Unrivaled Brands, Inc.

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.

These forward-looking statements and terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties, because they relate to events and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief or current expectations of Terra Tech and members of its management, as well as the assumptions on which the statements are based.

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in Terra Tech’s periodic reports filed with the SEC and that actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed conditions.

Finally, this conference call is being webcast. The webcast link is available in the Investor Relations section of our website at www.terratechcorp.com.

With that, it’s now my pleasure to turn the call over to Terra Tech’s CEO, Frank Knuettel. Frank?

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. For the first quarter of 2021, our non-GAAP SG&A expenses were $3.9 million, down 49% from the first quarter of 2020.

The full non-GAAP reconciliation can be found in our 10-Q filing. Further, SG&A cash compensation costs were down 44% from April 2020, reflecting a reduction in our corporate headcount.

While we have successfully made improvements in both, revenue gains and cost reductions to-date, we continue to work towards our goals which include continued revenue growth in our existing operations, as well as additional cost reductions. With that said, much of the possible facility level cost reductions have been achieved at this point, and future operating cost reductions will result from reduction of expenses associated with the merger with Unrivaled, which I will touch on shortly.

With respect to the monetization of our financial assets, I’m pleased to report that we received the final payment associated with the sale of our Decatur dispensary in Las Vegas. Pursuant to this, we received approximately $2.9 million in April, representing the final payment of the sale.

Additionally, we still have the outstanding note receivable, as well as shares in Mystic Holdings associated with the sale of two other dispensers in Nevada. Mystic Holdings is working on their filings to become listed and trading, and we are awaiting adjudication of those filings before determining whether or not to exercise our put rights.

But in short, we have approximately $15 million in note receivables or putable stock associated with the sale of these two dispensaries, the total of which we expect to harvest over the next 12 or so months. I would also like to report that we are negotiating with a buyer of our Fourth Street property in Las Vegas.

We currently have a $1.6 million mortgage on the property. And while there’s no certainty of the sale, we hope and expect to resolve this item as well over the next 60 to 90 days.

Two final points in this initiative I’d like to report. One, all the original convertible notes entered into in 2019 have been converted to common stock and Terra Tech no longer has a carrying cost associated with that debt.

Second, as many of you know, our investment in Hydrofarm has held up well and the lockup lifts in approximately three weeks. While there’s no certainty when and how quickly we can monetize the investment, we will evaluate the disposition of our investment to provide funding for the build-out of our Dyer Street property and other expansion opportunities.

With respect to our third initiative, rebuilding Terra Tech, we expect that our Hegenberger cultivation facility will be completed by the end of June or early July. Upon completion, we will launch our cultivation program in that facility and inspect our first harvest in late Q3 or early Q4 of this year.

The Hegenberger facility is approximately twice the size of our existing cultivation facility in Oakland and we expect to provide a high quality regular source of flower to drive the expansion of the Korova brand, which is being acquired as part of the Unrivaled merger. With respect to the closing of the announced measured of Unrivaled, we’re on pace with the completion of the closing conditions and expect to close in the second half of June.

The last significant closing condition is the delivery of audits for Unrivaled 2019 and 2020 fiscal years, which are expected in the very near future. Following completion of the audits, there is a simple notice period to Unrivaled shareholders as a precursor to the close of the transaction.

Importantly, our respective teams are working closely together and diligently planning post-transaction management of the combined business, which should allow for a seamless integration and launch. As we work to integrate the Unrivaled and Terra Tech teams, we have worked together to hone our strategy going forward and are focused on two primary paths: One is the expansion of company-owned operations; and the second is licensing our branded products in additional states.

With respect to expanding our base of Company-owned assets, our initial target, as previously indicated, is in the West and Southwest. This strategy has been further refined as we review the competitive landscape and realize the paucity of major multi-state operators in California and Oregon and to a little lesser extent Nevada, the three states in which we operate, either now or will operate upon close of the merge with Unrivaled.

This provides us with more of a greenfield opportunities than in most other legal states with a period of time during which we believe that we face less competition in expansion of our business. As part of this opportunity, we will be rolling out the Korova, Sticks, and Cabana brands in Nevada, using our joint venture cultivation and processing facility as our launch pad.

Our second parallel path is licensing our branded products in additional states. Korova’s currently licensed in Arizona and Oklahoma, and Unrivaled has received considerable inbound interest from other states.

We anticipate that these licensing efforts will provide us with valuable insight into new markets and consumer dynamics therein, as well as provide an opportunity to work with partners in those specific markets, the end result of which could well be enter in to those markets with company-owned assets. That concludes my prepared remarks.

With that I’d like now to turn the call over to Jeff, our CFO, for a detailed look at our first quarter 2021 financial results. Jeff?

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. When we back those onetime items out, our $12.1 million net loss becomes a $1.3 million non-GAAP net loss.

This non-GAAP number is another indication that we are starting to see improvements in our revenue growth and our cost control efforts. Also noteworthy, in Q1, we had growth in our cash balance, as it rose from $888,000 on January 1st to $1.243 million by the end of the quarter.

As I conclude the financial results portion of this call, I would like to reiterate that management will continue to invest in further expanding our operations, as well as investing in a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting our name and our products. Management will continue its efforts to lower operating expenses and increase revenue.

And given that most of the operating expenses have a fixed or a quasi-fixed character, management expects that as revenue increases, those expenses as a percentage of revenue will significantly decrease. Thank you for your attention.

Operator, you may now open the call for questions.

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

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.

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.?

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.

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

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…

Yes, exactly.

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.

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.

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.

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?

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...

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?

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.

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.