Terra Tech Corp.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Hello, and thank you for standing by. Welcome to Terra Tech Corp.’s First Quarter 2021 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. At this time, I’d now like to turn the conference over to Jason Assad, Investor Relations with Terra Tech. Please go ahead.

[Jason Assad:]

Thank you, operator. Good afternoon, and welcome to Terra Tech’s first quarter 2021 financial results conference call. With us today are Terra Tech’s Chief Executive Officer, Frank Knuettel; and Chief Financial Officer, Jeff Batliner. Before I turn the call over to management, please remember that this conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended.

[Frank Knuettel:]

Thanks, Jason, and thank you everyone for joining us this afternoon to discuss Terra Tech’s first quarter operating results. Prior to just providing details and our financial statements, I would like to provide updates on our primary initiatives. To begin with on the operation side, we’ve continued to make improvements and see gains in our existing operations. With revenues of $5.1 million in the first quarter of 2021, we recorded our largest quarter of revenues since the fourth quarter of 2019, registering revenue growth of approximately 41.7% over the fourth quarter of 2020. As part of this revenue growth, we have seen consistent month-over-month revenue gains at both of our dispensaries. Since we reopened our Oakland facility in October 2020, we have seen average monthly sales growth of 15.6% per month and in April, we recorded the highest revenue month at our Oakland dispensary since February 2020. Similarly, at our San Leandro dispensary, since we reopened in July 2020, we have seen average monthly sales growth of 14.0% per month, and in April, we recorded the highest revenue at our San Leandro dispensary since December 2019. On the other side of the ledger, expenses, we have continued to review our operations and drive appropriate cost reductions. Jeff will provide more details shortly, but I’d like to note that our non-GAAP SG&A expenses, which reflects the elimination of noncash or nonrecurring items, were down considerably.

[Jeff Batliner:]

Thanks, Frank, and good afternoon, everyone. For the quarter ended March 31, 2021, we generated revenues from continuing operations of approximately $5.1 million, compared to approximately $4.1 million for the quarter ended March 31, 2020, an increase of $1.1 million or 26.3%. The increase was driven by an $800,000 improvement in production revenue and a $450,000 increase in cultivation revenue, partially offset by a decrease in dispensary revenue. Our gross profit for the quarter ended March 31, 2021 was approximately $2.4 million, compared to a gross profit of approximately $2.3 million for the quarter ended March 31, 2020. This is an increase of $100,000. Our gross margin for the quarter ended March 31, 2021, was approximately 47.5% compared to approximately 57.4% for the quarter ended March 31, 2020. Our selling, general and administrative expenses for the first quarter of 2021 were approximately $14.1 million, compared to approximately $8.5 million for the 2020 first quarter, an increase of $5.6 million or 65%. And this was primarily due to a $9 million severance expense related to our founder’s exiting the business. This increase was partially offset by a $1 million decrease in salaries and wages due to reduced headcount, the $700,000 decrease in stock option expense, $568,000 decrease in amortization expense, along with $488,000 decrease in legal expenses, $295,000 decrease in bad debt expense, and a combined $400,000 decrease across multiple other items. Other expenses for the quarter ended March 31, 2021, were approximately $90,000 compared to other expenses of approximately $840,000 in the prior year, a decline of $750,000. The expense decline was driven by less interest expense in 2021 and more income from insurance and litigation settlements. In total, we incurred a net loss of $12.1 million or $0.05 per share for the 2021 fiscal first quarter, compared to a net loss of $17.3 million or $0.11 per share for the 2020 fiscal first quarter. And we had some very significant onetime items hit in this first quarter this year. So, we’ve included a few non-GAAP measurements to provide more clarity into our performance. This quarter, we have the large $9 million severance expense related to our founder’s exiting the business. We had a $6 million debt conversion expense as we recapitalized the Company. And we had a $6 million unrealized gain on our Hydrofarm investment.

[Operator:]

Our first question comes from private investor, Patrick Jones . Please go ahead.

[Unidentified Analyst:]

Thank you. I was wondering, could you all provide more insight with respect to how the integration with Unrivaled is proceeding?

[Frank Knuettel:]

Sure. Thank you, Patrick. This is Frank Knuettel. We actually have a very comprehensive plan in place, some of the items of which I touched on during our call -- or during our prepared remarks. And the plan is actually going very smoothly. The teams are integrating well. We’re aligning management responsibilities, working on sort of best-in-class processes between Unrivaled and Terra Tech, and that we each bring different strengths and background to the merged company. So, the teams are working well together. We’re bringing best-in-class processes. And I want to laud the members of the Unrivaled management team. They’re really smart, hard working group of folks that have been fully committed to the integration, which has made the whole process quite a bit more smoothly. All this sums up to putting us in a position that when we do close in 30ish days or so with the completion of the audits and the notice period, that we’re going to be in a very strong position to launch the various initiatives that we’ve been chatting about as a combined company. So, it’s been, frankly, a very smooth and well-integrated process.

[Unidentified Analyst:]

Thank you. If I may, just one other question. Can you provide any further insight into the strategy you might have to focus on the western U.S.?

[Frank Knuettel:]

Sure. Yes. I touched briefly on that during our call. And if you look at the landscape across the legal markets in the country, one of the things that I think is particularly relevant to understand is that amongst the large MSOs, many of them have little or even no footprint in California, and even more so in Oregon, and maybe to a little bit lesser extent, Nevada. And this is driven by a number of things. One is the regulatory environment, tax environment is somewhat prohibitive against the legal market. It is more competitive than many other states. So, a lot of the large MSOs have been focusing on states where the application of capital can provide more immediate returns and potentially with less sensitivity towards operational efficiency and management. So, what we’ve focused on is we’ve been operating in the California market for quite some time, and have managed to put together operating procedures and management efficiency and approaches to market that I think will put us in a really strong position to both, build our market share and compete against companies as they enter the California market, and that at this point it’s because the illicit market and the regulatory environment a little bit more difficult in which to operate. The other thing is, California tends to be a brand leader. And we are very focused on expanding our brands, both product brands and dispensary brands. And that California is a brand leader, I think, that also will provide a lot of support to our continued expansion and our competitive efficiency as the market continues to grow.

[Operator:]

Our next question comes from Joe Nava, private investor. Please go ahead.

[Unidentified Analyst:]

Yes. Can you describe the change in gross margin and gross profits a little bit more?

[Jeff Batliner:]

Sure. Thank you for that question. And I’m assuming that you’re kind of referencing the fact that our growth in gross margin didn’t really keep pace with our growth in revenue in the first quarter…

[Unidentified Analyst:]

Yes, exactly.

[Jeff Batliner:]

Okay. And that’s mainly because our Q1 was negatively impacted by inventory adjustments and some of the inventory disposals, primarily in our cultivation and our distribution operations. And essentially, what we’re seeing is, as those operations have been evolving, our inventory practices, both valuation and accounting are needing to evolve with them. And the adjustments that we made in Q1 are a reflection of that.

[Unidentified Analyst:]

Okay. And could you give us a little bit more -- the one-time and restructuring charges, maybe a little bit more clarity? It seemed like there was a lot going on in the quarter.

[Jeff Batliner:]

There definitely was. So, what we saw was roughly about $15.1 million in restructuring charges. Now, $9 million of that was severance expense. We also had $6.1 million in debt, extinguishment charges. And predominantly, almost all of it -- over 90% of that were noncash expenses. So, I mean, clearly one time, and we feel good about moving forward with our cost control method -- our cost control measures. So, we think we’re positioning ourselves well for the future.

[Operator:]

Next question comes from Brad , private investor. Please go ahead.

[Unidentified Analyst:]

Hi. Thank you for taking the question. This is more of a general question. Regarding your strategy for government legalization, whether it be for recreational use federally or implementation of the Same Banking Act? Does it -- do you have a plan to change strategy or how do these really impact the long-term goals of the Company?

[Frank Knuettel:]

You know, this is Frank Knuettel, thanks for your question. We are not very active in Washington and frankly the legislative environment at the federal level is muddy in cannabis -- or muddier in cannabis than it is in general. I will say this, the Safe Banking Act, I think would be a tremendous benefit to both the industry and the country with respect to the benefits it provides to access to commercial banking and cash management risks and issues associated with cash management. And frankly, I think this would increase the efficiency of operating in our sector. So, I think that one actually has a lot of value across the industry and frankly, across the society, and is an easier bite for Congress, I believe to take. The legalization issue is a much bigger issue at the federal level. And how that ultimately works out and the building blocks that get us across the finish line at whatever point that may be are very-undetermined at this time. Final point on that is, at the moment, I don’t actually have an issue with it being illegal at the federal level, and that we in the industry have an opportunity now and we as a company specifically have the opportunity to get a really deep market penetration in our selected areas, without the additional competition from federal non-cannabis brands, consumer product goods companies, alcohol, beverage and tobacco, et cetera. So, we have, around our industry right now, so long as it’s federally illegal, a protective moat that provides the participants in our industry the opportunity to get a really deep foothold. And frankly, based on my comments earlier, I think, we have the additional benefit of operating in the states a lot of the players in our industry have actually even avoided. So, I don’t know how long it’s going to be and what it’s ultimately going to look like and that sort of thing and it’s certainly a much bigger issue for Congress and the President to take on. So, I’m not necessarily...

[Unidentified Analyst:]

And part of that question too is, do we have a contingency plan, or I guess a plan for when the actual Safe Banking Act does come to fruition, if it does, do you have kind of -- if then, then act site plan?

[Frank Knuettel:]

Of course, but it’s not a -- I wouldn’t call it a contingency plan, though, either. I would say that the current constructs where banking is very difficult and bank services and cash management services are very difficult are the issue, and the Safe Banking Act would dramatically improve the operating environments of those things. So, I don’t look at the Safe Banking Act as a contingency under any circumstances. To me, it’s an opportunity if it were to pass to lower operating costs, increase our efficiency, and reduce the risk of cash management handling. So, I very much don’t see it as a contingency. I would see it as a very strong benefit, when and if it were to happen.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Frank Knuettel II for any closing remarks.

[Frank Knuettel:]

Thank you very much for your help today. And to all those who joined us for the call, I appreciate your time and your support of Terra Tech. As we’ve previously stated, it is our hope and we endeavor to provide transparency and a level of management professionalism to the industry and our Company in particular that we hope to live up to. And I just want to again take the note to thank everyone for their time and their support. Thank you.

[Operator:]

The conference is now included. Thank you for attending today’s presentation. You may now disconnect.