Why did TPCO write down $654M?
The Parent Company, also known as TPCO Holding, is the latest player humbled by California’s unforgiving market.
TPCO began 2021 as arguably the brightest star in California’s firmament. It had: 1) A headline grabbing (and expensive) partnership with Jay-Z and his Roc Nation entertainment juggernaut, 2) Executed a triple merger with Caliva and Left Coast Ventures and 3) raised the largest cannabis SPAC to date. The new entity had roughly $575M on its balance sheet.
“We’re going to dominate,” Michael Auerbach, a former D.C. think tanker and “commercial diplomat” who led the SPAC deal crowed to WeedWeek.
Any illusions that they would came to a crashing end last week after TPCO reported a net loss for 2021 of $587M.
What’s going on?
TPCO revenue fell well short of expectations. In January 2021, the company anticipated $334M in 2021 revenue. It came in at $174M. The product is “mediocre at best” said longtime dispensary operator and consultant Oliver Summers, and often unjustifiably expensive.
- Jay-Z’s Monogram brand launched in December 2020, with a $50 blunt that struck some as tone deaf. Journalist and critic Lindsay Maharry called it “far and away my least favorite celebrity brand.“
- TPCO declined to make anyone available for an interview for this story. (Disclosure: TPCO is a client of Mattio Communications, which sponsors WeedWeek Pro.)
Even so, it’s annual report lists operating expenses for the year at $184M, a bit above revenue. The company also notes an “impairment loss” of more than $654M on the year.
- An impairment loss, in this case, essentially means the company is revising down the goodwill value of its assets. In SEC filings the company largely attributes the impairment loss to macro conditions in the California market.
- No one disputes the market has been challenging. Still Dai Truong, a managing partner at investment bank Arlington Capital Advisors, called the loss a “glaring number.” (Truong previously worked for Left Coast Ventures, which became part of TPCO, but he left more than a year ago.)
In addition to the impairment charge, TPCO’s annual report discloses that it has identified a “material weakness” which could prevent it from timely or accurate financial reporting. It attributes this to acquisitions of private companies with limited accounting personnel or skill.
Speaking generally, Jonathan Bench, an attorney with firm Harris Bricken, said the “material weakness” language in TPCO’s annual report suggests a company moving too fast to close acquisitions or other deals without making diligence a priority. This remains common in the industry, he said.
- “It’s not a mature market where you can look at documents, talk to management and be confident you’re getting the whole story.”
- This results, among other things, in declining investor confidence and stock prices.
- TPCO stock is priced around $1.19/share down from a peak above $12 in January 2021.
Despite the difficult start, banker Truong says TPCO has sufficient reserves to regroup, under new CEO Troy Datcher, who joined the company from Clorox in mid 2021.
- But instead of a pre-ordained market leader, it will be scrambling to differentiate itself from a host of other midsized players.