In our SPAC Primer back in February, we took a high level look at SPAC formation, and some of the economics involved. Since then, AYR Wellness’ ($AYR.B) CEO Jonathan Sandelman executed the qualifying transaction for Mercer Park ($BRND) in acquiring Glasshouse.

Glasshouse is primarily (in terms of ft²) a veggie producer, who $BRND claims will become a million pound a year producer in pretty much no time flat. They’ll also be sporting some 21 retail outlets open by this time next year if all goes according to plan. Ambitious, and given they are relatively landlocked in California (for the moment, or perhaps year(s)?), $BRND promises the first ‘major’ push at establishing large scale verticality in the Golden State, and rolling out their ‘#2’ CA based brand nationally.

Our initial Structure on $BRND noted a heavy cultivation tilt to the deal – given the tenor of planned expansion/conversion of operations – and mused whether this was Sandelman anticipating interstate commerce opening up.

Curaleaf ($CURA) actually said the word ‘interstate’ out loud yesterday (!) in announcing the purchase of 66 acres of outdoor cultivation in Colorado. On the buy, $CURA Chairman Boris Jordan said: “($CURA’s) constructing low-cost supply chains that will secure healthy margins and position us for interstate commerce when it comes“.

Good. Someone finally said the ‘I’ word. Slaving to a fairytale narrative serves no serious investor well. A straight out reference by a Tier 1 MSO will hardly make it happen (or not) any faster, but, I see interstate’s possibility as a clear and present danger to goodwill on many balance sheets, along with margin currently derived from verticality.

At any rate, today we’re looking at The Parent Company ($TPCO), who launched to great fanfare on January 15th of this year, announcing their qualifying transaction(s) in buying Caliva (retail/CPG/brands) and Left Coast Ventures (LCV) (celebrity, brands, more celebrity/cultivation/sourced cultivation/processing/distribution, and….celebrity).

Like most emergents (and existing) in the cannabis sector, ‘pro-forma’ appears much more often than references to ‘existing performance’ – and a launch lets marketing unleash ‘new’ business plans and ‘new’ opportunities of the future……while earnestly presenting all of the ways those opportunities will (soon!) be monetized. (I caught the full monty on a ‘new’ business plan in person, delivered by none other than Peter Horvath on Green Growth Brands in Las Vegas back in late of 2018. Ain’t gonna lie, the presentation was good but unconvincing).

$TPCO has been busy, releasing their first set of financials today, and announcing a ‘strategic investment’. This latter item – the investment – is in $BRND no less – representing a 10 year off-take agreement and shelf space in those soon-to-be 21 Glasshouse stores.

In reality, $TPCO is making a $50MM private placement directly into Glasshouse via an offering by $BRND (presumeably since their deal hasn’t closed), and, as to that off-take and retail distribution, its’ simply something “which the parties have agreed to negotiate towards” at this point.

$TPCO also announced they’re buying 4 acres of outdoor from a ‘consortium’ of experienced cannabis farmers for <up to> $17MM, with $6MM in cash and a $2.5MM in shares. the remaining $8.5MM is in earn-outs. While the deal isn’t expected to close until next summer, apparently supply begins right away. $TPCO CEO Steve Allan said about it: “Our focus over the last 100 days has been to continue to scale up our supply chain”. So there you go.

Let’s have a run though $TPCO’s first quarter of existence, and see if we can’t tease out why the market apparently hates it so much. Unlike $BRND – who has been maintaining their $10 support – $TPCO’s been struggling with theirs. This morning saw the knees taken out, and I’m wondering what’s driving it. I’m also flying a little blind here, as SPAC’s have a different texture than a ‘traditional’ equity. Given their structure, I’d assume initial money seeks off ramps more frequently than say a more common ‘founder’ model. Replacement capital becomes more important in SPAC price decay, another relative ‘unknown’ to myself as well:

Nevertheless, I think fundamentals is the ultimate trump card. Let’s see what they look like. All dollars in USD unless noted.

To the financials!

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• First time I’ve ever seen an MD&A issued on a different day than the financials. Looks like the MD&A had to be ‘corrected and replaced’, a word insertion of ‘bankers’ on transaction fees, and apparently, Jay-Z took $25MM in marketing fees for ROC Nation.
• Goodwill and Intangibles 67% of all assets. Woot.
• Second is cash balance at $281MM. PP&E and inventory at a whopping 3.4% of total assets. Wow.
• A $232MM contingent consideration liability was priced down to $101MM, leaving a reported gain of some $131MM. It was measured against forward price of the equity, with a simulation using “a risk-neutral Geometric Brownian Motion-based pricing model” to get a handle on it. Largely vapour (a Monte Carlo would probably have been just fine), the flux in this will generally track underlying volatility in the reference equity.
• Part of that contingent consideration stems from the qualifying transaction: folks who sold them the assets had claim to payout if $TPCO hit $13/$17/$20 on VWAP at future points in time. It’s listed at $191MM.
• Note 3 (Business Combinations) is quite the read. Bringing an SPAC into the world isn’t a straight line. Nothing outside here, aside from the rather large ‘earn-outs’.
• Despite that $131MM gain, revenue of $40MM met a COGS of $35MM, and then ran head on into a $60MM OPEX. Loss on operations? $54.6MM
• That $60MM in OPEX included that $25MM in shares for ROC Nation & $6.2MM in SBC. SG&A was reported at $22MM. Excluding those ‘marketing’ services from ROC – $TPCO would have reported an operating loss of only $32.1MM.
• Yeah. Cost of Sales was $35.2MM on $39.9MM in sales. It’s only mentioned 5 times in the financials, no additional information is provided. Margin on sales? 11.7%.
• Note 15 details Jay-Z’s deal – it looks like they could owe him/ROC Nation another $15MM – so about $40MM in total. It’s to be paid all in equity. Another $26MM in cash or shares is to be spent over the next 6 years for Jay-Z’s endorsement, and it looks like a floor attaches. Comparatively, it cost Supreme ($FIRE)~=$7.5MM for Wiz Kalifa……Jay-Z’s definitely in a heavier weight class.

• They report a loss of $58MM on a re-measurement of assets held for sale. With the insertion of Caliva/LCV came a ‘non-THC’ business line. More below.
• They’ve a strong tilt towards reaching consumers beyond brick and mortar, which is where their ‘omni-channel’ phrasing comes in.
• A couple of clawback features in Note 16 (Share Capital) around share price. It looks like any lockups on initial shares end mid-July 2021, so not much of a rope there.
• 2.2MM in RSUs has already hit the ground running (2%+ of total float). Seems rich, particularly since they’re cash settled. There are equity ones as well that vest immediately, (78k), probably to the CEO.
• A fair bit of skin in the game by management. Another feature of SPAC’s. It’s not easy to divine their exposures though with warrant grants and replacement capital that might be coming in. Volume on the day ~=400k in shares, which is relatively thin, but in line with MSOs.

Ok. These are quite the financials. I can’t say I’ve seen numbers or flow in statements like these before. Likely a nature of the SPAC process, it strikes me as $TPCO has a few balls in the air other than operations.

A useful split in their operations is provided – it brings perspective to their supply chain claims. These guys are definitely upstream at the moment. I view that as a ‘good’ – inasmuch as being able to supply desirable product to the CA market would infer relatively high quality output (and assumption). It also reveals their ‘omni-channel’ DTC model could probably use a little upping of the ‘omni-ing’:

The reported loss on disposal of the ‘non-THC’ business….this is really something else. Spanning 3 Notes (Notes 3, 8, and 31), the reader finds out that this whole SPAC thing and its’ speed to market makes assets hard to value. And hey, an outfit might not get it quite right up front.

Ok. I understand that, to a point. So, what’s a potential variance? 10%? 20%? Here’s the fine print:

Seriously. One year to find out if what you just spent a half billion on is even worth it. Seriously. Future income? Liquidation value? All air?

I get there’s some fast and loose deals made in a ramp. A year though – to figure out actual versus accrual – on an actual asset acquisition of this magnitude and materiality? As if there’s not been any existing commercial interactions prior to purchase with which to do a valuation? Eesh.

This speaks to me more of a deal needing to get done (since an SPAC is on the clock), rather than the SPAC buying worthy assets. See, an SPAC only needs to clear a value of 80% of its’ initial raise – there’s nothing on whether the assets are worth that 80% level. One would assume due diligence during the buy should surface any issues. That process has blown up SPAC’s before, and one would assume the process is performed in all. I twitch on this here, because of the open ended and all-encompassing nature of the paragraph from the financials above. Particularly when a $58MM ‘whoops’ is included on a revaluation of assets being immediately dumped.

All that said – $TPCO is going to sell the non-THC business, and realize about $12MM for $8MM in what’s on the books. $52.7MM of the ‘loss’ is in goodwill. So. Is this just ripping off the band-aid faster?

As to operations…crack a beer and pass the joint.

Prior operations are reported, but the numbers are largely meaningless. There’s simply a $3MM/q loss reported in 6 prior quarters on a zero revenue operation. They’ve got $38MM in current liabilities, only the CFO knows what they are for beyond ‘trade payables’ being $17MM. The MD&A is one of the poorer ones in the sector, simply reiterating <a> lack of information from the statements.

I’m not all that dour on this thing, I’m really just trying to understand it. They’ve got an implied run rate of ~=$170MM/yr, and one assumes there will be some sort of operational settling that will need to take place. Despite a 75/25 split in wholesale/retail, their margin – to use a non-technical term – sucks.

The deal they did with Jay-Z/ROC Nation is ridiculously expensive. Some might bank on star power, I like to lean on operations more of which we have little visibility on.

As I said in the $BRND Structure, an SPAC without a stable (known) asset base increases risk. An emerging and fluid sector (cannabis) presents risk unto itself. Combining the two would logically increase the totality of risk in terms of equity pricing. And one data point does not provide much insight, and the potential flux in asset valuation looks to be orders of magnitude to a more ‘traditional’ acquisition.

The deal with Glasshouse is interesting to myself, as it could be seen as cultivation being consolidated first and foremost. $40MM/yr run rate in retail isn’t exactly barnstorming, but wholesale margins could be. It remains to be seen if CA accepts or is amenable to such a consolidation.

Not much more to say at this point. I am curious about their next financials though. $TPCO isn’t an investment in my eyes at this point and highly speculative.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds position in $TPCO, entering with $6.39USD average, hold duration will be day to day.