markets platform under the U.S. trading symbol CXXIF. On August 23, 2019 the Company announced it had been approved for trading on the OTCQB Venture Market, and on September 28, 2020 the Company upgraded to trading on the OTCQX Best Market.
The Company has changed its year end to March 31 and as such this Management Discussion and Analysis and the accompanying unaudited interim financial statements is for the three-month period ended June 30, 2024.
The Company's unaudited interim condensed consolidated financial statements for the three months ended June 30, 2024, were authorized for issuance on August 16, 2024 by the Board.
Additional information related to the Company is available for viewing on SEDAR at www.sedar.com or the Company website at www.cxxi.ca.
DESCRIPTION OF BUSINESS
The Company is a vertically integrated cannabis company that cultivates, processes, distributes and sells quality cannabis and hemp-derived consumer products in Nevada, U.S.A. The Company is focused on value creation through the disciplined acquisition and integration of core retail, manufacturing, and distribution assets in strategic markets, leveraging industry-leading retail revenues together with high-growth potential and multi-market branded consumer packaged goods ("CPG").
The Company focuses on scalable opportunities in key markets that take advantage of its core competencies, including: (i) retail operational excellence and expanding its retail footprint through value-add acquisitions in existing markets, and (ii) branded CPG expansion through both captive retail and wholesale channels. The Company focuses on acquiring businesses that provide immediate contribution to overall profitability, or have a path to profitability within twelve months, where it can leverage existing assets, brands, and domain expertise.
The Company currently holds licenses in Nevada spanning the entire cannabis supply chain. With the winding down and sale of its Oregon licenses and operations, the Company presents its Oregon operations as 'held for sale' on the Balance Sheet and as 'discontinued operations' in the Income Statement.
The Company's management team has significant professional experience, including deep experience both within the cannabis industry and other fast-paced growth industries like technology and venture capital. Management also includes experts from more traditional industries like forestry, manufacturing, real estate, and capital markets.
Strategic Focus and Growth
Our operations in Reno, Nevada under the Silver State Relief brand continues its strong financial performance generating healthy cash flow and satisfied customers. Building around this strong core we have accomplished much since the beginning of the Company's fiscal year 2024:
- On June 26, 2024, the Company opened its third Silver State Relief retail dispensary in Nevada.
- On June 7, 2024, the Company closed the acquisition of a cannabis dispensary in Reno, Nevada from Deep Roots Harvest. The Company acquired all the assets related to the operation of its 6,500 square foot, purpose-built, operational retail cannabis dispensary located in South Reno Nevada (the "South Reno Dispensary"). This acquisition will allow C21 to expand its retail footprint in Nevada, a pivotable step in its growth strategy. This store is being integrated and rebranded under the Silver State Relief banner. President and CEO of C21, Sonny Newman commented: "With the dispensary's desirable location in a high traffic, flourishing area of South Reno, we anticipate strong revenue growth from this acquisition, along with the added benefit of allowing us to expand the portion of our cultivation capacity sold through our retail channel."
- On May 6, 2024, the Company closed a private placement of C$4 million from the issuance of convertible debentures units (the "May 2024 Private Placement"). The proceeds will be used to fund the acquisition of the South Reno Dispensary. The convertible debenture units are comprised of a "Convertible Debenture" convertible into common shares at C$0.45, and a "Warrant" entitling the holder to exercise into common shares at C$0.55. The maximum shares issuable from the Convertible Debenture is 8,888,889 common shares, and from the Warrant, 4,000,000 common shares. The outstanding principal amount owing under the Convertible Debenture will accrue interest from the issue date at 12% per annum payable quarterly in cash. Repayment of the Convertible Debenture will be made in 25 equal monthly installments beginning on the last day of the 6th month from issuance. The Convertible Debenture matures 30 months after issuance. See the news release and public filings of this issuance for further information.
- On September 7, 2023, the Company appointed Aron Swan as its Chief Operating Officer. C21 has established the COO role to support the Company's long-term growth objectives. Aron Swan has been the long-standing Head of Operations and was responsible for the build-out and expansion of C21's Nevada operations, including managing a team of more than 100 employees, developing strong vendor relationships, and ensuring rigorous compliance standards. He has been integral to Silver State Relief since its inception in 2015 and has been instrumental in running our business and managing our growth initiatives. Aron is leading our strategic growth objectives as we pursue expansion in our market.
The Company's strategic Initiatives over the next 12 months include: (i) extending our Nevada retail footprint where we have a proven track record of success and (ii) continuing our disciplined approach to growth and financing.
As the Company has discontinued its Oregon operations, the discussion in this MD&A focusses primarily on the Company's Nevada operations.
NEVADA
The Company acquired Silver State Relief and Silver State Cultivation ("Silver State") on January 1, 2019. The Nevada business operates in Reno, Sparks and Fernley, Nevada.
Cultivation, Processing and Wholesale
Through Silver State in Nevada, the Company operates its indoor cultivation and processing out of a 104,000 square foot facility now with 37,000 square feet of cultivation and 1,200 square feet dedicated to volatile extraction. Silver State completed a $3 million expansion of its grow facility in April 2022, more than doubling capacity to 11,500 pounds of biomass with 8,100 pounds of flower and 3,300 pounds of trim annually. An additional 30,000 sq ft of cultivation can be built out on future expansion of Nevada retail footprint, which should produce an additional 6,000 pounds per annum of high-quality flower.
The Company's extraction processing supports branded CPG in both captive retail and wholesale channels. Silver State manufactures Hood Oil cartridges, Phantom Farms pre-rolls, and flower strains, together with the Silver State branded products which include Flower, pre-rolls, and concentrates. These in-house brands make up over 34% of sales in the dispensaries. With the increased production available, wholesale sales amounted to $3.0 million during the year ended January 31, 2024 ($2.2 million in prior year).
Retail
The Company now operates three dispensaries with the acquisition of the third, the South Reno Dispensary, finalized on June 7, 2024, with its grand opening occurring on June 26, 2024. It is a 6,500 square foot, purpose-built, retail cannabis dispensary. With the dispensary's desirable location in a high traffic, flourishing area of Southern Reno, the Company anticipates strong revenue growth from this acquisition, along with the added benefit of allowing it to expand the portion of its cultivation capacity sell through.
Our two established stores, an 8,000-square foot retail dispensary, located in Sparks, Nevada, and a 6,000-square foot dispensary located in Fernley, Nevada collectively service a total of more than 125,000 recreational and medical cannabis customers per quarter, with over 700 SKUs in each store.
Silver State had total retail sales of $25.3 million during the year ended January 31, 2024 as compared to $26.8 million in the prior year.
INTERIM MD&A - QUARTERLY HIGHLIGHTS
Operations
| 2 months | ||||||||||||||||||||||||
| LAST EIGHT QUARTERS, except as noted | ended | (000's unless noted) | ||||||||||||||||||||||
| 30-Jun-24 | 31-Mar-24 | 31-Jan-24 | 31-Oct-23 | 31-Jul-23 | 30-Apr-23 | 31-Jan-23 | 31-Oct-22 | |||||||||||||||||
| Inventory | 3,300 | 2,866 | 2,709 | 2,839 | 3,038 | 3,514 | 4,174 | 5,549 | ||||||||||||||||
| Revenues | 6,596 | 4,465 | 6,549 | 6,882 | 7,162 | 7,692 | 7,033 | 7,207 | ||||||||||||||||
| Income (loss) from operations, add back share based compensation | (418 | ) | 290 | 493 | 226 | 217 | 561 | (618 | ) | 1,408 | ||||||||||||||
| Adjusted EBITDA | 311 | 633 | 1,055 | 943 | 972 | 1,561 | 937 | 1,906 | ||||||||||||||||
| Income (loss) from continuing operations | (1,386 | ) | (51 | ) | (2,082 | ) | (357 | ) | (397 | ) | (387 | ) | (1,405 | ) | 237 | |||||||||
| *per common share, basic & diluted | (0.01 | ) | (0.00 | ) | (0.02 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) | (0.01 | ) | 0.00 | |||||||||
| Profit (loss) attributable to owners | (1,412 | ) | (74 | ) | (2,042 | ) | (376 | ) | (416 | ) | (471 | ) | (2,119 | ) | 249 | |||||||||
| *per common share basic & diluted | (0.01 | ) | (0.00 | ) | (0.02 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) | (0.02 | ) | 0.00 | |||||||||
The Company has changed its year end to March 31 and as such this is the first quarterly filing for the three months ending June 30, 2024. The next fiscal year end will be for the 12 months ending March 31, 2025.
Our inventory at June 30, 2024 has increased from March 31, 2024 due to the opening of our third store on June 26, 2024.
We experienced a loss from operations before share based compensation of ($0.4) million due to a fall in gross profit (see below discussion in "Gross Profit").
Adjusted EBITDA is down for the quarter mainly due to the loss from operations discussed above. See Non-GAAP measures below.
Income taxes are very high in the cannabis industry due to the restrictions of Section 280E of the tax code. Therefore, the measure of income from continuing operations taxes in the quarterly table above, is a useful measure.
Summary derived from the Company's consolidated financial statements:
| PROFIT AND LOSS | Q1 | 2 months | Q4 | Q3 | Q2 | |||||||||||
| 30-Jun-24 | 31-Mar-24 | 31-Jan-24 | 31-Oct-23 | 31-Jul-23 | ||||||||||||
| Revenues- Retail | $ | 6,196,208 | 4,163,292 | 6,303,351 | 6,433,991 | 6,383,974 | ||||||||||
| Wholesale | 399,801 | 301,658 | 245,461 | 448,087 | 778,133 | |||||||||||
| Revenue | $ | 6,596,009 | 4,464,950 | 6,548,812 | 6,882,078 | 7,162,107 | ||||||||||
| Inventory expensed to cost of sales | 4,565,310 | 2,688,650 | 3,702,469 | 4,129,429 | 4,331,192 | |||||||||||
| Gross profit | 2,030,699 | 1,776,300 | 2,846,343 | 2,752,649 | 2,830,915 | |||||||||||
| 30.8% | 39.8% | 43.5% | 40.0% | 39.5% | ||||||||||||
| Expenses | ||||||||||||||||
| General and administration | 1,870,030 | 1,151,305 | 1,780,705 | 2,006,623 | 2,103,082 | |||||||||||
| Sales, marketing, and promotion | 39,760 | 21,581 | 23,691 | 17,465 | 17,284 | |||||||||||
| Operating lease cost | 159,425 | 106,283 | 190,308 | 147,844 | 147,844 | |||||||||||
| Depreciation and amortization | 379,522 | 207,225 | 359,568 | 355,536 | 346,294 | |||||||||||
| Share based compensation | 422,218 | - | 5,527 | 5,499 | 5,595 | |||||||||||
| Total expenses | 2,870,955 | 1,486,394 | 2,359,799 | 2,532,967 | 2,620,099 | |||||||||||
| Income (loss) from operations | (840,256 | ) | 289,906 | 486,544 | 219,682 | 210,816 | ||||||||||
| Other items | ||||||||||||||||
| Interest expense | (52,863 | ) | - | - | - | (3,956 | ) | |||||||||
| Accretion expense | (83,889 | ) | ||||||||||||||
| Other Income (loss) | (41,740 | ) | 9,209 | (785,763 | ) | (13,800 | ) | (921 | ) | |||||||
| Change in fair value of derivative liabilities | - | 22,189 | (59,217 | ) | - | - | ||||||||||
| Income (loss) before before taxes | (1,018,748 | ) | 321,304 | (358,436 | ) | 205,882 | 205,939 | |||||||||
| Income tax expense | (367,700 | ) | (372,743 | ) | (1,723,925 | ) | (563,100 | ) | (602,674 | ) | ||||||
| Income from continuing operations | (1,386,448 | ) | (51,439 | ) | (2,082,361 | ) | (357,218 | ) | (396,735 | ) | ||||||
| Income (loss) from discontinued operations | (25,724 | ) | (22,965 | ) | 40,357 | (18,932 | ) | (19,351 | ) | |||||||
| Net income (loss) | (1,412,172 | ) | (74,404 | ) | (2,042,004 | ) | (376,150 | ) | (416,086 | ) | ||||||
With the change in Fiscal year end to March 31 from January 31, the comparative period in our interim financial statements will not be the same calendar months. The comparative for this first quarter ending June 30, 2024 ("Q1") is the 3 months ending July 31, 2023 (Prior Year"). The sequential comparative is to the three months ended January 31, 2024 (Prior Quarter").
"Revenue" includes retail revenues from our three stores and wholesale revenue from our cultivation operations. The Q1 total revenues were down 8% at $6.6 million versus the Prior Year $7.2 million and increased by 1% sequentially from the Prior Quarter of $6.5 million. Retail revenues in Q1 were $6.2 million, down 3% versus Prior Year $6.4 million, and down sequentially 2% versus Prior Quarter $6.3 million. Wholesale revenues in Q1 decreased to $0.40 million versus Prior Year of $0.78 million and increased sequentially from Prior Quarter of $0.25 million.
"Cost of Sales" includes the costs directly attributable to cultivating and processing cannabis plus the cost of product purchases from third parties, for sale in our stores. We use an average costing model which captures and averages costs over several quarters.
"Gross profit" Q1 gross profit margin% has decreased to 30.8% from 39.5% in the Prior Year and decreased from 43.5% in the Prior Quarter. This is due to several factors, including one-time internal supply issues, stocking for the new store and continued retail price discounting.
"Income from operations" for Q1 at ($0.8) million down versus the Prior Year $0.2 million and down sequentially versus Prior Quarter $0.5 million. This result is due to an increase in share-based compensation due to issuance of share options in the quarter and a fall in Gross Profit as discussed above in "Gross Profit".
Expenses
"General and administration" includes all overhead costs that have not otherwise been allocated to cost of sales. These include salaries and wages, professional fees including legal and accounting, insurance and some local taxes. Q1 costs of $1.9 million was down versus the Prior Year of $2.1 million due to savings in professional fees and merchant fees, and increased versus $1.8 million in the Prior Quarter due to salaries and wages.
"Operating lease cost" is the cost of leases not included in cost of sales and was $159,425 for Q1 versus $147,844 in Prior Year.
"Depreciation and amortization" include provisions for fixed assets and intangibles not included in cost of sales. The total depreciation and amortization in Q1 was $0.38 million versus $0.35 million in the Prior Year.
"Share based compensation" is a non-cash item and reflects the issuance of stock options to employees, officers, and directors. This expense of $422,218 is up from $5,595 in the Prior Year due to the issuance of share options to employees, directors and officers during Q1.
Other Items
"Interest expense" in Q1 was $52,863 versus $3,956 in the Prior Year due to the issuance of the C$4 million Convertible Debentures during the quarter.
"Accretion expense" in Q1 was $83,889 versus zero in the Prior Year due to the issuance of the C$4 million Convertible Debentures during the quarter.
"Change in fair value of derivative liabilities" is a periodic revaluation of the earn out shares outstanding to vendors of businesses purchased by the Company. These earn-out shares are revalued using a Monte Carlo simulation. The fair value of this liability will increase with an increase in the stock price of the Company and vice versa. The change in fair value must be recorded through the Company's profit or loss statement. As a result, a share price increase period-over-period will result in a reduction in net income and vice versa. In February and March 2023, the Company entered into cancelation agreements with the majority of the Swell Vendors who had rights to Swell Earn-Out shares, canceling those rights for a one-time cash payment. Of the 6.0 million original Swell Earn-Out shares 1.2 million remain outstanding. Of the original 10.5 million of earn out shares to both Phantom and Swell, 1.2 million remain.
"Provision for income taxes" in Q1 of $0.4 million is down versus Prior Year of $0.6 million due to the less taxable income.
"Other comprehensive income (loss)," specifically the cumulative translation adjustment, comes about in GAAP when translating the balances between the parent company (investments made in C$) and the US subsidiaries (US$). These foreign exchange gains or losses at each reporting date result from the translation of C$ amounts to US$ (which is our reporting currency).
"Net income (loss) from discontinued operations" the Company has classified all of its Oregon operations to 'discontinued operations'. The revenues and expenses pertaining to the Oregon operations are shown in this line item. We have had no active business in Oregon since early 2022. The effect of this treatment is to lower our revenues (Q1 -$nil, Prior Year-$nil) and increase our gross profit (Q1-$nil, Prior Year-$nil) and increase our income from operations and net income (Q1-$25,724, Prior Year- $19,351). There is no effect of discontinuing the Oregon operations on our Nevada operations as the cannabis business in each state is unique and separate, which is due to the regulation of the cannabis industry. Effective March 27, 2023, the Company reached a settlement with its central Oregon landlord with respect to its three remaining leases in Oregon, including an early termination of such leases, in exchange for an abatement of one month of the Company's rent applied to each respective lease. This is recorded in the year end FY2023 accounts. The Company maintains fee simple ownership of real property in central and southern Oregon, which are both listed for sale.
Non-GAAP Financial Measures
"Adjusted EBITDA" is supplemental, non-GAAP financial measures. The Company defines EBITDA as earnings before depreciation and amortization, depreciation and interest in cost of sales, income taxes, and interest. Additionally, the Company's Adjusted EBITDA presented above excludes accretion, loss from discontinued operations, one-time transaction costs and all other non-cash items. The Company has presented "Adjusted EBITDA" because its management believes it is a useful measure for investors when assessing and considering the Company's continuing operations and prospects for the future. Furthermore, "Adjusted EBITDA" is a commonly used measurement in the financial community when evaluating the market value of similar companies. "Adjusted EBITDA" is not a measure of performance calculated in accordance with GAAP, and these metrics should not be considered in isolation of, or as a substitute for, the measurement of the Company's performance prepared in accordance with GAAP. "Adjusted EBITDA," as calculated and reconciled in the table above, may not be comparable to similarly titled measurements used by other issuers and is not necessarily a measure of the Company's ability to fund its cash needs. Figures have been restated to match the current presentation.
| ADJUSTED EBITDA | Quarters ending: | 2 months | Quarters ending: | ||||||||||||
| 30-Jun-24 | 31-Mar-24 | 31-Jan-24 | 31-Oct-23 | 31-Jul-23 | |||||||||||
| Net income (loss) | (1,412,172 | ) | (74,404 | ) | (2,042,004 | ) | (376,150 | ) | (416,086 | ) | |||||
| Interest & accretion | 136,752 | - | - | - | 3,956 | ||||||||||
| Provision for taxes | 367,700 | 372,743 | 1,723,925 | 563,100 | 602,674 | ||||||||||
| Depreciation and amortization | 379,522 | 207,225 | 359,568 | 355,536 | 346,294 | ||||||||||
| Depreciation and interest in COS | 203,091 | 135,395 | 203,092 | 203,092 | 203,092 | ||||||||||
| EBI TDA | (325,107 | ) | 640,959 | 244,581 | 745,578 | 739,930 | |||||||||
| Changein FV of derivative liability | - | (22,189 | ) | 59,217 | - | - | |||||||||
| Share based compensation | 422,218 | - | 5,527 | 5,499 | 5,595 | ||||||||||
| Loss(gain) discontinued operations | 25,724 | 22,965 | (40,357 | ) | 18,932 | 19,351 | |||||||||
| One-time special project costs | 117,543 | - | - | 159,000 | - | ||||||||||
| Production curtailment, inventory adjustments | 28,700 | - | - | - | 206,000 | ||||||||||
| Other gain/loss | 41,740 | (9,209 | ) | 785,763 | 13,800 | 921 | |||||||||
| Adjusted EBI TDA | 310,818 | 632,526 | 1,054,731 | 942,809 | 971,797 |
"Free Cash Flow" is defined as Cash Provided by Operating Activities from Continuing Operations in a period minus capital expenditures. Management believes that Free Cash Flow, which measures our ability to generate cash from our continuing business operations, is an important financial measure for use in evaluating the Company's financial performance. Free Cash Flow should be considered in addition to, rather than as a substitute for, consolidated net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.
The following table summarizes free cash flow of the Company over the past five quarters:
|
FREE CASH FLOW |
|
Two months |
|
|
|
|
Quarter ended (except as noted) |
30-Jun-24 |
31-Mar-24 |
31-Jan-24 |
31-Oct-23 |
31-Jul-23 |
|
|
|
|
|
|
|
|
Cash provided by operating activities of continuing operations |
588,478 |
904,620 |
517,451 |
(110,329) |
1,649,786 |
|
Purchases of property and equipment |
(169,660) |
(51,483) |
(18,251) |
(259,343) |
(202,182) |
|
|
418,818 |
853,137 |
499,200 |
(369,672) |
1,447,604 |
RELATED PARTY TRANSACTIONS
A summary of the Company's related balances included in accounts payable, accrued liabilities, and promissory note payable is as follows:
| June 30, 2024 |
July 31, 2023 |
|||||
| $ | $ | |||||
| Lease liabilities due to a company controlled by the CEO | 4,849,723 | 4,917,482 | ||||
| Due to the CFO of the Company | 699 | 770 | ||||
| 4,850,422 | 4,918,252 |
A summary of the Company's transactions with related parties including key management personnel for the three months ended June 30, 2024 and July 31, 2023 is as follows:
| Three months ended | ||||||
| June 30, 2024 | July 31, 2023 | |||||
| $ | $ | |||||
| Consulting fees paid to a director | 15,000 | - | ||||
| Amounts paid to CEO or companies controlled by CEO for leases | 190,134 | 292,808 | ||||
| Amounts paid to CEO or companies controlled by CEO for repayments of promissory note | - | 1,025,202 | ||||
| Amounts paid to CEO or companies controlled by CEO for remuneration | 46,154 | 46,154 | ||||
| Salary paid to directors and officers | 105,616 | 97,583 | ||||
| Share-based compensation | 249,050 | 5,596 | ||||
| 605,954 | 1,467,343 | |||||
Amounts paid to CEO or companies controlled by CEO consists of salary, lease payments, and Newman Note principal and interest. The CEO owns all three buildings (two buildings sold to a third party last year) which Silver State operates from and a lease on each building was assumed by the Company upon the purchase of Silver State. The Newman Note was issued when the Company purchased Silver State in 2019 and the Newman Note was fully repaid and satisfied, and security and pledge agreements terminated, on June 1, 2023.
CONTRACTUAL OBLIGATIONS
The following table includes the Company's obligations to make future payments for each of the next five years that represent contracts and other commitments that are known and committed:
| CONTRACTUAL OBLIGATIONS | ||||||||||||||||||
| Carrying | Contractual | 1-3 years | 3-5 years | More than 5 | ||||||||||||||
| amount | cash flows | Under 1 year | years | |||||||||||||||
| As at June 30, 2024 | ||||||||||||||||||
| Trade and other payables | $ | 3,388,654 | $ | 3,388,654 | $ | 3,388,654 | $ | - | $ | - | $ | - | ||||||
| Finance lease payments (1) | 9,416,919 | 15,278,150 | 1,330,942 | 2,782,866 | 2,952,342 | 8,212,000 | ||||||||||||
| Convertible debt (2) | 1,156,259 | 1,156,259 | 1,156,259 | - | - | - | ||||||||||||
| Notes and other borrowings (3) | 393,856 | 393,856 | 393,856 | - | - | - | ||||||||||||
| Total | $ | 14,355,688 | $ | 20,216,919 | $ | 6,269,711 | $ | 2,782,866 | $ | 2,952,342 | $ | 8,212,000 | ||||||
(1) Amounts in the table reflect minimum payments due for the Company's leased facilities and certain leased equipment under various lease agreements and purchase agreements.
(2) Amounts in the table reflect the contractually required principal payments payable under various convertible note and convertible debenture agreements. These relate to the Oregon Action in the section Legal Proceedings below.
(3) Amounts in the table reflect the contractually required principal payments payable under a mortgage.
ADDITIONAL INFORMATION
LEGAL PROCEEDINGS
For a summary of the current legal proceedings, please refer to the Company's MD&A for the years ended March 31, 2024, and January 31, 2024 for detailed disclosure in this regard.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this MD&A, the Company has not entered into any off-balance sheet arrangements.
SHARE CAPITAL
The Company is authorized to issue an unlimited number of Common Shares.
As of June 30, 2024, there were:
- 120,047,814 Common Shares issued and outstanding;
- 6,525,000 options outstanding to purchase Common Shares, of which 2,908,333 options had vested;
- 4,000,000 warrants outstanding to purchase Common Shares; and
- no restricted share units ("RSUs") outstanding to purchase Common Shares.
- 793,093 acquisition shares to EFF vendors, yet to be issued. See 'Legal Proceedings' later in this MD&A.
As of August 16, 2024 (the date of this MD&A) the Company had the following securities outstanding:
|
Type of Security |
Number outstanding |
|
Common Shares |
120,047,814 |
|
Stock Options |
6,525,000 |
|
Warrants |
4,000,000 |
|
Acquisition shares |
793,093 |
|
|
131,365,907 |
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION
The Company's financial statements and the other financial information included in this MD&A are the responsibility of the Company's management and have been examined and approved by the Board. The accompanying audited financial statements are prepared by management in accordance with GAAP, and include certain amounts based on management's best estimates using careful judgment. The selection of accounting principles and methods is management's responsibility.
Management recognizes its responsibility for conducting the Company's affairs in a manner that complies with the requirements of applicable laws and established financial standards and principles and maintains proper standards of conduct in its activities. The Board supervises the financial statements and other financial information through its audit committee, which is comprised of a majority of non-management directors.
The audit committee's role is to examine the financial statements and recommend that the Board approve them, to examine the internal control and information protection systems, and all other matters relating to the Company's accounting and finances. To do so, the Audit Committee meets annually with the external auditors, with or without the Company's management, to review their respective audit plans and discuss the results of their examination. The Audit Committee is responsible for recommending the appointment of the external auditors or the renewal of their engagement.
ACCOUNTING POLICIES AND ESTIMATES
FINANCIAL RISK MANAGEMENT
The Board approves and monitors the risk management processes of the Company, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way in which such exposure is managed is provided as follows:
CREDIT RISK
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company's primary exposure to credit risk is on its cash held in bank accounts. The Company's cash is deposited in bank accounts held with a major bank in Canada, a credit union in Washington, Nevada and Colorado.
LIQUIDITY RISK
Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management of the Company and the Board are actively involved in the review, planning and approval of significant expenditures and commitments.
The Company's consolidated financial statements for three months ended June 30, 2024 have been prepared on a going concern basis, which assumes that the Company will be able to continue its operations and realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
At June 30, 2024, the Company had cash of $3,107,507, a working capital deficit of $8,416,419.
The Company has generated significant positive cash flow for the three months ended June 30, 2024, the transition two months ended March 31, 2024 and the fiscal year ended January 31, 2024. The Statement of Cash Flows for the three months ended June 30, 2024, shows cash provided by continuing operations of $0.6 million ($0.9 million - two months ended March 31, 2024, and $3.3 million - year ended January 31, 2024)
The promissory note owing to the President and CEO was fully repaid as of June 1, 2023, for which the monthly payments were $0.5 million plus interest. Other than lease liabilities, our largest liability at October 31, 2023, was income taxes payable of $10.6 million. The Company does not have any significant capital expenditure plans in the next 12 months. While operations' cash flow has slowed as our markets in general have slowed, we expect to continue to generate positive operations cash flow. The repayment of the promissory note gave the Company flexibility to pursue its strategic growth plans, which included the acquisition of a third store completed on June 7, 2024, at a cost of $3.5 million.
The Company's third store opened on June 26, 2024, and the purchase price was financed by internal working capital and the issuance of C$4 million of Convertible debentures, the May 2024 Private Placement. The Convertible debentures bear annual interest at 12% payable quarterly and monthly principal payment of C$160,000 per month commencing in October 2024. The payments on the convertible debentures will be paid for from working capital.
There remains uncertainty about the U.S. federal government's position on cannabis with respect to cannabis-legal states. A change in its enforcement policies could impact the ability of the Company to continue as a going concern and have a material adverse impact on the business.
INTEREST RATE RISK
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates, especially given the tightening interest rate environment since the beginning of 2022. The Company is not subject to any interest rate volatility as its long-term debt instruments and convertible notes are carried at a fixed interest rate throughout their term.
CAPITAL MANAGEMENT
The Company's objectives when managing its capital are to ensure there are enough capital resources to continue operating as a going concern and maintain the Company's ability to ensure sufficient levels of funding to support its ongoing operations and development. The purpose of these objectives is to provide continued returns and benefits to the Company's shareholders. The Company's capital structure includes items classified in debt and shareholders' equity.
The Board does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business considering changes in economic conditions and the risk characteristics of the Company's underlying asset.
The Company works with its capital advisors, CB1 Capital based in New York, to identify the best strategic options to execute our corporate growth plans, as well as increasing financial flexibility in managing our debt.
U.S. INDUSTRY BACKGROUND AND REGULATORY ENVIRONMENT
INDUSTRY BACKGROUND AND TRENDS
The emergence of the legal cannabis sector in the United States, both for medical and adult use, has been rapid as more states adopt regulations for its production and sale. Today 73% of Americans live in a state where cannabis is legal in some form and 48% of the population lives in states where it is fully legalized for adult use.
The use of cannabis and cannabis derivatives to treat or alleviate the symptoms of a wide variety of chronic conditions has been generally accepted by a majority of citizens with a growing acceptance by the medical community as well. A review of the research, published in 2015 in the Journal of the American Medical Association, found evidence that cannabis can treat pain and muscle spasms. The pain component is particularly important, because other studies have suggested that cannabis can replace patients' use of highly addictive, potentially deadly opiates - meaning cannabis legalization literally improves lives.
Polls throughout the United States consistently show overwhelming support for the legalization of medical cannabis, together with strong majority support for the full legalization of recreational adult-use cannabis. According to an October 2022 Pew Research Center survey, around nine-in-ten Americans favor some form of cannabis legalization, with roughly 10% saying cannabis should not be legal in any form. In that survey, 88% of U.S. adults support legalizing cannabis either for medical and recreational use (59%) or medical use only (30%). These views have held steady since April 2021 polling from the Pew Research Center. These are large increases in public support over the past 40 years in favor of legalized cannabis use.
Notwithstanding that 40 states and the District of Columbia have now legalized adult-use and/or medical cannabis (with 21 states and the District of Columbia allowing adult-use cannabis), cannabis remains illegal under U.S. federal law with cannabis listed as a Schedule I drug under the U.S. Federal Controlled Substances Act of 1970 ("CSA").
Currently the Company only operates in the state of Nevada. The Company may expand into other states within the United States that have legalized cannabis use either medicinally or recreationally.
FEDERAL REGULATORY ENVIRONMENT
For a complete summary of the Federal regulatory environment, please refer to the Company's MDA for the fiscal years ended March 31, 2024, and January 31, 2024, for detailed disclosure in this regard.
NEVADA REGULATORY UPDATE
For a summary of the Nevada regulatory environment, please refer to the Company's MDA for the fiscal years ended March 31, 2024, and January 31, 2024 for detailed disclosure in this regard.
RISK FACTORS
For a comprehensive list of the risk factors relating to the business and securities of the Company, please refer to the Company's MDA for the fiscal years ended March 31, 2024, and January 31, 2024 for detailed disclosure in this regard. The Company will face a few challenges and significant risks in the development of its business due to the nature of and present stage of its business. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial by the Company, may also impair the operations of or materially adversely affect the securities of the Company. If any such risks occur, the Company's shareholders could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of the Company could be materially adversely affected. Some of the risk factors previously disclosed are interrelated and, consequently, readers should read such risk factors in connection with one another.
The acquisition of any of the securities of the Company is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are enough to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of the Company should not constitute a major portion of a person's investment portfolio and should only be made by persons who can afford a total loss of their investment.
In the event of a federal rescheduling of marijuana under the CSA, short of removal from the CSA (i.e., descheduling), there is the risk that FDA takes a more hands on approach to marijuana regulation, in addition to existing state-based regulations.
FORWARD LOOKING STATEMENTS
This MD&A includes "forward-looking information" and "forward-looking statements" within the meaning of Canadian securities laws and United States securities laws. All information, other than statements of historical facts, included in this MD&A that addresses activities, events or developments that the Company expects or anticipates will or may occur in the future is forward-looking information. Forward-looking information includes, among other things, information regarding: statements relating to the business and future activities of, and developments related to, the Company, including such things as the lasting impact of the COVID-19 pandemic with potential reductions of operating (including marketing) and capital expenses and revenues, future business strategy, competitive strengths, goals, expansion and growth of the Company's business, operations and plans, including information concerning the completion and timing of the completion of contemplated acquisitions or dispositions, expectations whether such proposed transactions will be consummated on the current terms or otherwise and contemplated timing, expectations and effects of such proposed transactions, including the potential number and location of cultivation and production facilities and dispensaries or licenses therefor to be acquired or sold and markets to be entered into or exited by the Company as a result of completing such proposed transactions, the ability of the Company to successfully achieve its business objectives as a result of completing such proposed acquisitions or dispositions, estimates of future cultivation, manufacturing and extraction capacity, expectations as to the development and distribution of the Company's brands and products, the expansion into additional U.S. and international markets, any potential future legalization of adult-use and/or medical cannabis under U.S. federal law, expectations of market size and growth in the United States and the states in which the Company operates or contemplates future operations and the effect such growth will have on the Company's financial performance, expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally, and other events or conditions that may occur in the future.
Readers are cautioned that forward-looking information and statements are based on reasonable assumptions, estimates, analysis and opinions of management of the Company at the time they were provided or made in light of their experience and their perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable in the circumstances, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements.
Forward-looking information and statements are not a guarantee of future performance and are based upon a number of estimates and assumptions of management at the date the statements are made including among other things assumptions about: the contemplated acquisitions and dispositions being completed on the current terms and current contemplated timeline; development costs remaining consistent with budgets; ability to manage anticipated and unanticipated costs; favorable equity and debt capital markets; the ability to raise sufficient capital to advance the business of the Company; favorable operating and economic conditions; political and regulatory stability; obtaining and maintaining all required licenses and permits; receipt of governmental approvals and permits; sustained labor stability; favorable production levels and costs related to the Company's operations; the pricing of various cannabis products; the level of demand for cannabis products; the availability of third party service providers and other inputs for the Company's operations; the Company's ability to conduct operations in a safe, efficient and effective manner; the ability of the Company to restructure and service its secured debt; the availability of securitized debt financing on terms acceptable to the Company, or at all; and the ability of the Company's operations to perform and continue in the ordinary course in light of the lasting impact of the COVID-19 pandemic. While the Company considers these assumptions to be reasonable, the assumptions are inherently subject to significant business, social, economic, political, regulatory, competitive and other risks, uncertainties, contingencies and other factors that could cause actual performance, achievements, actions, events, results or conditions to be materially different from those projected in the forward-looking information and statements. Many assumptions are based on factors and events that are not within the control of the Company and there is no assurance they will prove to be correct.
Risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, among others, risks relating to U.S. regulatory landscape and enforcement related to cannabis, including governmental and environmental regulation, public opinion and perception of the cannabis industry, risks related to the ability to consummate any proposed acquisitions or dispositions on the proposed terms and the ability to obtain requisite regulatory approvals and third party consents and the satisfaction of other conditions, risks related to reliance on third party service providers, the limited operating history of the Company, risks inherent in an agricultural business, risks related to proprietary intellectual property, risks relating to financing activities, risks relating to the management of growth, increasing competition in the cannabis industry, risks associated to cannabis products manufactured for human consumption including health risks, potential product recalls, reliance on key inputs, reliance on a healthy global supply chain, suppliers and skilled labor (the availability and retention of which is subject to uncertainty), cyber-security risks, ability and constraints on marketing products, fraudulent activity by employees, contractors and consultants, risk of litigation and conflicts of interest, and the difficulty of enforcement of judgments and effecting service outside of Canada, risks related to future acquisitions or dispositions, limited research and data relating to cannabis, risks and uncertainties related to the lasting impact of the COVID-19 pandemic and the continued impact it may have on the global economy and the retail sector, particularly the cannabis retail sector in the states in which the Company operates, as well as those risk factors discussed elsewhere herein, including under "Risk Factors".
Although the Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such forward-looking information and statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such information and statements. Accordingly, readers should not place undue reliance on forward-looking information and statements. The Company may elect to update such forward-looking information and statements at a future time, it assumes no obligation for doing so except to the extent required by applicable law.
| This is an unofficial consolidation of Form 52-109FV2 Certification of Interim Filings Venture Issuer Basic Certificate reflecting amendments made effective January 1, 2011 in connection with Canada's changeover to IFRS. The amendments apply for financial periods relating to financial years beginning on or after January 1, 2011. This document is for reference purposes only and is not an official statement of the law. |
Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate
I, Sonny Newman, Chief Executive Officer of C21 Investments Inc., certify the following:
1. Review:I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of C21 Investments Inc. (the "issuer") for the interim period ended June 30, 2024.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: August 16, 2024
SIGNED: "Sonny Newman"
Sonny Newman, Chief Executive Officer
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.
The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
| This is an unofficial consolidation of Form 52-109FV2 Certification of Interim Filings Venture Issuer Basic Certificate reflecting amendments made effective January 1, 2011 in connection with Canada's changeover to IFRS. The amendments apply for financial periods relating to financial years beginning on or after January 1, 2011. This document is for reference purposes only and is not an official statement of the law. |
Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate
I, Michael Kidd, Chief Financial Officer of C21 Investments Inc., certify the following:
1. Review:I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of C21 Investments Inc. (the "issuer") for the interim period ended June 30, 2024.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: August 16, 2024
SIGNED: "Michael Kidd"
Michael Kidd, Chief Financial Officer
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.
The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.