Mr. Robert Cheney reports
C21 ANNOUNCES PROPOSED CHANGE OF BUSINESS, CONVERTIBLE DEBENTURE FINANCING AND INTENTION TO LIST SECURITIES ON THE CSE
C21 Investments Inc. intends to complete a change of business, subject to receipt of acceptance from a majority of its shareholders, spearheading into the U.S. cannabis industry and focusing on revenue-producing operations. C21 further intends to apply to list its common shares on the Canadian Securities Exchange and delist from the NEX board of the TSX Venture Exchange.
Change of business overview and convertible debenture financing
To maximize shareholder value, C21's management and its board of directors made the strategic decision to enter into two definitive agreements to acquire substantial cannabis cultivation and distribution operations in Oregon and Maine.
In conjunction with the acquisitions (which are more particularly described below), the company intends to complete a non-brokered private placement for gross proceeds of a minimum of $7,425,000 and up to $40-million.
These funds will be raised by the company issuing an aggregate principal amount of up to $40-million of secured convertible debentures, maturing 24 months after closing of the financing. From and after the date of issue until the maturity date, the debentures will be convertible into common shares at the option of the holder at a conversion price of $1 per share.
However, upon completion of the acquisitions, change of business, financing and listing on the CSE, and subject to receipt of any required regulatory and shareholder approvals, at any time on or after closing, the company may elect to force conversion of the then outstanding principal amount of debentures into conversion shares.
Interest on the debentures shall be calculated semi-annually in arrears, at an annual rate of interest of 8 per cent per annum.
The debentures will be secured by a security interest on all present and after acquired property and assets of the company in favour of a trustee on behalf of the holders of the debentures.
The proceeds from the financing will be used toward expenses required with respect to the acquisitions and for general working capital.
In connection with the financing, finders' fees equal to up to 5.0 per cent of proceeds raised may be paid in cash, in addition to such other fee(s) as may be agreed to by the company and approved by the applicable stock exchange.
Subject to any required regulatory approvals, the company intends to pay each subscriber who participates in the financing a loan bonus by issuing to each subscriber that number of shares as is equal to 10 per cent of the total number of shares issuable to each subscriber upon conversion of the debentures purchased under the financing by such subscriber, to be issued at a deemed value of $1 per bonus share.
One insider has indirectly subscribed for a total principal amount of $420,000 from the financing, which, accordingly if and when converted into shares and bonus shares are issued, will increase that related party's pro rata shareholdings in the company. All of the independent directors of the company, acting in good faith, have determined that the fair market value of the securities being issued and the consideration paid are reasonable and, with the value of the related-party transaction being less than 25 per cent of the company's market capitalization, is exempt from the formal valuation and minority shareholder approval requirements of Multilateral Instrument 61-101 (Protection of Minority Security Holders in Special Transactions).
With respect to the financing, under applicable Canadian securities law, the securities and underlying securities to be issued will be subject to a hold period of four months and a day from the date of issuance of the securities and will be subject to such further restrictions on resale as may apply under applicable foreign securities laws.
Intention to delist from TSX Venture Exchange and seek listing on the Canadian Securities Exchange
In connection with the acquisitions and subject to consent of a majority of shareholders of the company, the company will apply to list its common shares on the CSE, which application is subject to the company meeting the CSE's listing requirements. There is no assurance that the CSE will provide conditional or final approval of the company's application to list its common shares on the CSE. The company will concurrently apply to delist its common shares from the TSX-V, subject to TSX-V acceptance.
Following closing of the acquisitions, closing of the maximum financing and conversion of the debentures by the issuance of a maximum of 40 million conversion shares, as well as the issuance of a maximum of four million bonus shares, it is anticipated that the company will have 50 million common shares issued and outstanding, excluding any shares that may be issued on exercise of stock options entitling optionees to purchase up to 505,000 common shares that are currently outstanding. The company has no share purchase warrants outstanding at the present time.
Further details regarding the change of business will be outlined in the disclosure document to be submitted by the company to the CSE and filed on SEDAR. The change of business and CSE listing are contingent on receipt of shareholder consent. The company is confident it will secure consent from a majority of its shareholders in this regard.
As at the time of the acquisitions, the company's management and board of directors are composed of the following:
Robert Cheney, president, chief executive officer and director, has over 35 years within the business industry, and has obtained his law degree from UBC and a BA from Simon Fraser University. Mr. Cheney has extensive experience as an entrepreneur, forming and leading new ventures globally. Through his career, Mr. Cheney acted for several prominent emerging companies in mining, technology and films, as well as global investment firms, such as Charterhouse. Since the 1980s, Mr. Cheney has been focused in the business industry as an investor and venture capitalist.
Christopher Cherry, chief financial officer and director, has over 14 years of corporate accounting and audit experience. Mr. Cherry has extensive corporate experience and has held senior-level positions for several public mining companies, including director, CFO and secretary. Mr. Cherry has been a chartered accountant since February, 2009, and a certified general accountant since 2004. In his former experience as an auditor, he held positions with KPMG and Davidson and Co. LLP in Vancouver, where he gained experience as an auditor for junior public companies and as an initial public offering specialist.
Leonard Werden, director, is an experienced horticultural cultivation expert with over 35 years of experience in British Columbia and internationally. Mr. Werden advises on grow practices, facilities construction and design, lighting systems selection and installation, irrigation systems and practices, temperature and humidity control, and genetic strain selection. Mr. Werden has developed and supervised large-scale grow operations with state-of-the-art technology. Mr. Werden has an intimate understanding of indoor and outdoor grow practices.
Keturah Nathe, director, has over 11 years experience with various public and private companies in industries involving mineral exploration and development, oil and gas, technology, and agriculture. Ms. Nathe currently is acting as vice-president of corporate development for Simco Services Inc. and Iconic Minerals Ltd.
In accordance with the definitive agreements, the vendors have the option to appoint a person of their choosing to sit on the board of directors.
The acquisitions and financing represent the first stage of C21's investment strategy to acquire several, established, revenue-producing, cannabis operations, with proven management teams, which have the ability to expand and support such operations with the new investment capital. The near-term company target is to establish vertically integrated business operations, with high-quality cultivation, processing, branding and wide retail dispensary distribution.
Oregon acquisition terms
On Jan. 19, 2018, C21 signed a definitive agreement for the acquisition of Proudest Monkey Holdings LLC (the Eco Firma Farms (Oregon) or Oregon operations). For the acquisition of the Oregon operations, C21 will issue convertible notes entitling the current owners to receive up to 4.3 million shares of the company at a deemed value of $1 per converted share. The note as to 2.3 million shares has no cash value and bears no interest. The note as to two million shares has a cash redemption value of $2-million (U.S.) and bears interest at 4 per cent per annum.
In addition to the above notes, the company has entered into a lease agreement entitling C21 to acquire full legal interest in the property, structures and leasehold improvements for $4-million (U.S.). The vendors have the option to receive four million shares in lieu of the cash at the time of the purchase of the property.
Accordingly, in total, the vendors of the business and the real property collectively can receive a total of up to 8.3 million shares of the company in the event they convert all their notes and elect to receive all shares in exchange for the real property and improvements.
In addition to the 8.3 million consideration shares described above, the vendors in Oregon can also earn shares for producing EBITDA (earnings before interest, taxes, depreciation and amortization) over a five-year period. Up to 10 million shares can be earned in total over the five-year term with a maximum of two million shares earned per year. One share shall be issued for each $5 (U.S.) of EBITDA generated so long as the wholesale price of cannabis remains above $1,750 (U.S.) per pound equivalent. In the event the average wholesale selling price of cannabis received by the business is between $1,500 (U.S.) and $1,7499 (U.S.) per pound equivalent, then one share shall be earned for each $3.75 (U.S.) of EBITDA. If the average wholesale selling price of cannabis received by the business is between $1,400 (U.S.) and $1,499.99 (U.S.) per pound equivalent, then one share shall be earned for each $2.50 (U.S.) of EBITDA. In the event the wholesale price of cannabis received by the business falls below $1,400 per pound equivalent, then an additional year will be added to the earnout term.
To mitigate grow risk and ensure higher wholesale prices, C21 plans to open and manage its own retail dispensary outlets in Oregon.
As a condition of closing the acquisition of Eco Firma Farms (Oregon), C21 must receive approval to list on the CSE.
Maine acquisition terms
On Jan. 5, 2018, C21 signed a definitive agreement for the acquisition of North American Health Group LLC and New England Manufactured and Supply LLC (the Eco Firma Farms (Maine) or Maine operations). For the acquisition of the Maine operations, C21 will issue convertible notes entitling the current owners to receive up to 8.3 million shares of the company at a deemed value of $1 per converted share. The note as to 6.3 million shares has no cash value and bears no interest. The note as to two million shares has a cash redemption value of $2-million (U.S.) and bears interest at 4 per cent per annum.
In addition to the above notes, the company has entered into a lease agreement entitling C21 to acquire full legal interest in the property, structures and leasehold improvements for $2-million (U.S.). The vendor owners of Blue Water Marina LLC have the option to receive two million shares in lieu of cash at the time of the purchase of the property.
Accordingly, in total, the vendors of the business and the real property collectively can receive a total of up to 10.3 million shares of the company in the event they convert all their notes and elect to receive all shares in exchange for the real property and improvements.
In addition to the 10.3 million consideration shares described above, the vendors in Maine can also earn shares for producing EBITDA over a seven-year period. Up to eight million shares can be earned in total over the seven-year term with a maximum of two million shares earned per year. One share shall be issued for each $5 (U.S.) of EBITDA generated so long as the wholesale price of cannabis remains above $1,750 (U.S.) per pound equivalent. In the event the average wholesale selling price of cannabis received by the business is between $1,500 (U.S.) and $1,7499 (U.S.) per pound equivalent, then one share shall be earned for each $3.75 (U.S.) of EBITDA. If the average wholesale selling price of cannabis received by the business is between $1,400 (U.S.) and $1,499.99 (U.S.) per pound equivalent, then one share shall be earned for each $2.50 (U.S.) of EBITDA. In the event the wholesale price of cannabis received by the business falls below $1,400 per pound equivalent, then an additional year will be added to the earnout term.
To mitigate grow risk and ensure higher wholesale prices, C21 plans to open and manage its own retail dispensary outlets in Maine.
As a condition of closing the acquisition of Eco Firma Farms (Oregon), C21 must receive approval to list on the CSE.
About Oregon operations
The company's impending acquisition of Eco Firma Farms (Oregon) involves an approximately 20-acre cultivation site with a building structure providing approximately 26,000 square feet of available indoor grow, processing and office space. The company is acquiring a 100-per-cent interest in the business holding company, Proudest Monkey Holdings, and a 100-per-cent interest in the property holding company, Covered Marina LLC, under a put/call option lease agreement. Details of the transaction are set out below. Initially, the company will occupy the land and premises under a lease with an option to buy.
To date, several commercial indoor crop cycles have been completed. The Oregon facility is currently producing cannabis at a rate of approximately 2,400 pounds per annum. Oregon's cultivation team is led by experienced cannabis cultivators with combined experience of over 20 years in the industry. The company intends to double Oregon's indoor production capacity within nine months from the closing of the acquisitions. Additional outdoor grow operations, including greenhouses and processing, will also be included in the 2018 expansion program. This increased capacity will allow for the production of cannabis oil and the processing of branded bakery and edible products. The 2019 production is targeted to be 5,000 to 6,000 pounds of high-quality indoor flower. C21 is allocating $5-million (U.S.) of new investment toward expanding grow and processing operations, as well as greater distribution bandwidth within the next 12 months in Oregon. The Oregon facilities are fully licenced for cannabis cultivation under Oregon state law.
Jesse Peters, the president of Eco Firma Farms, commented on the merger, "We are excited to see what the future holds as we expand the footprint of Oregon cannabis here and abroad with the backing of new investment capital from C21."
About Maine operations
The impending acquisition of Eco Firma Farms (Maine) is located on an approximately 80-acre site with approximately 125,000 square feet of available indoor grow and processing operations. The acquisition is being effected through the acquisition of a 100-per-cent interest in North American Health Group LLC and of a 100-per-cent interest in the real estate assets through a put/call option agreement to acquire 100 per cent of Blue Water Marina.
C21's planned expansion in Maine includes additional outdoor cultivation to be built on site with 13 acres currently securely fenced to comply with state regulations. Greenhouses will also be constructed, as well as expansion of processing operations. A State of Maine permit has been granted for a 4,500-square-foot processing lab to be constructed. Commercial production from indoor operations of cannabis flower is targeted at 4,000 pounds for 2018 and 6,000 pounds for 2019 following the phase 2 expansion. Establishing outdoor cultivation, greenhouse cultivation, oil production, processing operations and branded products offers C21 significant revenue diversification and upside revenue potential for the Maine operations. The company is also considering producing CBDs (cannabidiol) with hemp cultivation in Maine to fully utilize the additional outdoor acreage.
Kevin Dean, the president of North American Health Group and New England Manufacturing and Supply, said: "We are excited about the sale of our companies to C21. Joining forces will allow us to pursue our aggressive growth plans with a well-capitalized company and great management team."
The cannabis industry in the United States is a new and exciting industry with projected rapid expansion. The majority of the states within in the United States now has some form of state-sponsored cannabis legalization, and the general regulatory trend is moving toward further legalization. The projected revenues for the U.S. cannabis industry are estimated at more than $5-billion (U.S.) for 2018 and could rise to more than $17-billion (U.S.) by 2021, according to the Marijuana Business Factbook. The tax revenues generated by the industry and the new high-skilled jobs created have been integral to economic growth for several U.S. states. It is estimated approximately 280,000 new jobs relating to cannabis could be created in the U.S. by 2020.
"Near-term growth prospects for the industry are very strong with double-digit market growth projected for the next few years. C21 has a strategy to participate in this exciting growth through timely acquisitions of established cannabis businesses with top-line revenue growth potential and EBITDA," said Mr. Cheney.
C21's acquisition strategy focuses on jurisdictions where cannabis cultivation, processing and distribution are legal under local state and municipal law. The cannabis operations being acquired by C21 undertake rigorous internal compliance standards to remain fully legally compliant with all state and local laws and regulations.
Canadian companies with U.S. marijuana-related assets
On Oct. 16, 2017, the Canadian Securities Administrators published staff Notice 51-352 (Issuers with U.S. Marijuana-Related Activities), which provides specific disclosure expectations for reporting issuers in Canada that currently have, or are in the process of developing, marijuana-related activities in the United States as permitted within a particular state's regulatory framework. All reporting issuers with U.S. marijuana-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other applicable disclosure documents to fairly present all material facts, risks and uncertainties about issuers with U.S. marijuana-related activities.
Upon completion of the acquisitions, the company will have direct involvement in cultivation or distribution of cannabis in the United States as it will own the business and operations of at least two licensed producers of cannabis.
Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the Access to Cannabis for Medical Purposes Regulations (ACMPR), in the United States, cannabis is largely regulated at the state level. To the company's knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam, that have legalized cannabis in some form. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule 1 controlled substance under the U.S. Controlled Substances Act (the CSA) and, as such, violates federal law in the United States.
As a result of the conflicting views between state legislatures and the U.S. federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August, 2013, when then deputy attorney-general, James Cole, authored a memorandum addressed to all U.S. district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating to cannabis for medical purposes. The Cole memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offences. In particular, the Cole memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level.
However, on Jan. 4, 2018, Jefferson Sasson, the U.S. attorney-general, issued a memo to all U.S. district attorneys rescinding the Cole memorandum in its entirety (the Sasson memo). The Sasson memo provided that in deciding which marijuana activities to prosecute under U.S. federal laws, prosecutors should follow the well-established principles that govern all federal prosecutions, including requiring prosecutors to decide which cases to prosecute, to weigh all relevant considerations, including federal law enforcement priorities set by the attorney-general, the seriousness of the crime, the deterrent effect of criminal prosecution and the cumulative impact of particular crimes on the community. Since the release of the Sasson memo, the footing for an interpretation on how to treat state-legalized cannabis is less clear. The risk of how each state will treat cannabis will be based on the district attorneys for the applicable state. Even if a state in which the company operates or holds assets permits cannabis cultivation, the U.S. district attorney can decide that such cultivation or sales are in contravention of U.S. federal law and initiate prosecution against the company.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licences in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity, or the market price of its publicly traded shares. In addition, it is difficult for the company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
As the company operates in Canada and is listed on the Canadian TSX Venture Exchange, with application to migrate to the CSE, it will be able to access the Canadian capital markets on a public and private basis. Such capital may be utilized for the continuing operations of the its U.S. holdings that operate in the cannabis industry. Although such investments carry a higher degree of risk and despite the illegal nature of cannabis under U.S. federal laws, Canadian-based issuers involved in making U.S. cannabis-based investments have been successful in raising substantial amounts of private and public financing. However, there is no assurance the company will be successful, in whole or in part, in raising funds, particularly if the U.S. federal authorities change their position toward enforcing the CSA. Further, access to financing from U.S. residents may be limited due to their unwillingness to be associated with activities which violate U.S. federal laws.
The company's investments in entities involved in the U.S. cannabis industry will be made: (i) only in those states that have enacted laws legalizing cannabis in an appropriate manner; and (ii) only in those entities that have fully complied with such state (and local) laws and regulations and have the licences, permits or authorizations to properly carry on each element of their business.
Once the acquisitions are complete, the company will implement measures designed to ensure compliance with applicable U.S. state laws on a continuing basis, including:
- Frequent correspondence and updates with legal and regulatory advisers;
- Development of standard operating procedures;
- Appropriate employee training for all standard operating procedures;
- Subscription to monitoring programs with large banks to monitor and ensure compliance with the U.S. Treasury guidelines for cannabis-related businesses.
The company has required representations and warranties for the acquisitions that the businesses being carried on are conducted in a manner consistent with the U.S. federal enforcement priorities and such entities are in compliance with licensing requirements and applicable state regulatory frameworks.
We seek Safe Harbor.
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