Editors Note: This interview was conducted on May 18, 2021.
Debra Borchardt CEO Green Market Report: Retracting the guidance for The Parent Company or TPCO Holding Company (OTC: GRAMF) in the recent earnings and the earnings report really caused a lot of criticism. People were not happy with that. What can you do now to gain back investors’ confidence, because the response I saw the investors were upset. Maybe not so much for the reason behind pulling the guidance, but just that it happened.
Steve Allen, CEO TPCO: I understand. People always want more information. Heck, I always want more information on what’s going on out there in the market, and so understand the perspective that folks have around that. The reality is for us is, especially with our new CFO, Mike Bates, onboard, we really want to make sure that when we are putting information out to the investment community that it is as accurate as it can possibly be. The reality within our strategy that we have here, especially having shored up the really critical key components of this, makes you think about our strategy, our strategy is to be a CPG brand-first company that’s focused on direct-to-consumer, that in California is powered by our vertically integrated platform. Now, outside of California, it’s really to leverage others in an asset-light approach. To establish the brand credentials, the quality in California, and then use the marketing air cover and then our production SOPs and move those into other states where people are able to perform against those SLAs to be able to have them, contract manufacturer, for us in those states.
When you look at the California component of it, a key critical area for us was ensuring that we had access to consistent raw materials and biomass, and I think what we’ve seen is while we have an incredible sourcing team who’s done a wonderful job there at being able to source for us and continue to do so, the reality is the fluctuations of the biomass market out there really makes it difficult on the predictable gross margin on a go-forward basis, as well as being able to ensure the consistency from a genetics profile that is required for us to be able to produce the branded product and really be that consumer packaged goods company with full control over what that genetic library looks like within it.
So for us, it really was about saying, “Okay, great. We’re able to source raw materials, but now we need to get to a greater degree of consistency and simultaneously get to a larger gross margin.” And so we did that. Our two transformative transactions, when you think about this is access to nearly a million pounds of biomass over the next 10 years, and it’s tied into some of the most advanced genetic libraries of any cultivators out there. We spent a lot of time evaluating and understanding who was in the market and selecting the particular partners that we wanted to move forward with. We got to great alignment there, and so when you think about what we’ve done, we’ve helped to integrate the business, we’ve helped to cut out the non-core assets, we’ve helped to streamline the operations of bringing three companies together, which doing that alone in three months is a Herculean task, yet alone shoring up the entire supply chain simultaneously.
What that actually does is it allows us now to be laser-focused on our direct-to-consumer and product categories. I think what the market will see from us is that we will go aggressively after M&A and development of other partnerships in retail, as well as organically building out our licenses, as we’ve always had as a plan, and really driving that on a go-forward here over the remainder of Q2 and into Q3. I think where the investor community will be pleased is when they see that we’re able to access 75% of California from 50% of California by the end of Q3. So that’s really where, when you think about the rationale for withdrawing the guidance, it’s that the timing of it-
Debra Borchardt: You mentioned that the M&A. Obviously your M&A guy is gone. You hired some outside advisors to pursue deals. There’s a lot of money chasing deals right now, and it seems like the prices are just ballooning for the properties that are still viable to purchase. Are you concerned now that at this point in the game that you guys are going to be having to pay up to get properties?
Steve Allen: No. To be as blunt as possible, absolutely not. When we’re evaluating a direct-to-consumer target, it needs to be something that fits in operationally, which means strategically into the geographic footprint of what we’ve mapped across the state. It needs to be accretive and it needs to drive long-term value. So those are lenses that definitely bring down the number of available assets, from 700 assets probably down to 200 assets just by the fact that you’ve got to cut those down. But when you’re looking at the fact that we’re talking about doing maybe 10 or 12 retail acquisitions, that’s still leaving a broad pipeline for us as we continue to develop. We’re also doing organic simultaneously, applying for licenses. We just know those take 18 to 24 months to get up and operational. So we see those as density enhancing versus really being new geography opening for us. The M&A really is the way that we go through that.
No, we’re not going to overpay for assets. There’s no way we’re going to overpay for them. There are definitely scenarios where particular properties have become bid up, have become part of bidding wars, and the reality is in those scenarios, we’re highly unlikely to consummate a transaction that’s gotten into that type of a scenario. The good news is there’s a big enough pipeline out there, and there are very few players who actually have the cash on the balance sheet to be able to consummate these transactions. There’s a fair amount of-
Debra Borchardt: True. You certainly are sitting on a lot of cash.
Steve Allen: Yeah. I jokingly refer to it, I’m married to an Australian, so this is why I can jokingly refer to it this way, but as the cannabis boomerang effect, which is we end up getting these conversations with particular targets, the targets are in conversations with multiple parties, they end up selecting a different party that has promised a higher multiple, essentially an evaluation that we view as not sustainable, and then that other acquirer is unable to actually consummate the deal. Either they just don’t have the cash on the balance sheet, or they’ve dug into the diligence, or they’ve taken an approach of, “Hey, I throw out a high number, and then I just beat you up and try to get to a lower number while we’re under exclusivity of an LOI period.
But meanwhile, you’ve got us sitting patiently around the hoop, waiting for the rebounder, waiting for that boomerang to come back, and it usually is about three, four, sometimes up to six months later that those boomerangs come back. I laugh about it because just over the last 10 days, we’ve had four of those boomerangs where these were conversations we had in Q1 that went away that all came back. Right? It’s almost like clockwork. 45, 60, 75 days later, “Oh, yeah. Here they are again. All right. Let’s now re-engage.”
And so I’m not worried at this point, because I haven’t seen a heavy amount of consummation of strategic deals or at least deals where they’re matching the footprint of geographies that we want to be in, and we’re still continuing to be engaged with multiple parties in each of those locations. Now, could that change over the next 90, 120, 360 days, as there’s more activity and more opportunity out there? Absolutely, it could. But at this point in time, it still is highly fragmented, and I still have yet to see substantial capital on balance sheets for most of these acquirers that are out there, side-by-side, having the conversations with us, which I think gives us such an incredible competitive advantage on closing rates.
Debra Borchardt: Let’s talk about the product line. You guys just recently launched the Uncle Cruiser, which is really a value line, but you made a lot of noise about the Jay-Z Monogram line, which is very high-end and fancy. Could that be confusing to the customer base of the parent company? Is this value? Is this luxury? Is the luxury product and the value product being grown in the same cultivation facility? Is there a concern that having promotions of those two very different types of products confuses the customer?
Steve Allen: I’m not concerned about it. I think if you look at most successful CPG companies, at the end of the day, they have a house of brands, right? You may not know that all of them roll up into a particular entity if you’re a consumer of them, and so it really is targeted towards the different consumer personas that are out there. We consider it incredibly important that when your goal is to be incorporating cannabis into the daily lives of consumers out there that really you need to be able to offer the breadth and depth of selections from both the form factor and a pricing perspective, from value up through ultra-premium. Really, when we look at it, the products themselves are priced against what’s out there within the market from a competitive standpoint, but it’s also priced against what those cogs are to be able to produce it.
So clearly our Deli Greens or our Fun Uncle Cruisers, the reality is they’re at a lower price point because there is a lower cost associated with the production. That’s not an indoor flower that we’re extracting and then putting into Fun Uncle Cruisers, right? That’s not the indoor flower we’re putting into Deli Greens. That’s outdoor and greenhouse flowers, which comes at a substantially lower cost, and so we’re able to provide that to the consumer. The difference is because of our vertical integration and because of that footprint, even more so now that we have these biomass agreements that we’ve been able to put in place, the reality is we have the opportunity to actually continue to push the price down for those value consumers to give them the better value within the market but while maintaining and improving margins.
The reality is if you’re not a fully integrated player that has this same kind of scale and access, you can’t do that. So if you want to compete, you’re essentially competing by squeezing your gross margin. We don’t really see that same thing. That’s where we really looked at it and said, “The most important first actions besides integrating the companies was to secure that biomass for the long term.” Now, we can feed that product portfolio at an unprecedented scale, which does allow us to move aggressively into the marketplace and be able to apply pressure on the market while we actually maintain margins, and others, frankly, will have had their margin shrink, and they’ll end up in unsustainable scenarios. So that’s how we look at it.
But across the spectrum of, again, the first question you asked, we really believe that it is important to have across that spectrum. Our Monogram products are having unique genetics and strains that are only available in those products, and it’s the highest quality of the indoor that we actually have on the market. So that’s where we look at it and see this as, yeah, it is priced differentiated because it is the best of the best, the cream of the crop. And so the folks that are looking for that are going to be able to have that product. For someone who’s looking for a value-based product, then they’re going to have that opportunity.
We want to provide that everywhere in between and across all form factors, so at the end of the day, people know that they can trust this set of products almost like you trust a Johnson & Johnson or a Procter & Gamble. You don’t necessarily know at every moment in time that it’s Johnson & Johnson or Procter & Gamble unless you go look at the fine print on the label, but because of it, you create this halo effect of trust. And again, because of where cannabis is today, coming out of 50 years of an egg in a frying pan, and just say, no, it is about building trust within that category, and that’s what we’re looking to do.
Debra Borchardt: $25 million was spent on marketing with Roc Nation. At the beginning of this SPAC, there was a lot of attention paid to the synergies between Jay-Z and Roc Nation and all that, but is there concern about the perception that maybe that’s a lot of money to go to one of the company’s executive’s other company, like a little incestuous there? That’s certainly a lot of money for marketing for a new company.
Steve Allen: Well, I guess it’s all relative. We also received over 800 million media impressions just in the first three months. So if you try to look at it from that perspective, we’re paying less than three cents, and then everything is free on the go-forward. So the reality is if you think about it, no, because this is unprecedented access that you get. You’ll continue to see more that rolls out of that partnership. But to be clear, these are two separate things, right? One was the acquisition of Jay-Z’s half of the Monogram product. Caliva already owned the other half ahead of the time. The second component of it is that Jay-Z also took on a role really on that chief visionary officer. That’s separate from Roc Nation, right? That’s with him as an individual. That was not the original deals that Caliva had with him were with him, not with Roc Nation.
So adding in Roc Nation, what that provides is access to their list of talent across both the sporting and entertainment side of things, to be able to have ROFOs on potential product opportunities there, to be able to have the amplification that comes with them through it. We’ll see here in the coming weeks and months what the next phase of that relationship with Roc Nation looks like. Again, all of these things are staged out in a very coordinated process. We had Monogram, we had some very active marketing programs around Monogram between the state line and the hypocrisy advertisements around it up through what we did with the Slim Aarons’ Good Life Campaign.
And then what’s been kind of trailing underneath all of that and adding a little bit of fun to cannabis, so hypocrisy in the state lines is definitely about calling out some of the ridiculousness about cannabis rules and laws and regulations that exist out there, to really try and call out, frankly, craziness, to re-shake up what the viewpoint is on this 50 years of war on drugs and war on cannabis. But we also want to recognize that cannabis is and should be fun, right? While it may have a pain-sleep-anxiety component, it also has a relaxation and escapism component to it, and it’s used by different people at different times for different reasons, right? The same person may be using it for totally different reasons one day versus another day, and so we wanted to make sure that we’re able to call that out. So that was part of what we’ve done in the Good Life Campaign to basically show the incorporation into everyday life and the opportunity of really an aspirational component to it.
Then there’s our Hightails episodes, which are really authentic, fun personal stories about how cannabis has helped to influence some key Roc Nation stars and their artistic development journey. This is where we need to be able to create that balance. We need to call out and bring dignity to cannabis, but we also need to make sure people understand that it still can be fun and enjoyable. And while we’re very serious about changing things at the federal level, we also know that we want to be able to have fun with cannabis in whatever form and function we’re able to while we wait for the federal hierarchy to bring about the necessary shifts and changes that take place.
Debra Borchardt: Last question. You guys had a lot of work to do. I think that a lot of people call it “De-Spacking”, which is interesting that that’s kind of the new moniker of the things you have to do. Is that work done, because you spun out some assets, you pulled back on some of the SKUs?
Steve Allen: It’s not complete, but we’ve made substantial progress. As you said, we spun out three assets, we eliminated 10% of personnel expense. We are in process of consolidating three locations. While we have moved all of the operations out of those locations, we have not completed the process of actually selling those off, so that’s still in process. We continue to refine our combined company SOPs and operating systems as well as the digital infrastructure. So again, while a good portion of that is taking place, it’s not fully complete, and then if you want to get very squarely to, as you call it, despacking, the despacking process requires a purchase price allocation. That is incredibly complex when you’re bringing together, essentially, what was four-and-a-half entities, between Subversive Capital, we had Caliva and then 50% of Oji Enterprises, which was the Jay-Z brand, Monogram.
So you’re trying to bring all of those things together. The complexity of the international accounting associated with that, that won’t be done until probably the end of June in regards to us actually have completed that process. And then there’s a further component to it, which is we now need to take everything that we’ve done in IFRF, and we need to convert it all back to GAAP and get all of that audited because we do want to register with the SEC so that when, not if, but when there is a shift from a federal perspective, we will have completed all of the necessary pre-work to be able to list on the US exchange. So that effort will really be taking place in Q3. So as you kind of just thinking about what are the things that need to be done from a de-spack.
Debra Borchardt: That sounds like fun. I think you’re going to need to use a lot of Uncle Cruiser to get through that.
Steve Allen: Yeah. I was going to say at the end, we’ll be excited to have it done. I don’t think anyone’s ever mistaken dealing with auditors and regulators as the enjoyment part of cannabis. That may fall into the pain, sleep, and anxiety side of cannabis.
Debra Borchardt: Right. But you sold that CBD.
Steve Allen: There’s always going to be more to do. And look, we have an absolute acute focus on continuous improvement. So let’s be clear. It will never be done, because we’re going to be doing M&A activities, continuing to ingest more companies. That’s going to cause more integration. We’re absolutely eyes wide open, understanding that we need to absolutely get faster and better at our integration management to be effective because we do not want to be one of those statistics of 50% of M&A failing, and we know that the way you do that is appropriate diligence upfront, including the integration teams early on in the process, and really focusing on that integration management in that subsequent one to four, sometimes six quarters that it takes to really get something fully integrated, depending on what the asset is that you’re acquiring. We’ve got the team, plans, resources in place for it, but let’s be clear. It will never be done until we’ve finally rolled up all of the cannabis globally. So maybe I can tell you in 30 years that we’ll be done.
May 28, 2021 at 4:44 pm
Nice. Not only was Debra Borchardt asking very pointed and relevant questions, Steve Allen was sharp as a tack and fearless with his responses. As an early investor via Subversive, I am pleased. Although the stock has fallen off 30%+ from the $10 SPAC pricing (closed today @ $6.15), I averaged down from $9.96 to my current $7.09 on 2K shares. With the remaining amount of capital and much promise, this piece added to my confidence. Thinking about adding a bit more now.
May 29, 2021 at 4:51 pm
So Debra, you think TPCO’s got a real plan in action or is Mr Allen “blowin’ smoke”? Wasn’t overly impressed with GRAMF’s 1st ER, a lot of cash has vaporized through the De-SPACKING… ;>)