Rising High: Exclusive talk with multi-state operator C3 Industries

In this edition of “Rising High,” The Fly conducted an exclusive interview with Ankur Rungta, Co-founder and Chief Executive Officer of C3 Industries, a multi-state, vertically integrated cannabis company headquartered in Michigan. Here are some highlights:

HIGH QUALITY CANNABIS: C3 Industries is a private multi-state operator that cultivates, manufactures and retails high quality cannabis products with a focus on customer service and value. The company offers multiple product brands including Cloud Cover and Galactic Cannabis as well as a retail network, High Profile Cannabis Shop. “Our markets are primarily focused in the Midwest and the Northeast,” Rungta said. “The larger part of our business is retail. We have 24 retail stores that are currently open between Michigan, Massachusetts, Missouri, Illinois and New Jersey, and that’s about 75% of our business today. We also operate roughly 220,000 square feet of production, primarily focused in Michigan, Massachusetts and Missouri. It’s about 25% of our business.”

The company is looking to build a meaningful retail footprint in select markets, as well as production where it makes sense, he said. “We really want to focus our attention to try to be the leading player in these markets,” the CEO said. “Our focus has always been to try to build a fundamentally sound business, one that is constructed the right way and has the right balance sheet. In each of the markets that we are going into, we try to make sure that the business will be fundamentally sound and ultimately will perform well financially.”

He added C3 is differentiated from many other MSOs of its size as the company started business in highly competitive markets like Oregon and Michigan. “We saw those markets mature and we saw the increasing competition, price depression and margin depression,” Rungta said. “We were forced to deal with that pretty early on in our business and it informed our view on how to build these businesses the right way. We are always focusing on how we find the right opportunities, either by winning them organically or buying them at a good price, and then being able to operate well with the right fundamentals and the right financial profile.”

He said the company also has a competitive edge on the retail side of the business as C3 is skilled at product assortment and purchasing. “We are really well-attuned to the customer and what they are looking for,” the CEO said. “We really understand what we are doing when it comes to buying products, pricing it the right way, making it interesting and making the customer feel like they are getting value. And on the production side of things, we have also been noted for our flower product and we produce high-end flower creating full-spectrum cannabis products. We have always had an ability to produce high-end, quality products at scale with an efficient cost of production.”

BRANDS, RETAIL: C3 offers product brands Cloud Cover, an indoor flower brand created for cannabis connoisseurs seeking an elevated experience, and Galactic, a concentrate and vape brand aimed at the value consumer. “Cloud Cover is our original brand,” Rungta said. “That is very high-quality flower, with certain varieties being selected and certain THC and cannabinoid profiles. We also produce prerolls, edibles and concentrates. It is typically for us a mid-tier price point, but we view it as a very high-quality product at a mid-tier price point. We’ve built a lot of loyalty around that brand.”

Galactic is an edgier brand directed at younger consumers that utilizes greenhouse flower produced in Michigan, he said. “It’s designed to be a little bit more of a value product, so it is priced below that mid-tier,” the CEO said. “We are doing a lot of exciting stuff with it from a product standpoint and we are seeing a ton of excitement around it. With Galactic, it is not just flower and pre-rolls, we are also producing a vape cartridge line under that brand and we have started producing some edibles and other things.”

C3 curates and sells premium cannabis flower and products through its High Profile Cannabis Shop network, which is always focused on offering consumers value, he said. “That can mean a lot of different things,” Rungta said. “Some consumers are looking for very high-end products or a very specific offering, whether it is a certain brand or a certain strain. We make sure that we have those options for them and that they are priced appropriately. Even though something might be on the premium end, it can still be priced in a way that that customer is getting value.”

He noted the company has also seen many consumers seeking more value products in several of its markets. “If you are a regular flower consumer for example, you may be looking for a certain price point or a certain THC level,” the CEO said. “You may be buying higher quantities of it than someone who is an infrequent flower user. As a company, there is a way to buy and assort the product you’re offering those people at the price points they want and really try to fit a budget. That is where we are really seeing a ton of activity across the industry and it’s happening with a lot of consumers looking for those value products. We’re really trying to pass on value to the customers, so that when they leave they want to come back to visit us again.”

MARKET EXPANSION: C3 retails products at High Profile locations in Michigan, Missouri, Massachusetts, Illinois and New Jersey and plans to enter Connecticut in 2024. “We are headquartered in Michigan, our corporate team is mostly based in the Southeast Michigan area and our corporate office is in Ann Arbor,” Rungta said. “I’m a University of Michigan graduate myself, so Michigan was always an early focus for us just because of our history here. Headed from there, we felt like there was a regional play for us between the Midwest and the Northeast, so the next markets we entered were Massachusetts and Missouri.”

The company was able to win licenses in the states organically through applications and develop out the assets there, he said. “We expanded to Massachusetts and Missouri through an organic path, and we built out both production and broad retail portfolios in those markets,” the CEO said. “The next layer of expansion for us has been a combination of some organic license wins and then some M&A. The markets that we targeted for the next wave are Connecticut, New Jersey, Illinois, very much fitting into the Midwest and Northeast recreational market target.”

He said the company is trying to incorporate more M&A into growth plans and bought a fair amount of retail licenses in some of the states to enter them. “We’re just trying to keep the balance between organic growth and some M&A,” Rungta said. “We are trying to pick markets that have a decent population on the recreational side and we think there is a lot of growth potential there. The other thing we are focused on is, having been through markets like Oregon and Michigan, we are always thinking about the competitive landscape. We are fine with competition given our history, but there are some markets that truly become oversaturated. Even if you’re a great operator, you may not be able to build a profitable business.”

He added C3 is not looking to spread itself too thin over too many markets. “At this point being in five states and going into Connecticut, we have a lot to execute in these six markets,” the CEO said. “We have got a lot of new retail that we are opening and some production facilities. Our main focus for 2024 is to really get all of these states fully built out and if we are going to enter a new state, that’s looking at portfolios that are already operational.”

PRODUCT CATEGORIES: According to cannabis research firms, flower still holds the biggest share of sales of any cannabis product category, usually followed by vape. “The death of flower has been greatly exaggerated,” Rungta said. “There has been a theory for years that flower was going to fade away and that the consumer product side of cannabis would really gain share. The reality is that flower is an incredibly popular and resilient category.”
Flower is still the category that most consumers are familiar with, he said, particularly those that are transitioning into the licensed dispensary environment from purchasing in the illicit market. “We just see a lot of ongoing strength in that category,” the CEO said. “In a lot of our states, it has basically held as a percentage of overall sales or it has grown a bit. I don’t feel like it is going anywhere, at least any time soon.”

He noted C3 has seen some shifts within the flower category such as growth in pre-rolls relative to all flower. “Then vape is typically the second biggest category,” Rungta said. “There is a lot of consumer interest in that offering, that type of way of using the product, and we are just seeing that societally with e-cigarettes as well. It just seems to be something that is trending in a bigger way during this time.”

SAFER BANKING: In September, a U.S. Senate committee voted to advance The Secure and Fair Enforcement Regulation Banking Act bill, which seeks to ensure that all businesses, including cannabis businesses, have access to deposit accounts, insurance and other financial services. “I am not optimistic about any legislative movement on the federal level for cannabis,” the CEO said. “I don’t think there is any way to pass any cannabis related legislation in the House in particular right now. That may change after this election cycle if control of the House flips, but I think within 2024, there is no chance of anything happening legislatively like SAFER.”

SCHEDULING: In August, the U.S. Department of Health and Human Services made a recommendation to the Drug Enforcement Agency that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act. ” We are hearing that there is a pretty decent chance of rescheduling happening this year,” Rungta said. “It feels like this process that is going on with the agencies is going to reach some conclusion. That would be very helpful. If there is rescheduling away from Schedule I, most likely in that scenario 280E would go away and that would be a huge, huge boost for the industry.”

CHALLENGES: When asked about the largest hurdles facing the cannabis space, the CEO pointed to cost to capital and 280E as challenges facing players in the industry. “280E makes it very difficult to invest in the right way in your business, because you are making so much money on your federal taxes that normally you wouldn’t be,” he said. “So many of those types of expenses are not deductible. It really holds the industry back in my opinion. Equity capital is almost non-existent right now and debt is available, but it’s very expensive. There are definitely some real capital constraints in the industry right now.”

The environment is creating difficulties for a lot of companies, Rungta said, particularly those that took on a lot of debt to do M&A and build their business up to scale quickly. “A lot of companies now are struggling with that debt and it’s not a very friendly environment to try refinance it and deal with it,” he said. “And generally, the space has just become very competitive and that is true in almost all markets. You cannot think anymore that you are just going to buy a license, open something up and you’ll do well in retail and be able to sell your product wholesale. The fundamentals are becoming more and more important.”

OPPORTUNITIES: As the cannabis space develops, the CEO said he views C3’s opportunities and growth along two paths. “On the one path, we want to continue to grow our business in terms of new retail stores and new production facilities,” he said. “We want to expand in the six states we’re operating in and continue to build leading portfolios in those states. The second path, that is really exciting and is more of a long-term play, is building the brands and intellectual property around the industry. Companies that can build the R&C portfolio, the retail and the production, that to me is exciting, but that is the first step. Then it is about who can build the exciting brands and the exciting IP alongside the retail. Companies that are viewed as branded are going to be looked at in a very different way than those that are viewed as pure retailers or pure cultivation.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Audacious (AUSAF), Atai Life Sciences (ATAI), Aurora (ACB), Avant Brands (AVTBF), Ayr Wellness (AYRWF), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), Cresco Labs (CRLBF), CordovaCann (LVRLF), Cronos (CRON), Columbia Care (CCHWF), Compass Pathways (CMPS), CURE Pharmaceutical (CURR), Curaleaf (CURLF), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Enveric Biosciences (ENVB), Fire & Flower (FFLWF), Flora Growth (FLGC), Trees Corporation (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), IM Cannabis (IMCC), Innovative Industrial Properties (IIPR), InterCure (INCR), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lotus Ventures (LTTSF), Lowell Farms (LOWLF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MedMen (MMNFF), MindMed (MNMD), NewLake Capital (NLCP), Numinus (NUMIF), Optimi Health (OPTHF), Organigram (OGI), Planet 13 (PLNHF), Red White & Bloom (RWBYF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor Financial (SHFS), SNDL (SNDL), Sproutly (SRUTF), Skye Biosciences (SKYE), Stem Holdings (STMH), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).