TPCO Holding Corp (OTCQX:GRAMF) Q2 2022 Earnings Conference Call August 15, 2022 6:00 PM ET
Company Participants
Troy Datcher – CEO & Chairman
Rozlyn Lipsey – EVP, Operations & Wholesale
Michael Batesole – CFO
Conference Call Participants
Robert Burleson – Canaccord Genuity
Eric Des Lauriers – Craig-Hallum
Operator
Good evening, everyone. Welcome to The Parent Company’s Second Quarter 2022 Conference Call for the 3-month period ending June 30, 2022.
Listeners are reminded that certain matters discussed in today’s conference call or answered that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to The Parent Company’s future financial or business performance. Any such forward-looking information is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information, including the risk factors detailed in the parent company’s continuous disclosure filings that can be accessed via the U.S. Securities and Exchange Commission website at www.sec.gov or SEDAR at www.sedar.com. Forward-looking information provided in this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today’s date. There can be no assurance that forward-looking information will provide to be accurate, and you should not place undue reliance on forward-looking information. The Parent Company undertakes no obligation to update such forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable law.
In addition, during the course of this call, there may also be references to certain non-GAAP financial measures, including references to adjusted EBITDA, which do not have any standard meaning under GAAP and, therefore, may not be comparable to similar measures presented by the company. For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, please refer to the company’s quarterly report on Form 10-Q, including management’s discussion and analysis available on the SEC’s website and SEDAR.
I would like to remind everyone that this call is being recorded today, Monday, August 15, 2022.
Now I would like to introduce Mr. Troy Datcher, the Chief Executive Officer of The Parent Company. Please go ahead, Mr. Datcher.
Troy Datcher
Thank you, and thanks, everyone, for joining us. During today’s call, I’ll provide an update on how we’re executing on our goals for 2022 and the success we’re having, thanks to our efforts to refocus the business. Then I’ll turn the call over to our newly appointed Executive Vice President of Operations & Wholesale, Roz Lipsey, who will provide an overview of the operational optimization that is occurring at the company. Following Roz, our Chief Financial Officer, Mike Batesole, will review our Q2 2022 financial results in more detail. Then we’ll open the call for questions.
Our entire organization is focused on implementing the strategic initiatives we put into place at the beginning of the year, profitability and drive value from our portfolio of high-quality assets.
Now here’s the good news. We’re seeing initial signs of success from our efforts with 69% of our revenue coming from our omnichannel retail business in Q2 of 2022 compared to only 22% in Q2 of 2021. As a result of this shift to high-quality revenue, our gross margins improved to a solid 24% in Q2 2022 compared to only 9% in Q2 of 2021. As anticipated, our top line revenue has been impacted by the shift as we rationalize operations and move away from high volume, but low quality, bulk wholesale business.
Looking ahead to future profitability improvements, we expect to continue to increase the percentage of first-party brands available at our own stores. I’m pleased with the progress we’re making here as our first-party brands account for 29% of sales in the second quarter, up from 26% in the previous quarter.
The optimization of our business is our top priority, really to ensure we build a robust growth platform that can successfully navigate the evolving local, state and federal market trends to emerge as the leader in the California marketplace. Now it goes without saying that the California cannabis industry has been experiencing a variety of challenges, which have impeded the market growth. This includes the pervasive illicit industry as well as the supply imbalance which occurred late last year and resulted in the degradation of pricing in the wholesale market.
We strongly believe that our consumer-first approach will be what differentiates us here. During the first quarter, we rolled out new in-store initiatives to increase customer satisfaction and drive omnichannel retail sales growth. This includes a new customer experience that allows customers to smell before they buy. We have new tables that create a more immersive experience for our flower assortment. We also created a new glaze bar where customers can learn how to roll a joint, dab, understand terpenes or take a workshop. We’re also curating our menus using real-time customer demand data to deliver optimal product mixes to each of our store locations.
Now this is a competitive environment, and we intend to remain at the forefront of customer engagement. That means delivering retail interactions that remove frictions and bring our customer unique experiences.
To this end, we’ll be increasingly thoughtful and consider it when we expand our retail footprint. On that note, we recently celebrated Coastal opening its third Northern California location. This new Coastal storefront is only the second adult-use dispensary in Concord, California. They serve a vibrant community, featuring a virtual menu, bud bars and customer-curated selections, including a robust assortment of The Parent Company’s product portfolio. Upon close of the Coastal acquisition as well as receipt of any required local and state license transfer approvals, this location will become our 12th retail location in California.
Convenience and quality are 2 of the most important aspects when attracting customers and building brand loyalty, and we will deliver against both with our premier products in combination with our expansive coverage of retail locations, our delivery and also our convenient mobile ordering app.
Following the end of Q2, we are thrilled to announce our expansion into the East Coast with our first out-of-state partner agreement for Curio Wellness in Maryland. We’re extremely diligent with selecting the right partner to build our premier products and bring them to marketplace to new audiences, and we’re very pleased to announce the partnership with Curio.
Maryland customers will have available for purchase a variety of company brands, including MONOGRAM, Caliva, Mirayo by Santana as well as other owned brands with a variety of selection or form factors such as jarred fresh flower, pre-rolls, premium vapes and infused gummies. This exciting launch will also feature signature strains cultivated by Curio in collaboration with us. Our brands will initially be available at Curio’s Far & Dotter dispensaries, with broad distribution to dispensaries across the state to follow.
As we entered the second half of 2022, our focus remains on accelerating our profitability through cost savings plans, omnichannel retail growth strategy and our focus on building brands that resonate with consumers. We are building the company for the long term. we want to build meaningful consumer interactions and connections by developing innovative products driven by our data and insights and to always meet consumers where and how they like to shop. We believe this is the key to reaching our goal of becoming the top consumer choice in our market.
I look forward to speaking with you again on the progress as we continue to execute over the coming months and quarters. At this point, I’d like to turn the call over to Roz who will discuss the profitability initiatives and cost savings measures were undertaken as a company. Roz, welcome to The Parent Company.
Rozlyn Lipsey
Thank you, Troy. Really happy to be here today speaking with everyone on the exciting work we are undertaking at The Parent Company. To accelerate our path to sustainable long-term profitability, we have identified and are in the process of implementing several strategic long-term initiatives to save costs and drive efficiencies.
Annual expense savings of approximately $9.3 million have already been achieved principally through the renegotiation of long-term lease agreements and organizational design restructuring. In parallel with this restructuring and to better optimize operations, we have realized an approximate 17% reduction in our workforce throughout 2022, which represents $7.6 million in annualized payroll reductions. We’ve also generated $7.6 million in cash through the sale leaseback of property, the sale of underutilized equipment and the settlement of outstanding litigation.
Our distribution platform is being enhanced through initiatives such as the recent agreement to transition wholesale distribution activities to Nabis. Beyond direct cost reduction, the Nabis partnership reduces operational complexity and allows The Parent Company to focus on its strategic priorities: brand building and fostering premier consumer experiences. We also decided to close our Costa Mesa delivery center as Nabis will now handle distribution at this locale. This agreement is extremely beneficial to our efforts and comprises the entire company wholesale portfolio, which will introduce our products to new prospective customers and give us additional data to better serve our current customers.
We’re also executing on delivery depot optimization. We have recently exited our Sacramento and Culver City operations. We are viewing our stores not just as retail store fronts but also depots for delivery operations themselves, so we can better manage our inventory and achieve operational efficiencies by operating out of fewer locations. Additional cost-saving measures are currently being reviewed, including a thorough examination for potential outsourcing of nonstrategic capabilities. As Troy mentioned earlier, with the implementation of these measures, we expect to reduce our full year 2022 operating expenses by approximately $30 million, roughly 20% lower than in 2021.
While cost-savings initiatives are an important part of our strategy, we are also working on in-store optimization to further improve our profitability. Our retail locations need to reflect the communities they operate in. A customer in West Hollywood is not the same as a customer in Hanford. With our focus on customer satisfaction, we will ensure our product selection at our locations meets the needs of the consumers that shop there. We are actively engaging in developing customized assortments for our stores based on the data we get out of each location and look forward to better serving our customers.
And at this point, I’d like to turn the call over to Mike, who will discuss the financial highlights of the quarter. Mike?
Michael Batesole
Thanks, Roz, and good evening, everyone. As a reminder, the results I’ll be going over today can be found in our financial statements and MD&A contained in our quarterly report on Form 10-Q. All figures are in U.S. dollars. And it should be noted that we are a U.S. registrant with the SEC. And as such, our financial statements are prepared on a U.S. GAAP basis.
Q2 ’22 net sales totaled $27.4 million compared with $54.2 million in Q2 ’21 as we pivot our business to focus on our more profitable omnichannel retail revenue. This focus has been successful with the omnichannel retail revenue growing 60% to $19 million in Q2 ’22 compared with $11.9 million in Q2 ’21. The higher-margin revenue accounted for 69% of sales in Q2 ’22 compared with only 22% of sales in Q2 ’21.
Wholesale revenue was $8.4 million or 31% of sales in Q2 ’22 compared with $42.3 million or 78% of sales in Q2 ’21. The decrease in the wholesale revenue is consistent with both our efforts to shift our revenue mix to our more profitable operations as well as continued wholesale market pricing challenges. As a result of this pivot, our gross profit was improved 37% to $6.6 million or 24% of sales in Q2 ’22 compared to only $4.8 million or 9% of sales in Q2 ’21. With continued growth to our omnichannel retail operations, we expect to see further improvements in gross profit and gross margin as we continue to shift our business to higher-margin activities and product categories.
Total operating expenses for Q2 ’22 decreased by 21% to $34.1 million or $43 million in Q2 ’21. Operating expenses for Q2 ’22 included cash expenses of $9.1 million in general and administrative costs, $10.5 million in salaries and benefits and $3.7 million in sales and marketing. Noncash expenses included in stock-based compensation, $411,000 for allowance for bad debt and an approximate $6.7 million in depreciation and amortization. Adjusted EBITDA loss for Q2 ’22 was $18.4 million compared to a loss of $13.1 million in Q2 ’21.
We ended the quarter with unrestricted cash and cash equivalents of $126 million. Since the closing of qualifying transactions, we’ve invested $48.8 million in acquisitions, $6.5 million in share repurchases and $122.4 million or an average of $6.9 million in cash used per month in operations to integrate and scale the business.
We look forward to updating you and sharing our progress in the months ahead. I would now like to turn the line over to the operator to commence the Q&A questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. We will take our first question from Bobby Burleson from Canaccord.
Robert Burleson
So I guess the first one would just be, you guys have a target cash balance that you want to kind of maintain as you exit 2022. And you may have gone over this in the formal comments, I just missed it, or in the press release, but can you give us an update on what that cash level is that you want to exit the year at and whether or not you’re on target for that still?
Troy Datcher
Bobby, thanks for the question. Yes, we’ve stated publicly that we’d like to end the year with $100 million in cash on our balance sheet, and that’s barring any opportunistic and strategic investments. And we’re making some of those along the way, so we’ll update throughout the course of the year. As we talked about today, we’ve made tremendous progress on cutting our cash burn over the course of the last couple of quarters. The highlight of the data we shared today is a 17% reduction in staffing over the course of the year, which was a large contributor to our savings. But we’ll continue to update you and the rest of the of our investors and employees and folks that are interested in this progress over the course of the quarter.
We made some announcements towards that, Bobby, two I’ll just mention: one is our outsourcing to Nabis; the second one, we’ve optimized some of our underperforming delivery depots. We talked about that today. We have some major announcements to make over the course of the next several weeks of optimization of capabilities that we have found partnerships with that will lighten that load from a complexity and cost standpoint.
Robert Burleson
So just for clarification, it sounds like you could potentially outperform that number given the types of announcements you’re talking about. Or are there investments that could lead to maybe adjusting the number a little bit lower?
Troy Datcher
Yes. I won’t be that aggressive in terms of that target, it’s aggressive enough, Bobby. I’ll tell you, in addition to the strategic investments we’re making, we are seeing some challenges, obviously, in performance in the California marketplace just based off of macro conditions. And so that’s putting pressure against that objective as well. So we will continue to update you with our progress, but we have some headwinds that we have to overcome as well as we’re looking at some strategic investments we’d like to make that really puts us in a great position for ’23 and beyond.
Robert Burleson
Okay. Great. And then my second question is just understanding where you see the value of your assets going forward in the California market. Obviously, you’re pulling back from some operations in some places. Obviously, you’re trying to do less on the commodity end of the spectrum. But what do you see kind of as the crown jewel of the business going forward?
Troy Datcher
We’ve publicly stated that our objective as an organization is to be national brand builders. And so we see our brands as our most valuable assets long term. The capabilities that we own are ones that are critically important for the success of building brands. And so our retail outlets, that scale that we have, the 12 outlets that we mentioned that we have today, are a big part of getting our products in front of consumers. As we stated earlier today, 29% of all our sales are first-party brand sales. That’s a really great indicator that we’re developing brands that are resonating with consumers. At the end of the day, the assets that we own have to be really beneficial to that brand-building mission. If there’s a rightful owner of other capabilities that are not core to that strategy, we’re looking for the right partners to off-load the complexity and cost.
Operator
[Operator Instructions]. We’ll take our next question from Eric Des Lauriers from Craig-Hallum Capital Group.
Eric Des Lauriers
I have a follow-up on that last one there. Just as we think about your overarching strategy or north star of distributing brands, how are you looking at the wholesale channel in California? And maybe if you could just give us a sense of whether you’re scaling back to only a certain amount of brands that you’re distributing to third-parties, should we expect a complete wind-down of all wholesale operations such that your products are only in your stores? Just a bit more kind of high-level, qualitatively, how are you looking at wholesale in California with respect to your overarching brand strategy?
Troy Datcher
Well, Eric, thanks for the question. And Roz, please jump in to fill any gaps I may miss here. But we want to be clear, we think that wholesale distribution of our products to more dispensaries in California is a good thing for our brands. We believe that to have winning brands in California, they have to be successful beyond our ecosystem. While we learn a lot from the consumer and the journey using our delivery depots and our dispensaries to collect the data, it’s only helpful as we take those data points and bring them to rest of market, and that really shapes our innovation, marketing and demand plans.
We’re being very thoughtful, Eric, in terms of the role of wholesale, meaning I think we used to often talk about number of doors. I think we’re going to get smarter about how we measure success in wholesale. It’s going to be with the right partners. We’re fortunate enough to have Roz Lipsey join the team. Roz comes to us with a great deal of experience, especially with wholesale experience, and she’s putting that experience to work and pulling together a new strategy for us that you’ll hear more about in the coming quarters.
Having a partnership with Nabis was a big part of that foundation. They will allow us to get to the right doors. They have a lot of great proprietary information that they can share with us on, retailers that are doing things the right way, the winning way, and we certainly want to partner with those dispensaries, first and foremost. So it’s not just about the shotgun approach and being in most dispensaries, it’s being about being in the right ones. And you’ll hear more of that from Roz and the team moving forward. But it is a big part of who we want to be as brand builders. Roz, anything to add?
Rozlyn Lipsey
I think the only thing I’d add is we also have a great team that has access to a significant number of accounts to support these efforts and really strong long-term relationships that help us to qualify what accounts we’re looking at, as Troy said. So I think that’s another added benefit for us.
Eric Des Lauriers
Okay. That’s very helpful. I appreciate that there. And then last question for me. On the Curio deal, congrats on signing that and expanding out of California. Could you just help us understand how that deal is structured? I mean is this just a sort of royalty type arrangement where this could also be sort of margin accretive? I mean I’m assuming it’s going to be relatively immaterial compared to your overall sales here. If you could just sort of help us understand, one, how it’s structured; and then two, how much of a focus on more of these deals is there from you guys. Should we expect more of these announcements over the coming months and quarters? Or do you guys have your hands full with everything you’re doing in California already?
Troy Datcher
Thanks for the question, Eric. We’re really excited about the deal with Curio. We’ve taken our time and did our due diligence to find the right strategic partner for our first out-of-state partnership. And you heard me state previously, what was really important is that we find a partner that was like-minded in terms of the type of organization that we are and we want to be. And that is one that’s built on principles of trust with our consumers. And we found that in the folks at Curio Wellness in Maryland. In addition, they share the same values in delivering a really great quality product that will meet the ambitions of our brands. And so that is exciting, to find a partnership that allows us to build a blueprint around how we’d like to take these programs going forward.
As far as the structure of the deal, I won’t get into the nitty-gritty details of the percentages, but we do have a deal in place that is a royalty-based deal. It is an asset-light deal, which we have always talked about, and the first of many that we will execute over the course of the next couple of years. What I’d say, over the course of the next couple of quarters, you will hear announcements from us about extending our products to other states. But we’ve got a very strict level of criteria which has to be met before we move forward. We’re in no rush to get these deals done, but we do see a rich opportunity for us to get our brands in front of the consumers. And we’re having some wonderful conversations with the like-minded companies across the landscape of recreational legal cannabis that can help us expand our portfolio into consumers’ hands over the course of the next year.
So we’re excited about that. It will be a revenue driver for us. We’re excited about the margin profile of these types of deals and partnerships. And again, we’re excited about the Curio deal, first and foremost, based off of the promise of building the right blueprint that we can execute across other states as we expand.
Eric Des Lauriers
I appreciate that info, and best of luck.
Troy Datcher
Thank you.
Operator
[Operator Instructions].
Troy Datcher
So if there are no more questions, operator, I just want to say thank you to everyone for joining us. I appreciate everyone taking the time this afternoon to spend with us. A big thanks to the employees of The Parent Company for all your efforts over the previous quarter and quarters to come. Big thank you to both Roz and Mike for joining me this afternoon.
During today’s call, we shared more details about our 2022 objectives. And importantly, we shared our overview of our plans and how those changes we’re implementing over the course of the coming months will position us to be a better leader in California. And our stated objective is to be a world-class brand builder. Nothing’s changed with that. We’re excited about the prospects of the future. We look forward to sharing our plans and our results with you in future quarters.
We appreciate the time again today. Thank you. We’ll talk to you next quarter.
Operator
Thank you, Mr. Datcher. This concludes today’s call. Thank you all for your participation. You may now disconnect.
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