The Parent Co. Pumps The Brakes On Guidance

TPCO Holding Corp. (OTCQX: GRAMF) has reported financial results for the first quarter ending March 31, 2021, which was full of firsts for this newly formed company. First-quarter 2021 net sales totaled $39.9 million, although since TPCO was created from a SPAC (special purpose acquisition company) that occurred on January 15, it was not a full quarter of sales. Had the company included those extra weeks, the first-quarter net sales would have been approximately $45.6 million.

The company delivered a net income of $19 million in the quarter. Despite the strong showing right out of the gate, The Parent Company decided to withdraw its previously provided guidance, which included benefits from potential corporate development activities as well as revenue from its divested hemp CBD business line. TPCO cited the uncertainty of the California cannabis market as another reason. Even though the company was pumping the brakes on its guidance, Allen said on the company earnings call, “We are actively working to expand our retail and delivery depots to broaden our reach, having set a goal to serve nearly 90% of the California market within the next 18 months. We’re at approximately 50% today and should be approaching 75% before the end of Q3 this year.”

The first quarter also experienced an adjusted EBITDA loss of $11.4 million. The loss was primarily attributable to the ongoing operation of the company’s core business. TPCO is in a comfortable position having ended the quarter with $281 million in cash and cash equivalents.

CEO Steve Allen said, “The foundation of our company is dependent upon the vertical integration of our business in California. And to that end, we integrated our core assets, shed non-core assets, and improved our product distribution.” He went on to discuss this week’s transaction in which TPCO acquired four acres of outdoor cultivation from Mosaic.Ag an affiliate of Soma Rosa Farms, our strategic investment in Mercer Park Brand Acquisition Corp. along with the retail partnership agreements with the Glass House Group. “These pivotal transactions coupled with our own award-winning indoor capabilities, provide us with an unprecedented scale and margin advantage through long-term access to a significant supply of high-quality indoor greenhouse and outdoor-grown cannabis biomass, which covers all of our plan product and brand needs for the foreseeable future and allows us to achieve the full potential of our vertical integration,” said Allen.

The company noted that first-quarter operating expenses were $61.9 million, which included $40 million of non-cash expenses, comprised of $25 million of marketing expenses that were settled in shares for services provided under the Roc Nation agreement. In addition, stock-based compensation of $6.2 million and depreciation of $7.9 million, the remaining $21.9 million of cash operating expenses were comprised of general administrative costs of $9.5 million, salaries and benefits of $7.8 million, and sales and marketing expenses of $4.6 million.

Chief Operating Officer Dennis O’Malley said on the company’s conference call “The Mosaic.Ag farm acquisition and the 10-year Glass House partnership provide long-term access to top-quality outdoor and greenhouse flower at best-in-class pricing. This access to outdoor and greenhouse flower, in addition to our existing indoor cultivation, provides for a full flower portfolio for The Parent Company long-term and completes our vertical integration California. Access to this variety of cannabis allows us to increase margins on current products as well as provides for opportunities to expand our product portfolio in the future. Beyond access to high quality flower, we are specifically excited about our long-term product partnership with Glass House, where our branded wholesale business will be selling nearly $25 million of our product portfolio into Glass House stores over the next six years.”

Restructured Product Line

TPCO narrowed its brand portfolio offering to eight core brands from 17 previously, eliminating redundancies and reducing potential sales category overlap. It also selectively reduced the total SKU count across its eight remaining core brands with a focus on higher-margin product offerings. This quarter it launched Fun Uncle Cruisers, the first product to take advantage of the full vertical integration of its business.

Looking Ahead

The Parent Company said it has a robust pipeline of potential corporate development activities and remains committed to ensuring that potential acquisitions are accretive to the company’s strategic growth initiatives. The company noted that the timing around these opportunities remains uncertain. To accelerate its execution on corporate development opportunities, TPCO said it has retained two experienced external advisory firms with deep backgrounds in identifying, evaluating, and executing inorganic opportunities.

So it seems that since it outsourced the M&A work, Drew Kornreich is stepping down from his position as Chief M&A Officer effective May 17, 2021. “On behalf of the entire team, I’d like to thank Drew for his diligent work and greatly appreciate all his contributions throughout his tenure both at Caliva and The Parent Company,” said Allan.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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