TPCO Holding Corp.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Good afternoon, everyone. Welcome to the Parent Company’s First Quarter 2021 Conference Call for the Three Months Period Ending March 31, 2021. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to the Parent Company’s future, financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in the Parent Company’s periodic filings and registration statements. These documents maybe accessed via the SEDAR database. I would like to remind everyone that this call is being recorded today Monday, May 17, 2021.

[Steve Allan:]

Thank you. Good afternoon, everyone and thank you for joining us for today’s call. With me today are Mike Batesole, our Chief Financial Officer; and Dennis O’Malley, our Chief Operating Officer. We know that you all enjoyed that Stevie Wonder custom recording Hold music that was created specifically at the request of Jay Z to accompany the Hype Williams recreation of the Slim Aarons, Good Life Campaign for MonoGram this past month. I hope that each of you have had the opportunity to experience the iconic imagery, which is helping to change the historical narrative and to bring dignity to cannabis. As this is our first earnings call, I’d like to take a few moments this afternoon to review our strategic priorities, and provide an overview of our business and positioning. And then Mike will discuss the financial results and integration efforts. Following that Dennis will review our progress on operations and corporate development updates. Afterward, we will take your questions. We are the leading vertically integrated cannabis company in California that brought together Jay-Z, Roc Nation, Caliva, Left Coast Ventures and SISU to win in the world’s largest cannabis market. We completed our qualifying transaction in January, providing us the Parent Company over $300 million in growth capital, which has enabled us to execute on our vision to consolidate California’s highly fragmented and woefully undercapitalized cannabis market. It’s been just over four months since we completed our qualifying transaction and I’m incredibly proud of the combined work of our united teams that they’ve done to move with urgency to seamlessly integrate into a single more efficient organization. Our three strategic priorities coming out of our qualifying transaction were to advance our product portfolio, to aggressively build out our direct to consumer network and to further bolster our vertically integrated platform in order to maximize our potential margins and to ensure that we are able to meet our future consumer demand. The foundation of our company is dependent upon the vertical integration of our business in California. And to that end, we integrated our core assets, shed non-core assets and improved our product distribution. An essential step to achieve our long-term goals was to ensure we enhanced our access to high quality, low cost cultivation on industry best terms. As such, we are pleased to announce today two transactions that provide access to high quality, low cost outdoor and greenhouse cannabis biomass for the next 10 years, including our acquisition of 4 acres of outdoor cultivation from Mosaic.Ag an affiliate of Soma Rosa Farms, our strategic investment in Mercer Park Brand Acquisition Corp. and our off-take and retail partnership agreements with the Glass House Group. These pivotal transactions coupled with our own award-winning indoor capabilities, provide us with an unprecedented scale and margin advantage through long-term access to a significant supply of high quality indoor greenhouse and outdoor grown cannabis biomass, which covers all of our plan product and brand needs for the foreseeable future and allows us to achieve the full potential of our vertical integration.

[Mike Batesole:]

Thanks, Steve, and good afternoon, everyone. Before starting, I just like to say how excited I am to have joined the parent company team and proud of the work I’ve seen since joining. As a reminder, the results I’ll be going over today can be found in our financial statements in MD&A and all are in U.S. dollars. First quarter 2021 net sales totaled $39.9 million. As Steve mentioned earlier, is important to note that as a result of our qualifying transaction occurring on January 15, we did not report a full quarter of sales. If we had, the first quarter net sales would have been approximately $45.6 million, which includes the net sales of the operating companies from January 1 through March 31, 2021. First quarter gross profit was $7.2 million or 18% of total sales. As noted earlier, the Company’s focus is to drive more direct-to-consumer sales, which will shift the waiting of this product category and overtime is expected to increase gross profit. To that end, the first quarter Company’s consumer to direct websites processed over 150,000 consumer transactions.

[Dennis O’Malley:]

Thanks, Mike, and good afternoon, everyone. As Steve mentioned, we are executed against our stated strategy of building an industry leading CPG product portfolio, expanding our direct-to-consumer business and strengthening our vertically integrated platform. Our strategy for growth will continue to be driven organically and inorganically primarily focused within California, but soon to expand into other states. Within our product portfolio, we recently launched Fun Uncle Cruisers, a one gram vape line at an industry disruptive price point, leveraging our vertical integration. These five SKUs have been our best performing vape products within our D2C channel since their launch.

[Operator:]

Thank you. Our first question comes from Bobby Burleson with Canaccord Genuity. Please go ahead.

[Bobby Burleson:]

Good afternoon. Thanks for taking my questions. Good. How are you, Steve? I think this is for you. So I guess just starting off on the guidance, right? You guys are kind of redacting items. It sounds like you’re pretty far along in the retail distribution efforts you’re talking about 75% reach kind of within the state, by the end of Q3. You’re already at 50%. What’s kind of the thing versus your old guidance? That’s the most uncertain. And I know that wholesale – bulk wholesale and branded wholesale were the biggest drivers of revenue in the near term, but just what’s going on there specifically, maybe that’s causing a little bit of caution.

[Steve Allan:]

Yes. I mean, within the forecast that we’ve had previously and what we’re looking at today, especially within that direct-to-consumer bucket, it really is dependent upon our inorganic and organic activities, which as M&A itself can be uncertain as to when it’s closing. We do have an incredibly robust pipeline. We’re evaluating quite a few retail opportunities that give us both retail and delivery footprint throughout the state, that we’re executing against. Again, the timing of those becomes uncertain. Similarly on the organic side of things that the process of getting permits and licensing up and running, again also, it can have some delays around that and uncertainty as to specific timing. So it really, when we combined all that together, we found it was best to really just withdraw the guidance that we had. So we could focus on the opportunities in front of us. The reality is we do have such a large active pipeline, that there – any guidance that would be given you today most likely would be irrelevant and replaced by the time we do this call again in August.

[Bobby Burleson:]

Yes, fair enough. And then the Glass House deal sounds pretty interesting. And just what you’ve done with sourcing in general with these transactions, I’m curious kind of, if this takes some pressure off of the M&A efforts on that end of the barbell that allows you to focus more on the kind of retail end?

[Steve Allan:]

Okay. Yes. Bobby, you’re spot on, right. When you think about the strategy that we have, right, there is three pillars, right? We’re a consumer products company within cannabis, that’s focused on the direct-to-consumer channel that leverages within California, our vertically integrated platform. And so when you think about the process of us looking to lead in California, it was first about making sure that we had access to the raw materials to help us be able to drive the rest of our business forward. What these two transactions do is provide us the opportunity to start to focus pretty much exclusively on the product and direct-to-consumer side of the house for our future inorganic activities.

[Bobby Burleson:]

That’s great. And then just one last one with the Glass House in particular, you’ve got like a 10 years agreement in place. They’re building out a lot of capacity. Do you have access to their existing capacity with this agreement? Or is it the incremental capacity that’s coming online? How does that work?

[Steve Allan:]

Yes. Now this is a partnership that initiates here in June. So thus we would be having access to both their current and their incremental capacity over time. But both in the off take from a biomass perspective, but also in the retail partnership that we have as they open up and bring online new stores.

[Bobby Burleson:]

Okay, great. Thank you.

[Steve Allan:]

Thank you, Bobby. Take care.

[Operator:]

Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

[Eric Des Lauriers:]

Great. Thanks for taking my questions guys.

[Steve Allan:]

Yes, no problem, Eric. How you doing?

[Eric Des Lauriers:]

Good. How are you?

[Steve Allan:]

I’m great.

[Eric Des Lauriers:]

Okay, good. So two housekeeping questions from me first, before diving in a bit here. So first, do you guys have a rough breakdown between bulk wholesale and D2C revenues in the quarter?

[Steve Allan:]

Yes. So within what was put out there we essentially have about a quarter of it was our D2C and three quarters of it was our wholesale business.

[Eric Des Lauriers:]

Okay, great. And then second I just wanted to clarify that goal of 75% consumer reach by the end of Q3, was that via wholesale or was through your own D2C channels?

[Steve Allan:]

No, that’s 75% is directly to consumers. So that is our D2C platform. We already are well over 450 stores out of the 700 stores from a wholesale perspective and continuing to evaluate which are solid partners for us. But really when we’re focused upon that 50% to 75% shift and eventually to 90%, that is about our direct-to-consumer. So both from a retail and a delivery perspective.

[Eric Des Lauriers:]

Okay, great. And could you just provide an update on currently where you’re at with the retail and delivery operations? How many locations do you have under your belt right now? Was there any rationalization or streamlining there that went along with the reorganization activities?

[Dennis O’Malley:]

Sure, Eric. This is Dennis. So the first question was how many retail and delivery operations do we have right now?

[Eric Des Lauriers:]

Yes.

[Dennis O’Malley:]

Yes. So again, we’re operating at three brick-and-mortar stores and five delivery depots today. And then were your second question around some of the rationalization around that?

[Eric Des Lauriers:]

Yes. Just wondering if there was any rationalization there that went along with some of the reorganization activity that you guys have mentioned?

[Dennis O’Malley:]

Yes. In terms of the integration, again, we are expanding our direct-to-consumer channel. The benefit that we had on the integration was taking the historical Left Coast Venture ventures or LCV products, and being able to actually deliver those into that direct-to-consumer channel. So you’ve seen some of those brands, like Mirayo and Chill that we’re now receiving D2C type of economics on those products. So there hasn’t been anything other than I’d say expansion in terms of the D2C business versus rationalization on it.

[Eric Des Lauriers:]

Okay, great. That’s helpful. And then I oppose, relating to the partnership with Glass House Group, could you expand a bit more on the retail aspect of that? Should we think of this more as like a royalty agreement or is this more of a normal wholesale relationship and then any kind of comments on margins or its impact? That will be helpful. Thanks.

[Dennis O’Malley:]

Yes. So the first part on the clarity around that it’s a whole – a normal wholesale type of relationship there, Eric. So you would look at us being able to supply and provide Glass House retail stores with our full branded product portfolio. So we’re really excited for that partnership with Glass House, as Steve mentioned, as they expand their stores, to be able to provide our full branded portfolio again, from the MonoGram’s to the Caliva, to the Deli’s on their shelves over the next six years.

[Eric Des Lauriers:]

Okay, great. And then any comment on its impact to margins? Or just how we should think about those?

[Dennis O’Malley:]

Yes. Again, in terms of a branded wholesale margins, it’s consistent with our other branded wholesale business, so not the necessarily to call out there.

[Eric Des Lauriers:]

Okay. That’s helpful. And then I suppose moving on to the supply side of the agreements so obviously with similar wholesale economics to your existing operations, it seems to have some attractive pricing. I think you guys mentioned it was best-in-class. How should we think about the pricing in that agreement, given that it is a 10-year term? We’ve seen some fixed supply pricing deals become issues up in Canada and when pricing turns south. So we’d love some color on how the pricing is structured in that agreement, to the extent that you can comment on it.

[Mike Batesole:]

Yes. Eric. No, those are good points. Since you when you look at the supply agreements that we’ve put in place really this provides us the opportunity to get very attractive bulk pricing for us to be able to source, upwards of almost 0.5 pounds of cannabis over the 10-year time period. It does have certain indexes specifically around COGS and CPI, but really the component about the partnership is that we do have the ability, depending on what the pricing is to look elsewhere from a sourcing perspective. If in fact the Glass House Group is not successful in becoming the best-in-class lowest cost producer. That being said, we’ve spent significant time with Glass House over multiple years of evaluating them, and really do believe that they are going to be the leading cultivator from a greenhouse perspective in the state of California, and be able to produce substantial quantities of really high quality, low cost cannabis. And this partnership gives us access to be able to do that. So we’re helping them to jumpstart and be able to accelerate what that production capabilities are. And as such, we’re able to benefit as they bring their costs down as well.

[Dennis O’Malley:]

Yes. And Eric, just to build on top of that, if you take in context Glass House, and you add Mosaic.Ag as well as our indoor cultivation, you’re really looking at a comprehensive flower product portfolio of outdoor greenhouse and indoor that provides us a lot of flexibility in terms of market segmentation, when we’re looking at both current SKUs, brand extensions and as well as new brands. So we’re really excited about having those long-term supply agreements to be able to inform our product and brand portfolio to move forward based.

[Eric Des Lauriers:]

Yes, certainly very exciting agreement there. I guess just last one from me here. So the Fun Uncle Cruisers, I know that was sort of a big focus for you guys. Can you just remind us how sort of disruptively priced those are. And then any kind of early feedback on those would be great. Thank you.

[Mike Batesole:]

Yes, Eric. So they’re priced at $25 for that one gram vape across the SKU base. So again, those five SKUs and the initial five SKUs so far the consumer reviews have been fantastic. We’ve definitely seen the velocity in our D2C business within those Fun Uncle Cruisers. And again, it really leverages the complete vertical integration that we have. So the oil production from the SISU team, our manufacturing from the Caliva manufacturing centers and then our complete distribution capability, both through direct to consumer outlets, but as well as through our wholesale network of different dispensaries up and down the state. So we’ve been very pleased as to the launch of that product.

[Eric Des Lauriers:]

Okay. Great. I appreciate the color. Thank you.

[Steve Allan:]

Thank you. Take care.

[Operator:]

Next question, Scott Fortune with Roth Capital Partners. Please go ahead.

[Scott Fortune:]

Yes. Good afternoon. Thanks for taking the question. On the cultivation side of things, are you satisfied with your indoor? Or does the Glass House agreement kind of supply the high quality that you need for the premium side, or you can look to potentially expand from the indoor side?

[Steve Allan:]

Yes. With our indoor, we’re always looking for opportunities for continuous improvement from a yield perspective, a cost perspective, really trying to make sure that we have the best strains out there. Again, that’s really focused on our high end products. So think about our MonoGram and Caliva products. So really we don’t look at that Glass House deal as a replacement variable. We see it as an augmentation variable. We’ve always had indoor and continue to focus on how we’re expanding that from more of an inorganic perspective, rather than an inorganic perspective. But we have not had a direct cultivation from a outdoor or a greenhouse perspective. And so that’s really what we were focused on in these two transactions was how we were able to secure that biomass for the long-term at an incredibly attractive pricing.

[Scott Fortune:]

Got it. And then real quick follow-up on the Glass House. They currently have four retails right now by expanding what’s the potential size for the retail opportunity through the Glass House agreement here?

[Steve Allan:]

Yes. The current plan from a Glass House perspective is what’s available from their perspectives that they’ve put out there as part of their SPAC transaction with Mercer. And so what it is essentially of their four stores currently, they also have 17 stores as part of the transaction that they’re bringing online. One of which I believe is online, the rest are in development. And they also have a portfolio of licenses that they’ve applied for which we’ll see how they’re awarded those and what those timelines look like. But we really aligned this partnership so that as they expand their retail footprint, we get the opportunity to expand with them.

[Scott Fortune:]

Got it. I appreciate the color. And last one for me, when you look out as you kind of original estimates or kind of outlook, you were looking for roughly 60% kind of on the direct-to-consumer, 40% wholesale as you look out at a couple of years. Is that timeline kind of pushed back because the licenses or fluid find the wholesale piece right now, and then most of the focus will be DTC? How can we look at that split as we look at next couple of years here?

[Steve Allan:]

Yes. I think you’re spot on there, right? This is really about securing that raw material biomass to be able to fill in for our products, to be able to help us on the expansion of that. And we will continue to expand our wholesale accounts and we will continue to very aggressively expand our direct-to-consumer footprint. Clearly, as you just think through the margin profiles, the direct-to-consumer has the highest gross margin profile followed by the wholesale. And so, again, as we look through this, we want to continue to trend towards best-in-class margins within the state. And these were critical transactions for us to be able to do so. You will see over the coming weeks, months and quarters, our continued focus and effort on the direct-to-consumer pipeline and how we’re growing that both organically from a customer acquisition and retention perspective, but also inorganically from a license and location perspective. And it really is how we couple those two things together that will help to drive what that footprint looks like. And over time, we will see the gross margin expansion, both in the efficiencies that we’re able to introduce to the business, but also as we continue to shift a greater percentage of our sales over to that highest margin direct-to-consumer channel.

[Scott Fortune:]

Perfect. I appreciate the color. I will jump back in the queue. Thank you.

[Operator:]

Thank you. Our next question comes from Mike Regan with MJResearch. Please go ahead.

[Steve Allan:]

Mike, are you there?

[Operator:]

Mike, you may be on mute.

[Mike Regan:]

Yes, I was sorry, but I apologize for that. Thanks taking the questions. Real quick. Most questions have been asked. But on the Mosaic.Ag deal they are cookies if I’m not mistaken, so is there any comments around how I guess that relationship will or will not play into the Parent Company’s strategy going forward?

[Steve Allan:]

Sorry, can you clarify the last part of that question, Mike?

[Mike Regan:]

Well, I think in looking at Mosaic.Ag, they are a supplier to the cookies brands. So I was just wondering after you acquire them, what your strategy is surrounding that ultimate brand.

[Dennis O’Malley:]

Yes. I think again, in the context of looking at such a high quality type of operator like Mosaic.Ag, one of the benefits to that acquisition was certainly the type of genetics and the type of track record that they’ve had in terms of growing. So we’re extremely excited about leveraging a lot of their general traditional candidate knowledge, as well as their genetics to be able to put into our existing products and potentially new products out there. So you’re right. They have a great reputation in terms of being great cultivators and really excited about announcing that acquisition.

[Mike Regan:]

Okay. Thank you very much.

[Operator:]

Next question, Bobby Burleson with Canaccord Genuity. Please go ahead.

[Bobby Burleson:]

Hi, guys. Just one more for me just to make us drag on a little bit longer.

[Steve Allan:]

No, problem, Bob.

[Bobby Burleson:]

Just curious about going back to the Glass House agreement, just curious whether or not your wholesale sales into their retail store network are tied any way through off-take agreement to kind of focus independently? Or is there something embedded within those agreements that kind of tie the two together?

[Steve Allan:]

Yes. Well, it’s one partnership, these are two separate agreements between the companies. So it is a really deepening of the relationship between the two organizations to ensure that we’re able to touch base with them on all components, both from an ability to take their best-in-class greenhouse flower and be able to put it into current and future product and brand lines over the long-term, but also to ensure that we’re able to place our products on their shelves across their expanding store footprint, so that more consumers have ready access to our best-in-class products that we build out. But those are our two separate agreements just simultaneously executed between the companies.

[Bobby Burleson:]

Okay. Great. And then just as a follow-up to that, they’re filing talks a lot about wanting to have an unusually high share of their own shelf space with their own brands. And so that’s ambition of theirs. What is it that you typically were most attracted to in terms of the wholesale agreement that you guys struck? Is it the MonoGram brand or something else that make someone to make – make this type of a deal, or just any thoughts there relative to their own shelf space ambitions?

[Dennis O’Malley:]

Yes. No, I appreciate the question. Much like we’ve found at the Parent Company is that we have success in both our first party and third-party brand through DTC channel. I think Glass House sees the same. And I think it’s really the breadth and depth of our product portfolio and our ability to be able to execute against that, to always have products on the shelf to always be a consistent supplier. But certainly as you mentioned, Glass House, like many other stores are looking to say, hey, how do you get MonoGram on the shelf? But you can see the other brands that we have, whether it’s Caliva or Fun Uncle or Deli or Chill. We have a broad selection of products everywhere from flower to the funnel vape to Deli Nickels. And I think that real branded portfolio and the depth and breadth of that I think what was attractive to Glass House around That.

[Bobby Burleson:]

Okay. And then since you’re going to be growing to a certain degree, are there any additional efficiencies in terms of wholesale distribution and cost savings, or kind of a hub spoke set up maybe to some of their stores or will it pass through this similar kind of supply chain that your other products would?

[Dennis O’Malley:]

Yes. I think that the great thing about integrating in Glass House to our existing wholesale distribution network is the actual logistics around that is a very small incremental lift. We already have our shipping lanes up and down the state, in all of our stores that we deliver to on a monthly basis today. So they have great locations. They have locations in Berkeley, LA, in Orange County, in Santa Barbara, all of them are within our current existing wholesale distribution logistics routing today. So the actual capability for us to be able to bring on those four stores initially, and then those 17 other stores, as Steve mentioned that are coming online, it is going to be a very small incremental lift for us. So there will be a lot of efficiencies incorporating them into our wholesale network.

[Bobby Burleson:]

Great. Thanks, Dennis. Thanks guys.

[Operator:]

Thank you. I would like to turn the floor over to Steve for closing remarks.

[Steve Allan:]

Thank you. Thank you for joining us today. I’d like to thank our team who has worked diligently to successfully integrate our house of brands and to establish the foundation for long-term success. The Parent Company has an incredibly strong balance sheet and a long runway for growth, both organically and inorganically. and we’ve planned to leverage our competitive positioning to reshape the industry in California and the future of cannabis, both nationally and internationally. We look forward to speaking to you all in August when we will announce our second quarter results. Have a wonderful evening. Thank you.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.