The Parent Company is coming to conquer California’s cannabis market — with some big-name help

• The company runs the largest vertically integrated cannabis operation in California
• Backed by global icon Shawn “JAY-Z” Carter and the Roc Nation Empire
• Aggressive M&A strategy with $575 million cash-in-trust to build market share in California
• Social Equity Ventures arm that will invest up to $10 million in Black and other minority-owned cannabis business

What The Parent Company does:

TPCO Holding Corp (The Parent Company) (OTCQX:GRAMF) (NEO:GRAM) is about to become one of the cannabis industry’s most-watched stocks.

Part of the reason is due to its ambitious strategy to build market share in highly competitive California, where even the biggest companies are lucky to amass around 1% or 2%. The other reason is thanks to its big-name backing: entertainment mogul Shawn “JAY-Z” Carter is a key shareholder and holds a seat at the executive table as the company’s chief visionary officer. With him comes Roc Nation, a premier entertainment organization representing some of the world’s most recognized artists and athletes from Rihanna to Kyrie Irving, whose influence reaches around 1.5 billion followers across the globe.

The Parent Company’s envious combination of top cannabis operators and cultural cache has already shot the firm to over an estimated $185 million in revenue from operations in 2020. Most of that stems from more than 17 owned and licensed brands offering over 250 SKUs in over 20 form-factors like flower, pre-rolls, vaporizer cartridges, concentrates, gummies, chocolate, beverages, capsules, tinctures, lozenges, topicals and body care products. A couple of standouts include Monogram, JAY-Z’s luxury cannabis brand, and Caliva, a San Jose-based brand that grows, manufactures and sells its own branded products in more than 250 dispensaries across California.

A key factor in The Parent Company’s success will be its ability to gain a strong foothold in California. In order to do that, the firm has a three-pronged strategy: vertical integration, omnichannel expansion and brand awareness. It plans to be aggressive on the acquisition front – with up to $575 million cash-in-trust, there is plenty in the bank to fuel its growth. The firm will build organically as well through its robust brand and product selection and extensive manufacturing footprint that includes over 50,000 licensed square feet of space.

Led by CEO Steve Allan and backed by a strong team of business veterans, The Parent Company’s ethos is to give back as it grows. JAY-Z and chief social equity officer Desiree Perez will lead the firm’s Social Equity Ventures, a fund of up to $10 million that will invest in Black and other minority-owned cannabis business.

Unlike multi-state operators (MSOs), which have capex-heavy models, The Parent Company plans to grow its brand equity in California and expand to new states via asset-light licensing or co-manufacturing partnerships.

It has its eyes sharply focused on the Tristate area of New York, where the brand is expected to benefit from Brooklyn native JAY-Z’s outsized influence, plus neighboring New Jersey and Connecticut. New Jersey, which legalized adult-use cannabis in November, is expected to be a $1 billion market, and there are sure signs that New York is expected to follow suit in 2021. Collectively, The Parent Company estimates that the Tristate area could represent a $8.9 billion market opportunity by 2025, given its nearly 32 million-strong population, high cannabis consumption rates, and high household income in the NYC metro area.

How is it doing:

In May, The Parent Company reported its first quarterly results since its IPO in January that showed the cannabis firm had US$281 million in cash and equivalents. Net sales since January 15 came in at $39.9 million, a figure that would have been closer to $45.6 million if adjusted for the full quarter beginning in January. Gross profit in 1Q 2021 was $7.2 million, a gross margin of 18%, while its adjusted EBITDA loss came in at $11.4 million. 

In a statement, the California-based firm told investors that with its focus on driving stronger direct-to-consumer sales, it expects to shift its sales to “higher-margin product categories,” which should drive expanded gross profit. The firm is targeting around $334 million in revenue in 2021.

To that end, The Parent Company announced a partnership in April with Omura, a first-of-its-kind whole flower vaporizer, entering the firm’s “heat-not-burn” category with the launch of Caliva Flowersticks, a new line of 100% whole flower cannabis pre-filled paper cartridges featuring three signature Caliva strains: Alien OG, Sour Diesel Lemon Kush and Watermelon Sorbet.

The Parent Company also recently struck an agreement to acquire 6.2% of subordinate voting shares of Mercer Park Brand on the closing of its qualifying transaction with Glass House for $50 million in cash. In addition, Parent Company has entered into a non-binding letter of intent with Glass House to negotiate a 10-year, half-a-million pounds of cannabis biomass offtake agreement, and a nearly $25 million retail partnership deal over six years that enables Parent Company’s products to be sold across Glass House locations. The qualifying transaction is expected to close by the third quarter of 2021.

The company has also introduced a number of new products and programs in 2021. Since March, The Parent Company launched Fun Uncle Cruisers, a line of full gram vape cartridges; a three-part advertising campaign from Shawn ‘JAY-Z’ Carter and his cannabis brand, MONOGRAM; and its first-ever integrated loyalty program, Caliva CLUB.

Inflection points:

• Ten new storefronts opening in 2021/2022 in the Bay Area, Los Angeles, Central Valley and four additional locations
• Growing presence throughout US, starting with the Northeast coast
• Expand from six delivery depots to more than 20
• Direct to consumer footprint expected to grow to around 15 retail and 20 delivery locations by end of 2022
• Further M&A in California

What the broker says:

On May 18, Canaccord Genuity Capital Markets tagged The Parent Company with a ‘Speculative Buy’ rating and US$12.50 price target following the release of the company’s quarterly results. 

“[The Parent Company] delivered Q1 revenue of $40 million in a quarterly release that included the announcements of consolidation initiatives, investments to secure access to biomass, and several divestments,” the firm wrote. “Importantly, the company announced a $50M investment in Glass House Group and the acquisition of Mosai.Ag to shore up long-term supply of flower and gain additional access to shelf space.”

“These transactions bring access to roughly 900,000 pounds of high-quality cannabis to support GRAMF’s brands throughout its wholesale and retail network.”

Canaccord also noted that Parent Company management expects meaningful progress by the end of the third quarter and that cost savings from streamlining initiatives should help margins. The firm projects second-quarter revenue of $53.1 million, 2021 revenue of $261.7 million, and 2022 revenue of $506.4 million

“Management provided an update on its integration efforts, touching on actions taken to optimize operations across cultivation, manufacturing, and consumer brands,” Canaccord wrote. “…We note GRAMF’s Fun Uncle Cruisers, launched in March, are seeing strong traction and positive consumer reception, demonstrating the company’s capacity to leverage its fully integrated operations and launch quality products with attractive pricing and strong margins.”

What the boss says:

The Parent Company’s CEO Steve Allan told investors upon the closing of the group’s qualifying transaction in January: “With both the most comprehensive vertically integrated platform and brand portfolio in California, and the healthiest balance sheet in cannabis, we will reshape the industry in the world’s largest cannabis economy.”

The firm’s chief visionary officer, JAY-Z added: ”This is an incredible time for this industry. The end of cannabis prohibition is here, and The Parent Company will lead the charge to a more expansive and inclusive cannabis industry. We are paving a path forward for a legacy rooted in dignity, justice, care, and consistency. The brands we build will redefine growth, social impact, and social equity. This is our time. I’m proud and excited to lead the vision of The Parent Company.”

Contact Andrew Kessel at [email protected]

Follow him on Twitter @andrew_kessel

Story by ProactiveInvestors