Debra Borchardt
Geronimo Capital founder and TPCO (OTC: GRAMF) shareholder George Allen sent a letter to the company’s CEO Troy Datcher outlining why he thinks the deal with Gold Flora is terrible.
TPCO - vote against GF MergerAllen questioned the numbers supporting the transaction and suggested that the board could be doing the deal because it benefits them more than shareholders.
In February, TPCO announced it was merging with California-based Gold Flora Corp. Gold Flora would become the majority holder of the company with 51% of the shares, while The Parent Company shareholders would own approximately 49%.
Allen claimed that with dilution, TPCO shareholders will actually be left with 42%, not 49% of the company.
The Numbers
Allen noted in his letter that TPCO is contributing 56% of revenues and 62% of gross profit to the combined entity, as TPCO’s 2022 revenue was $83 million versus Gold Flora’s 2022 revenue of $65 million. In addition, TPCO has a net cash position (calculated to include net working capital) of $82.4 million, whereas Gold Flora would bring $50.8 million of net debt to the transaction.
While TPCO management told shareholders that the company “needed” to do the deal, Allen pointed out that Gold Flora was listed as a “going concern” and was running out of money. In addition to Gold Flora’s debts, it also has $78 million in lease liabilities.
Allen did concede that Gold Flora could bring some value to the table, but even so, Allen said TPCO should own 76% of the merged companies, not the disputed 49%.
Allen’s letter tried to make the proposed math work, but stated that in order to get Gold Flora to a point where it should have majority ownership, he’d have to assume a revenue multiple of 4.8x versus a revenue multiple of just 2x for TPCO. TPCO also has better gross margins than Gold Flora.
Other Risks
Allen also shined a light on Gold Flora’s convertible debt, writing: “The Gold Flora transaction hinges on certain treatment of Gold Flora convertible debt that appears to be counter to the terms and spirit of those agreements.”
Gold Flora reported $43.5 million of convertible notes, of which $23.4 million is expected to convert into equity at closing. The remaining $15.2 million is expected to roll over into outstanding convertible debentures of the NewCo. The conversion price is set at a “meaningful premium” to the current stock price, despite a commitment for a 25% discount to a liquidity event.
“Who benefits from this trickery?” Allen asked.
Gold Flora’s cultivation facility in Desert Hot Springs – cited as a valuable asset – has a sale-lease back arrangement that pays more in rent than the revenue received from the operation.
Who Benefits?
Once the letter laid out the math, it zeroed in on who benefits the most from doing this deal.
The change of control triggers the issuance of 22.2 million shared (about 20% of the company), which several board members are likely poised to participate in, called “contingent consideration payable” to the three pre-SPAC merger entities (Caliva, Left Coast Ventures, and OG).
They were meant to reward recipients when the stock price reached levels well above the current trading point. However, a clause in the agreement grants the full amount if a change of control happens before January 2024.
“As we can see, this transaction is getting done just in the nick of time,” Allen wrote
The letter said that the change of control also triggers severance benefits for Datcher of $1.1 million and accelerated vesting on approximately 1.2 million shares. He said that collectively the disclosed cash payouts to management come to $1.6 million and at least 2 million shares. That cash and transaction expenses come to roughly $2 million, which further drains the company’s cash.
TPCO Responds
“Mr. Allen’s opinion is subject to extreme bias due to his deep involvement with a California cannabis competitor,” a spokesperson for The Parent Company told Green Market Report in an email. “Furthermore, there is a significant irony in his criticism, considering his recent completion of a non-arm’s length transaction that severely undermined the viability of the very same California cannabis competitor.
“We strongly refute George’s baseless allegations and retain the right to pursue all available legal avenues to challenge unfounded and irresponsible claims. Shareholders seeking further insights into the advantages of this merger are encouraged to review the details outlined in the circular.”
