TPCO Holding Corp (OTCQX:GRAMF) Q3 2022 Earnings Conference Call November 14, 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
Good evening, everyone. Welcome to The Parent Company’s Third Quarter 2022 Conference Call for the Three Month Period ending September 30, 2022.
Listeners are reminded that certain matters discussed in today’s conference are answers that may be given to questions asked, could constitute forward-looking statements that are subject to risk and uncertainties relating to The Parent Company’s future financial and business performance. Any such forward-looking information is based on certain assumptions and is subject to risk 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 filing that can be accessed via the US Securities and Exchange Commission website at www.scc.gov 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 prove 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 other company. For more information about both forward-looking information and non-GAAP financial measures, including the 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, November 14, 2022.
I’ll now hand the call over to Mr. Troy Datcher, the Chief Executive Officer of The Parent Company. Please go ahead, Mr. Datcher.
Troy Datcher
Thank you operator, and thanks everyone for joining us on today’s call. During the call today, I’ll provide an update on how we’re successfully transformed our business in 2022, establishing a strong foundation for us to accelerate our growth plans in 2023. Then I’ll turn the call over to Chief Financial Officer, Mike Batesole, who will review our Q3 2022 financial results in more detail. Following Mike, our Executive Vice President of Operations and Wholesale Roz Lipsey will providing an overview of the operational optimization that’s taken place as a company over the past several months. Then we’ll open the call up for questions.
Throughout this past year, we’ve focused on executing our strategic initiatives to address both the significant opportunity and near-term challenges that the California market has presented. I’m really proud that our team has come together and leverage our things such as a deep pool of diverse talent, our proven brand building expertise, our consumer-centric experiences to build a stronger business that is positioned for long-term success. The decisive actions we’ve taken is working and I’m proud to see our company emerging at the California leader.
The initial signs of our success are clear. As our third quarter revenue grew 3.5% year-over-year to $19.6 million. This includes revenue from our book wholesale business excluded as we decided to divest that business subsequent to quarter end with our revenue now primarily focused on our more profitable omnichannel retail operation.
As a result of this shift, we also reached our goal of significant improvement gross margin, which improved to 34% in the third quarter compared to 26% in the third quarter of 2021, and well in line with our stated objective of expanding gross margin to be in excess of 30% by the end of the fiscal year.
In connection with our focus on higher margin revenue, we’ve been steadily increasing the proportion of company-owned brands at our own stores. In the third quarter of 2022, 32% of our sales were derived from our company branded products, up from 29% in Q2. This improved mix will further drive our profitability, as our in-house brand product generate higher gross margin than third party offerings.
Looking at our brand building piece [ph] in September, we hosted the exclusive launch to recovery at a common West Hollywood location. Recovery is a premium cannabis brand co-founded by Chat [ph] AKA brain, a YouTube star and Co-Founder of the popular eSports and entertainment organization FaZe Clan. Recovery was developed by Phase Ray in partnership with our cannabis — our previous cannabis brand, Cleva [ph], and was created to support our lifestyle focused on wellness and creativity.
Our priority as a company is to work with authentic leaders and innovators in this space, and this was a wonderful opportunity to work with a trailblazer at the intersection of cannabis and gaming, one which has been well received with a tremendous amount of positive feedback following the launch.
During the quarter, we were also very excited to share the news with our first out-of-state expansion partnership with Curio Wellness in Maryland. We’re thrilled to announce to East Coast consumers that our premier West Coast brands will be available through this partnership with Curio and we’re excited that we just weeks away from launching and consumers can expect to begin seeing our brands of variety brands, including MONOGRAM, Caliva, Maria by Santana Cruisers, as well as others at Curio’s Far & Dotter dispensaries.
Soon consumers will have a variety of form factors available to them, such as jarred fresh flower, pre-rolls, premium vapes, and infused gummies. This exciting launch will also feature signature strains curated by Curio in collaboration with us. We anticipate broad distribution to dispensers across the state to follow in 2023.
Looking at our retail footprint, we continue to be focused on delivering innovative and exciting consumer experiences. This includes new in-store initiatives such as immersive bud pod tables, smell before you buy opportunities, curated location-specific product menus, and a new glaze bar where consumers can learn how to roll a joint, dab, understand terpenes, or take a workshop.
During the quarter, we completed the acquisition of the remaining 15% equity of our Common West Hollywood dispensary following receipt of all necessary regulatory approvals. Completing this acquisition was a fantastic milestone force of the company, Common West Hollywood is in a beautiful location surround about cultural destinations, church attractions, which both the best flowers who are met in West Hollywood.
We also just announced that we completed the acquisition of Coastal, a retail dispensary license holder and operator founded in Santa Barbara in 2018. Coastal operates six dispensaries located in Santa Barbara, Pasadena, West Los Angeles, Stockton, Concord, and Vallejo with two additional fluid depots. We intend to shut one of delivery depots as a part of our delivery network optimization plan.
With both of these acquisitions completed, we are now owned and operate 12 dispensers across California. Our broad retail footprint provides us with a holistic view of the market and allows us to efficiently identify gaps in our product portfolio on a real time basis to meet consumer needs and desires.
This in depth research has led us to several brand and product specific initiatives that are currently underway. This includes a new brand line-up that will feature significant value at the lowest price for gram of flour in our entire portfolio. Additionally, we’ll be rolling out new infused pre-rolls, gummies, vapes and flour varieties. Both improvements will include the looks and brand refreshes as well as the retirement of select performing product line and brand. We’re incredibly excited about the innovation taking place right now. We can’t wait for consumers to see what we in store for them.
And at this point, I’d like to turn the call over to Mike, who’ll discuss the financial results over the quarter. Thanks, Mike.
Michael Batesole
Thank you, Troy, 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 US dollars. It should be noted that we are a US registrant with the SEC and as such, our financial statements are prepared on a US GAAP basis.
Net sales from continuing operations in Q3 ’22 was $19.6 million compared with $18.9 million and Q3 ’21. As a result of our transformation, our Q3 ’22 gross profit improved to 32% to $6.6 million or 34% of sales compared to only $5 million or 26% of sales in Q3 ’21. With continued growth in our omnichannel retail operations, we expect sustained improvement in our gross profit and gross margin.
Total operating expenses for Q3 ’22 was $36.8 million compared to $30.9 million in Q3 ’21. Operating expenses for Q3 ’22 included general adminstrative expenses of $9.7 million, $9.1 million in salary and benefits, and $2.7 million in sales and marketing, which was flat compared with the prior quarter.
Non-cash expenses included $1.1 million at share base compensation, $722,000 in allowance for bad debts, $1.1 million in depreciation and $10.4 million in amortization. Adjusted EBITDA loss for Q3 ’22 was $15.9 million compared to a loss of $18.4 million in Q2 ’22 and a loss of $14.6 million in Q3 ’21. We ended the quarter with unrestricted cash and cash equivalence of $107 million. The company has generated today, approximately $8 million in cash through the sales lease stack of property and the settlement of outstanding litigation in ’22.
As for the closing and qualifying transaction, we’ve invested $54.6 million in acquisitions, $6.5 million in share repurchases and $140 million in operations and integrated scale of the business. Despite our success in meeting our expense targets set at the beginning of the year, market conditions have continued to challenge our ability to efficiently dispose off certain non-strategic assets, and for those assets which we did sell, the proceeds received were less than originally anticipated.
In addition to inflation and consumer software has negatively impacted our ability to generate cash from operations. As a result, the company may immaterial deviate from its objective of maintaining a minimum of a $100 million in cash at December 31, 2022, after considering cash extended on opportunistic partnerships and acquisition transactions.
Nonetheless, Roz will discuss shortly that we have made significant progress in reducing our structural overhead costs, optimizing our delivery depot network and exiting non-core business lines. These initiatives are anticipated to simplify our supply chain, increase gross margins, and most importantly, allow us to invest in the development of our brands and deliver higher quality products to consumers.
At this point, I’d like to turn the call over to Roz, who will discuss the profitability initiatives and cost saving measures that we have undertaken. Roz?
Rozlyn Lipsey
Thanks, Mike, and good evening, everyone. Since we began implementing our profitability initiatives, we have executed on numerous deliverables to simplify our business and leverage our best assets, transitioning to a focus on high margin, high quality revenue sources, and away from the low margin and frankly costly revenue streams we historically relied on.
Our work to date has been successful and we’ve implemented approximately $13.6 million in annual expense savings due to our long-term profitability strategy. Over the course of the year, this is included outsourcing our wholesale distribution activities to matter as we shared last quarter, and since that time, we’ve also entered into agreements with third party providers to temporarily outsource certain aspects of our manufacturing operations, as well as strategic partnerships with cultivators that can meet our brand specifications and allow us to take advantage of current pricing in the California market. On the manufacturing side alone, we expect to see a cost savings of approximately 30%.
Additionally, we recently announced the divestment of SISU, the wholesale extraction division. This was an ideal scenario as it allows us to focus on our higher margin revenue while still ensuring long-term access to SISU’s oil and flower brokerage services through a 24-month supply agreement should California wholesale pricing improve? We were also pleased to find a buyer of SISU that was committed to keeping the good people that worked in that division employed.
The outsourcing of these capabilities gives us the ability to reduce costs of production and realize significant workforce cost savings, while also providing us with the ability to more efficiently explore opportunities to expand the breadth and depth of our products to better serve evolving consumer needs. As I just mentioned, consistent with optimizing our operations, we’ve had a reduction in our workforce of approximately 33% as of October 27, 2022. This has resulted in annualized payroll savings of approximately $10 million.
Recently, we’ve made improvements in advance of proposed changes to California’s Cannabis delivery regulations, which increases the allowed delivery case pack value limit to $10,000 from the previous $5,000, all of which will now be permissible to be product not part of a previously made order. With this change, we optimized our delivery footprint as this increases the geographic area that can be covered by a vehicle and permits for a much greater breadth of product to be carried on board.
This has allowed us to dispose off certain redundant delivery locations, which can now be more efficiently managed by other facilities. These dispositions resulted in approximately $500,000 in gross sale proceeds and an additional annual cost savings of $1.8 million. We look forward to updating you and sharing our progress in the month ahead.
I’d now like to turn the line over to the operator to commence the Q&A for questions. Operator?
Question-and-Answer Session
Operator
[Operator instructions] Our first question will come from Robert Burleson from Canaccord.
Robert Burleson
Hey, everybody. So I guess if I heard it correctly, you said materially different year end cash balance and the $100 million that you had been projecting earlier this year. Is that correct?
Michael Batesole
Immaterially.
Robert Burleson
Immaterially. Okay. Thank you. That’s an important spillable, I guess that I didn’t hear. All right. And then just in terms of what the business is now, right, because you’ve divested some operations and if we think about how you’re positioned in the state versus the competitive landscape, what sticks out to you guys, are you guys unique in terms of the scale of your omnichannel presence or the combination of omnichannel with brands? How do you see yourselves positioned out there in California?
Troy Datcher
Yeah. Hey, Bobby, it’s Troy. Thanks for the question. With the closing of our Coastal acquisition, we’re incredibly pleased with our footprint in California. If you look at those locations the cities that I mentioned earlier today, they are great cities for us from a business — incremental business building opportunity standpoint.
It also is a diverse group of stores, which allows us to really tap into the diverse needs of Californian consumers and as we stated before, we’re taking all of that data and information and it’s informing our product line-up, our innovation plans, our demand plans, that is something unique that we can do that others can’t. And it’s really informing our plans in ’23 and beyond.
I’m really excited over the course of the next couple of quarters to share with you our brand portfolio and the changes we’re making there being led by Esther Song, our CMO. We have some really exciting initiatives on the horizon, many of which I dare to say other California operators cannot execute against because the lack of data information that they have, the footprint that they can’t duplicate as well as the influences that we’re partnering with, I just mentioned that we partner with recently with a YouTube star gamer.
That’s a unique way to reach consumers and to cut through clutter and shape culture is something uniquely we’re positioned to do and we’re going to take advantage of that. So we’re excited about the footprint piece or excited about the data and information we’re collecting. We’re acting on that and you’ll hear more of those plans over the next couple quarters.
Robert Burleson
Okay, great. That’s really all I had.
Troy Datcher
Great, thanks. Thanks, Greg, for you quarter.
Operator
[Operator instructions] And our next question is going to come from Eric Des Lauriers with Craig-Hallum Capital Group.
Eric Des Lauriers
Great. Thank you for taking my questions. Good job on the gross margin improvement. I guess first question here, do you have a sort of, updated potential gross margin range or target that you think you can get to just with all these various changes that you mentioned, outsourcing production you outsource distribution or wholesale to Navis [ph] and now you have that sort of increased efficiency on the delivery side. Could you just sort of talk about, I know it’s early days, but how much of an impact do you think this can have on your gross margin profile going forward?
Michael Batesole
Yeah, Eric, thanks for this question. This is Mike. We’re actually continuing to evaluate that now. We do see improvement there. There’s easily 10% to 15% improvement that we’re going to see in 2023 based on the initiatives that we’ve undertaken thus far. If as long as the current pricing and everything in the market holds true.
Eric Des Lauriers
All right. And then on the brand side, you mentioned you were looking at some brand refreshments. I’m just wondering if you could expand upon that. As you guys mentioned, one of your big advantages is the retail data that you have. I’m just wondering what that is telling you at this point, if you have any few or category places that you’re underrepresented, if you’re leaning too much into premium or value and you need to improve one or the other, I’m just wondering if you could expand a bit more on what the data is telling you in terms of what you should be doing with your brand mix?
Michael Batesole
Yeah, I’ll start and I’ll let Roz jump in. Roz if you want to add any additional commentary, but Eric thanks for the question. The data that — I’ll share with you as much as we won’t give away any secrets, how about that? But I’m excited about the fact that we the data is sharing a couple things with us that will inform our decisions.
One, I think what everyone knows, which is we’re all facing an inflationary period where consumers are being challenged economically. So we see an opportunity to continue to bolster the value segment, and we have a brand today that leaves in that direction, but you’re going to see us double down with that brand with more variety of form factors to reach a broader range of consumers. If you start at a portfolio, there are some segments that we are clearly not playing in that offers an opportunity and one of those segments is for example, is infused pre-rolls.
That’s a segment we don’t play in today. You should expect that you’ll see some innovation from us in that area. And you’ll see again some innovation in the value segment as we’re all gearing up for a challenging economic environment that we don’t see any relief form in the short term.
So we’re excited about that, but there’s also a lot of exploration that the consumers asking us to take to go in a journey with him on him. And we’re excited about what that’s going to allow us to do across the board, but to answer your question succinctly we think value’s going to be a big area of focus and we see a variety of form factors, which are gaps in our portfolio today that we’ll address.
Eric Des Lauriers
I appreciate that, that was very helpful. And then just last one from me any commentary on when we might be able to expect to see some brand licensing revenue coming in? I’m not sure if you had alluded to that in your prepared remarks but just, with curio in Maryland, obviously, you have that, which presumably got more attractive with the legalization of adult use in the future here.
Could you just talk to, like specifically on Maryland any help with expected timing there and then, how much of, I guess how much appetite there is for additional licensing agreements in different markets and how much of a priority that is for you versus just continuing to optimize within California? Thank you.
Michael Batesole
Yes. So the revenue will start to — you’ll start to see the revenue slowly build in fiscal ’23 with curio and we are also planning on signing two more license agreements before the end of this fiscal year, which will also expect to start to deliver revenue in the back half of ’23 and I’ll let Troy expand on that program a little bit more.
Troy Datcher
Yeah, we’re excited about the interest in our brand portfolio outside of the State of California. We’ve got a lot of inbound interest and that comes from our ability to partner with some influencers. We were excited about the opportunity to take our brands to other states and one of the important pieces of criteria that we’ve talked about, Eric, is finding the right partners that can produce the quality product that meets our brand ambitions.
And we are on a journey to do that across states where cannabis is regulational legal. We are have targeted, as Mike mentioned, two additional states over the course of this calendar year and with more to come at the beginning of the year. So in Q1 we’ll have more of an outlook in terms of the number of states for the entirety of ’23.
But we are excited about our first step, which is with the Curio wellness team in Maryland. They met all our criteria in terms of the like-minded partnership that we’re looking for, helping us really establish the protocol procedures and approach that we’ll take to other states. And so we’re excited to see the revenue come in, but importantly getting opportunity to showcase our brands and, and other states and to put them into consumers hand across the US. As we’ve always stated, Eric, we’re going to be national brand builders, and this first partnership in Maryland is the first step along that journey. So we’re excited.
Eric Des Lauriers
And just a quick follow up to that. So Curio revenue should slowly build in fiscal ’23. Any sense is if that’s coming in and, sort of Q1, Q2 or if that should be back half as well. And then just remind us if these, should be like a true, licensing fee, that’s a 100% margin, if there’s perhaps any COGS in there that we should be aware of.
Michael Batesole
Yeah, there the products, once they launch, obviously they need to get into market and sell through, and then on a quarterly basis after that happens, we’ll start to recognize the associated margin with that. There in the first one, we actually are having some initial start-up costs. We’re doing document documentation, SOPs, things of that nature to basically build out the program that then we can replicate and leverage across the rest of the country. But on a going forward basis, there are really no COGS on our behalf or no significant support in order to generate that revenue. It’s truly a licensing deal.
Eric Des Lauriers
Okay, great. Appreciate the help. Thanks.
Operator
That concludes today’s question-and-answer session. At this time, I will turn the conference back over to Mr. Troy Datcher for any additional or closing remarks.
Troy Datcher
So no more questions and operator, I want to thank you and everyone for joining us on the call today. A big thanks to Roz and Mike for joining me this afternoon and a huge thanks to all the employees at The Parent Company for all that you do every day. This has truly been a transformative year, and it’s been because of the hard work by all of you.
Through today’s call, we spoke a lot about our success in 2022 and executing on our strategic plan. This is incredibly important foundational work for us as a company that needs to be completed to put us in the best position to be successful moving forward.
Now, we firmly believe that California is the heart of the legal cannabis industry and as I’ve shared many times with you, we’re building this business not just for today’s marketing, but for the future. To be a leader in California and a world class brand builder, it has required many difficult decisions to do so and steps over the past 12 months. But with much of the work underway, we are more excited than ever about the future; more to come, we hope, you’ll follow us alone the journey and thank you for your time and attention.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
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