Description

I believe The Parent Company (OTC Ticker: GRAMF) represents a very attractive, early stage public equity risk/reward opportunity, requiring a little more art than science to evaluate at this phase.  To invest in this idea, you need to be able to either view it as a hybrid “VC/value play,” or do it through your PA (as I have).  While I believe this has the potential to be a multibagger investment, maturing into an industry leader, to provide my own financial projections at this stage in this company’s life cycle would be disingenuous (and likely impossible to do with any degree of precision).  I think the future of this investment can be clearly seen from 30,000 feet.  So if you’re looking for a report with the type of granularity often found on this site, you probably shouldn’t read any further.

Sifting through a lot of trash that litters the cannabis sector at this moment isn’t an easy task. For every “real” company, there are countless overhyped situations that are likely to result in severe pain for those left holding the bag. The recent price action in the Canadian LPs (Tilray, etc.) is nothing short of insane. They are, in most cases, businesses trading at very high valuations (propped up by strong pro-cannabis sentiment, with recent additional support from the Reddit crowd) and importantly, they will not benefit from the legalization of recreational adult use cannabis that is sweeping through more and more US states, and the more than likely end of prohibition at the federal level expected later this year or in 2022.  

The US operators, still unable to list their stock directly on the US exchanges (hence the OTC listings) or utilize traditional banking services because of longstanding federal restrictions, are currently being overlooked.  On that note, a well deserved hat tip to issambres839 and azia1621 for their informative and timely write-ups on Ayr Strategies/AYRWF (name change to Ayr Wellness announced yesterday).  Ayr has built a great business with a focus on generating positive EBITDA and FCF.  I believe that Ayr remains a great investment opportunity today despite the stock’s impressive run, but I think The Parent Co. is also worthy of an investment and may have even more upside from here, given its very early innings status and its large cash hoard which should turbocharge the M&A aspect of their strategy.  And when banking and listing restrictions are lifted, the cannabis companies with the strongest balance sheets will benefit the most from first-mover advantage to finance, acquire and build out new licenses in existing and new US states, and the Parent Co. appears poised to be one of that movement’s leading beneficiaries.

COMPANY BACKGROUND:

The Parent Company, previously known as Subversive Capital Acquisition Corp (before de-SPAC’ing last month), is the largest vertically integrated cannabis company in California, the result of the largest amount of cash ever raised in the industry via SPAC.  Through its acquisitions of Caliva and Left Coast Ventures, and in partnership with Shawn Carter (better known as billionaire Jay-Z) and Roc Nation, The Parent Company now distributes a diverse selection of branded cannabis products targeting the wellness and recreational markets, with celebrity-powered marketing support. 

After closing those acquisitions, the company still has over $300 million in cash, no debt, and an unrivaled infrastructure from seed to sale (cultivation, extraction, manufacturing, distribution, brands, retail and delivery).  Its assets currently include 7 manufacturing facilities, 5 distribution plants with the ability to deliver to 450 active dispensaries in California within 72 hours, an omnichannel portal in Caliva.com that can deliver to/reach >50% of California’s population, a >500 farm procurement network and a premium indoor cultivation facility.  The company expects to grow their reach to 88% of the state by the end of 2022, as they expand their physical presence to >15 retail and >20 delivery locations.  They currently have an estimated 11% share of retail sales in the state today and that number is expected to rise to 20% by the end of 2022.

The Parent Company expects to do $593 million in sales in 2022 and generate over $137 million in EBITDA that year (see slide from the company’s investor presentation below).  It’s important to note that this does not include any additional M&A likely to be announced in the not too distant future, as management has indicated in recent interviews that they have a “robust M&A strategy.”  They’ve had plenty of time to pick targets, and have plenty of cash to acquire them.

It’s worth noting that California is the largest cannabis market in the world.  And it can’t hurt to have the Governor of California publicly praising the The Parent Company’s social justice efforts (https://twitter.com/GavinNewsom/status/1352375351352020993?s=20), nor does it hurt that the company launched a small fund to invest in minority-owned cannabis companies (which presumably could lead to additional returns, while strengthening political and social support for their businesses).  

In addition, The Parent Company has an experienced board and management team.  Its Chairman, Michael Auerbach, was a seed investor in Tilray and remains on that board of directors.  Carol Bartz,formerly the CEO of Yahoo and Autodesk is also a board member.  Other Parent Company board members bring experience from JP Morgan and Goldman Sachs.  I believe this group will make wise capital allocation decisions, and smart, creative M&A deals.   

The Parent Co.’s stock is currently trading just slightly above its SPAC pricing, having not participated in the run-up that other cannabis stocks have enjoyed YTD, likely because of how recently it de-spac’d, that its business is US-based, and that it is in a quiet period with post-SPAC financials yet to be reported (they will report them in March). 

BRANDING/PROMOTION/STAR POWER

When you step back and look at the cannabis industry, it’s easy to overlook how early we are in this game. There isn’t a “brand” yet that you can point to. Just the concept of cannabis, its coming legalization and acceptance, and the explosion of potential ways to invest in its future.  The Parent Company has a significant advantage in the form of an incredible marketing powerhouse of partners and investors, and the ability that affords them to influence, create, strengthen, and sell brands to their wide array of followers.

Jay Z serves as the company’s Chief Visionary Officer and yes, I’m serious… that’s his title.  The duration of his agreement with the Parent Company is 10 years.  Along with him came a 3-year minimum exclusive deal with Roc Nation, which serves as The Parent Co.’s official cannabis partner, and in turn will provide special access and rights to its huge roster of artists (Rihanna, Meek Mill, Alicia Keys, etc.), athletes and influencers who will promote the company’s portfolio of cannabis brands.  

Total Roc Nation follower count: 1.45 billion

Instagram followers: 532 million

Facebook followers: 350 million

Twitter followers: 352 million

Source: rocnation.com

The power to tweet (at no additional expense) to hundreds of millions of people about which product celebrities endorse is a priceless marketing asset and The Parent Co. has just that, and in spades.  20% off your next cannabis purchase with a ticket to a concert?  That unique type of promotion will be commonplace with this company.

QUIET PERIOD

The company is currently in a quiet period post de-SPACing that ends later in Q1. When that is over, I expect to see a robust M&A strategy unfold, and a media blitz that will leverage the star power associated with the company.  

CASH IS KING

In addition to the sizeable acquisitions already completed, the company has over $300 million available for further acquisitions. The warrants outstanding, once called (the stock must exceed $18 for a period of time in order for them to do so), would yield an additional >$400 million. This is the largest warchest of any cannabis company.  And with a strong management team with expertise in deploying capital wisely, this should result in turbo charging this business plan.  Per Canaccord Genuity, who covers the sector well, many of the other US public cannabis companies have negative net cash positions and those who do have net cash have an average of just $80 million, representing a small percentage of their market capitalizations. The Parent Co.’s cash balance exceeds 30% the company’s market cap, with no debt, and over $400 million more likely to come from its warrants eventually being called/exercised.  

ETF GROWTH

I expect the ETF market for US cannabis stocks to continue to grow.  Currently, there is only one: AdvisorShares Pure US Cannabis ETF (Ticker: MSOS).  This ETF currently owns 2.1 million shares of The Parent Co. as of 2/11/21, with a 2.5% position in the ETF.  This actively managed ETF continues to grow rapidly, with $915 million in AUM as of 2/11/21.  As it receives more inflows, it should continue to be a buyer of additional shares of GRAMF.  

USEFUL RESOURCES: 

• Investor presentation from December (before the de-SPACing):  https://s27.q4cdn.com/853048262/files/doc_presentations/2020/12/Dec-2020-SCAC-Presentation.pdf

• Fireside chat (video) with Steve Allen, The Parent Company’s CEO:  https://ir.theparent.co/events-and-presentations/events/event-details/2021/Kahner-Global-A-Big-Fish-in-a-Big-Pond-Fireside-Chat-with-Steve-Allan-CEO-of-The-Parent-Company/default.aspx

• Carol Bartz, former Yahoo CEO, current board member, interview on CNBC (Note: she may have consumed too much of the product pre-interview lol):

https://www.cnbc.com/video/2021/01/21/the-parent-company-board-member-on-its-notable-investors-in-cannabis.html

On 2/3/2021, Canaccord Genuity became the first sell side research firm to initiate coverage on The Parent Co., rating it a Speculative Buy with a $15 price target, which they deemed to be a conservative estimate.  They do great work on the industry (they’ve been bullish on Ayr for some time).  Below is their analyst’s comp table, with estimates for The Parent Company and its peers. 

Risks

• Federal legislation gets delayed or remains unchanged

• The company overreaches in its M&A strategy and overpays for assets.

• Current lack of complete financials ahead as we await the company’s first earnings release.

I am long The Parent Company (GRAMF) and may buy or sell additional shares at any time. This is not a recommendation to buy or sell securities. Please conduct your own research and reach your own conclusion.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

Catalyst

• Quiet period ending, and likely ensuing publicity and promotion to follow

• General recognition of the company, as it is barely known to investors

• M&A activity post quiet period

• Expansion of its Direct to Consumer delivery and retail stores

• Launch and promotion of new brands 

• Legalization at the federal level allowing US listing and access to banking