TPCO Holding Corp.
Q2 2021 Earnings Call Transcript

Published: 16 Aug 2021

[Operator:]

Good afternoon, everyone. Welcome to the Parent Company's Second Quarter 2021 Conference Call for the three months period ending June 30, 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. 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 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 IFRS financial measures, including references to adjusted EBITDA, which do not have any standard meaning under IFRS and therefore, may not be comparable to similar measures presented by other companies. For more information about both forward looking information and non-IFRS financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable IFRS measure please refer to the parent company's management discussion and analysis available on SEDAR. I would like to remind everyone that this call is being recorded today, Monday, August 16, 2021. I would now like to introduce Mr. Steve Allan, Chief Executive Officer of the Parent Company. Please go ahead, Mr. Allan.

[Steve Allan:]

Thank you. Good afternoon, everyone and thank you for joining us for today's call. With me on the line today is our Chief Financial Officer, Mike Batesole; and our Chief Operating Officer, Dennis O'Malley. I'd like to take a few minutes this afternoon to review our results and recent successes. And then I'll discuss our strategic priorities for the remainder of the year. Briefly taking a look at our results for the quarter, our Q2 2021, net sales grew 19% sequentially to $54.2 million. Our Q2 sales were driven by wholesale and direct-to-consumer growth of 23% and 7% respectively. We remain well positioned with an industry leading balance sheet as we execute on our consolidation and expansion initiatives to add both depth and scale to our business in the California cannabis market. This strategy includes growing our retail and delivery footprint to expand our reach to a broader market of potential consumers across the state. Subsequent to the quarter end, we acquired two new retail dispensaries Calma and Jayden's Journey. Calma is located in the Los Angeles metropolitan area, with a population of more than 18 million people. This 3250 square foot dispensary is one of only 10 stores in the popular area of West Hollywood, and is licensed for both delivery and storefront retail. Jayden's Journey is located in Ceres, California, which is in the Modesto metro area and increases the company's consumer delivery reach to an additional 1.7 million people. In addition, we have also opened our new consumer delivery hub in Chula Vista which will service an additional 3.3 million residents of the greater San Diego metro area. Further as we've announced earlier today, we acquired another consumer delivery hub covering the Sacramento metro area expanding access to an additional 2.4 million residents there. In total, these openings have expanded our state consumer delivery reach from 50% to over 70% of the California consumer population. As of today, we're operating five omnichannel retail locations, and three consumer delivery only hubs, all accessible via caliva.com and through the Caliva App on the Apple App Store. From an inorganic perspective, we have completed four transactions for total consideration, inclusive of potential earnouts of $31.6 million, of which 17.6 million is in cash and 14 million is in equity, which represents an annualized monthly recurring revenue multiple of 1.4x. As we evaluate potential M&A targets, our focus is on driving strong, long term shareholder value. As such, we have developed a deep evaluation criteria to ensure that potential transactions are both accretive to our business and aligned with our strategic growth plans. Outside of California, we have made progress on our plan to leverage the existing strength for consumer brands focused on MONOGRAM to expand using an asset-light strategy through licensing and co manufacturing partnerships. We're evaluating numerous opportunities across a variety of partners and states. And we look forward to updating you regarding our ongoing progress here on the back half of this year. Turning to another important area of focus, I also like to take a moment to update you on our social equity initiatives. We're at the forefront of a generational wealth creation opportunity and we strongly believe there's a responsibility to promote a diverse and more equitable cannabis marketplace. In May, we finalized our social equity advisory committee, and in June we completed our first two investments. Our first social equity corporate venture fund investment, Josephine & Billie's was founded by Whitney Beatty, and is developing a welcoming and educational retail experience for women of color thus filling an existing void for this important demographic within the Los Angeles market. With our investment Josephine & Billie's is expected to open its first retail location this fall. Our second investment was in the Peakz Company, an Oakland based cannabis brand founded by Jessie Grundy. Our investment will both expand the available working capital to grow the business, which has expanded over 20% and to allow Peakz to leverage our expansive direct-to-consumer capabilities and retail locations, enhancing their footprint in the California cannabis community. The Peakz strains are available for sale on caliva.com and at all Caliva retail locations. Finally, we continue to focus on building a world class leadership and management team. And today we announced that we have brought on Troy Datcher to assume the role of CEO in September. Troy joins us with over 20 years of experience at Clorox, and he brings deep CPG knowledge to this role. During his time with Clorox, Troy oversaw their global sales organization, and most recently, he served as Senior Vice President and Chief Customer Officer. I know I speak on behalf of our entire team in welcoming Troy. I look forward to working closely with him over the next few months to ensure a successful transition. All of these efforts, together with our unique growth strategy and industry leading balance sheet have positioned our company for strong, long-term growth. We look forward to updating you on our progress as we continue to execute over the coming months and quarters. At this point, I would now like to turn the call over to Mike who will discuss the financial highlights of the second quarter. Mike?

[Mike Batesole:]

Thanks Steve and good afternoon, everyone. As a reminder, the results I'll be going over today can be found in our financial statements and MD&A all are in US dollars. Q2 2021, net sales totaled 54.2 million, representing an 18.9% growth compared to the adjusted Q1 2021 revenue of approximately 45.6 million. The sequential increase in revenue was driven by a 7.2% growth in our direct-to-consumer business and a 22.6% growth in our wholesale business, which totaled 11.9 million and 42.3 million respectively. Our Q2 2020 gross profit was 8.1 million or 15% of total sales. The company remains committed to driving direct-to-consumer sales, which will shift the weighting towards first party products over time, and is expected to increase both our gross profit and gross margins. Q2 2021 operating expenses of 60.7 million, which included 31.8 million of non-cash expenses, in the quarter, cash expenses included general and administrative costs of 11 million, salaries and benefits of 10.4 million in sales and marketing expenses is 7.4 million. Non-cash expenses included stock based compensation of 6.1 million, depreciation and amortization of 9 million, and a 16.7 million impairment loss associated with exiting several non-core licenses. Our Q2 2021 adjusted EBITDA was a loss of 10.4 million and was primarily attributable to ongoing operation of the company's core business. We ended the quarter with 257.5 million in cash and cash equivalents and as Steve noted earlier, we are well funded to continue executing our consolidation strategy. As part of our cost reduction integration plan, in May 2021, the company committed to a plan to sell three licenses and transfer related right of use asset and lease liability, which were acquired as part of the Caliva, OGE, and LCV acquisitions on January 15, 2021. As a result, an impairment loss of 15 .8 million was recognized on the intangible assets and 0.3 million on the right of use assets. In addition, the company recognized an impairment loss of 0.6 million in operating expenses on two property leases where the company has vacated the premises. Before I hand over the line, I'd like to briefly mention that we recently filed a registration statement on Form 10 with the United States Securities and Exchange Commission to register our common shares and share purchase warrants in advance of potentially being permitted to list in the common shares and warrants on the New York Stock Exchange or the NASDAQ. This is an important first step on our pathway to potentially uplifting to a major US Exchange when permissible. We are rounding out key assets. And we need to lead California's cannabis in 2022. And we are pleased with the progress we've made in Q2 and with the plans ahead of us for the remainder of the year. I would like to turn the line over to Dennis to discuss our progress against our strategy and corporate development activities.

[Dennis O'Malley:]

Thanks Mike and good afternoon, everyone. As both Mike and Steve mentioned, we are executing against our stated strategy of expanding our consumer packaged goods portfolio, strengthening our direct-to-consumer business and completing our vertical integration foundation. This growth is driven organically and inorganically starting in California. On the product portfolio front in Q2, we launched Fun Uncle Cruisers with live resin, a one gram vape cartridge available in four strains at a uniquely affordable price point of $36. In the first full quarter, since we launched the cruisers vape product line back in March, the Fun Uncle Cruisers have ranked number six in California for brand new to sales in the one gram distillate vape category according to BDSA. The launch of cruisers with live resin extends this approachable product line to consumers thinking the robust flavor and enhanced experience that live resin products deliver. The cruisers product line takes advantage of our vertical integration capabilities, including our in-house oil production. On the flower side we continue to see Caliva's Alien OG and Fun Uncle Shotgun OG to place in the top 10 ranking of bestselling flower in California according to Headset's weekly report. For MONOGRAM we continue to benefit from the nationally recognized brand campaigns including the Good Life campaign, which was inspired by Slim Aarons and photographed by Hype Williams, and generated 228 pieces of media content and over 824 million impressions. The MONOGRAM campaigns have created demand from out of state operators looking to partner with the parent company to bring MONOGRAM into their respective states. The campaigns have additionally been successful in generating demand from in state dispensaries looking to carry MONOGRAM in their stores. We've continued to strengthen our direct-to-consumer business. We've recently launch an upgraded shoppable App available through Apple's App Store, allowing California based consumers to make cannabis purchases through the app. The shoppable Caliva app is available for download through the Apple App Store for consumers 21 and older throughout California. The app provides our consumers with the ability to browse products, complete in app purchases, schedule a delivery or pickup and track their order. Since its launch just four weeks ago, the app has contributed to approximately 9% of our online commerce with a 25% increase in conversion rate. In addition to our app, we continue to see traction and increased consumer engagement through our integrated loyalty program Caliva CLUB, which counted 23,000 customers at the end of Q2. Additionally, customers participating in the loyalty program are spending over 30% more than customers not participating in the program. As Steve mentioned earlier, we've made solid progress on expanding our direct-to-consumer platform and California and have a deep pipeline of potential acquisition targets that we are currently evaluating. Today we operate five omnichannel retail locations, and Calma it in West Hollywood will be our sixth retail location, subject to regulatory approval and certain closing conditions. In addition to our retail locations with our new Sacramento delivery location, we now have three consumer delivery hubs in major metro areas. This DTC footprint allows us to service more than 70% of California consumers. As a result of this expanded coverage, we served over 58,000 customers and processed over 165,000 transactions in Q2. Our goal remains to achieve approximately 90% consumer coverage in California by early 2022 and we remain on track to reach that target. From the traction of our cruisers product line, to the MONOGRAMs national exposure, to our expanded DTC footprint California, we are executing against our vision of building great products, providing ubiquitous access and offering great value and service. I look forward to providing you updates on the strategy in the months to come. I'd now like to turn the line over to the operator to commence the Q&A session. Operator?

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Bobby Burleson of Canaccord. Please go ahead.

[Bobby Burleson:]

Hi, thanks for taking my questions. So I guess Steve this is for you. Trying to understand the context of being on track to that 90% coverage of consumers in California, it seems like the ramp of DTC or retail distribution, at least versus planning you guys set out during the time of the De-SPAC seems a little bit behind. So is there a big hockey stick in terms of number of delivery hubs, you guys expect to bring online here in the second half or stores? Just maybe a little bit more color on what's keeping you guys on track here in the second half?

[Steve Allan:]

Yeah. Hey, Bobby. Good to chat with you. Yeah. So then in regards to building out the physical infrastructure for our direct-to-consumer, we definitely had a slower rollout than we had anticipated in the first three months following the qualifying transaction. But we have seen that start to accelerate here over the last 90 days. So if we actually go back to what our envision rollout was. Our envision rollout was to get to somewhere between 75% to 80% of the California population by the end of 2021, and get close to 90% by the end of 2022. Based on the current pipeline of activities that we're looking at from a direct-to-consumer basis, we'd expect that we're going to actually exceed the 75% here by the end of the year and think that we'd achieved the 90% significantly earlier into 2022. So while we definitely - we're slow out of the gates on getting the direct-to-consumer access points up and running, but we've definitely seen a robustness in that pipeline and an ability to get deals done. And we anticipate continuing that over the subsequent 90 days upcoming.

[Bobby Burleson:]

Great, so when we refer back to those original kind of - I think you were talking about 14 points of distribution in Q2 and then 24 by Q3 and so on, eventually reaching 40, I think, by the exit of '22. Are you on track in terms of those numbers? Or is there a different way to think about how you guys are on track?

[Steve Allan:]

I think it's probably best covered by the percentage of the population that we can cover and really one of the things that has us excited about the opportunity to expand to more locations, and to be able to grow those locations more rapidly is the fact that the Apple Store is now allowing for an App which we recently launched, as Dennis covered. And so for us, we actually see this as an even more important imperative for us to accelerate on the direct-to-consumer side to really be able to grow that base. We know that this is the opportunity or the best in class out there from a cannabis delivery perspective, to be able to reach out to those consumers and be able to build that relationship with them. And so we really want to be able to cover the entirety of the state as quickly as we can, or at least the vast majority of the state as quickly as we can, and really be able to get them on the App and get them on to the loyalty program, be able to drive that stickiness and continued growth. And so when we look at it we really look at it from that percentage perspective. In regards to the number of outlets that will continue to evaluate the opportunities that are presented in front of us. Every time we look at that position, we're looking at something that we can operationally enhance and that's accretive to the business, both in the short-term and on our long-term goals. And we'll continue to really keep that focus on the direct-to-consumer. It is a robust pipeline that we have. And I would expect that you'll continue to hear about more opportunities for us to cover a greater percentage of the total population and also be able to cover it with increased density as we move forward.

[Bobby Burleson:]

Okay, great and then you guys had a kind of a barbell strategy in terms of how you want to consolidate. And originally you were talking about the fragmentation of the number of cultivators in California as an opportunity. But it sounds like you're thinking of more of an asset-light approach to that side of the supply chain, is this substantially less capital intensive business than originally envisioned in terms of how you guys plan on sourcing biomass?

[Steve Allan:]

Yeah, so I think we should provide a little bit of clarity here, Bobby. So in regards to the barbell approach, that barbell approach is really for the state of California as we go to take our leadership position within the cannabis economy here. And really, that focus has been predominantly on that direct-to-consumer, how we're helping to solve the access problem within the state. Again, we have to recall that dispensers per capita look more like Florida, and about a tenth of what they look like in Colorado. And so from that perspective, we continue to look at what those opportunities and prioritize those opportunities. That being said, we've always been on the lookout for opportunities within cultivation, to help us further secure that supply chain as we continue to grow those retail outlets, to be able to help support us from a biomass perspective. We do have an incredible sourcing network that we have with the C-Suite folks and that has really helped us up to this point, but longer term, really as we hone in on genetics. And as we really are building out our signature strains, we recognize that we likely going to need to produce greater amounts of biomass to be able to feed into our branded first party products to be able to go into those first party distribution channels. And so we will continue to be opportunistic around cultivation assets that come up as well.

[Bobby Burleson:]

Okay, great. And just one last -

[Steve Allan:]

So just in regards to the asset-light that really is an out of state component. So when you think about us going to other states, such as the Tri-State area, or into the Midwest or the Southeast, those really are opportunities where we're looking to do the asset-light, which is a licensing - co-manufacturing type of opportunity, rather than going in and buying ground up cultivation manufacturing, like we have within California.

[Bobby Burleson:]

Sure, okay. I was kind of taking the cue from the Glass House. I know you guys didn't consummate that, but it seemed like you were trying to maybe secure supply in a different way than owning it yourself. So is that still a strategy and you're just kind of reevaluating the partners that you want to work with there?

[Steve Allan:]

Well, I think when we look at the securing of biomass of - whether that's done with a great partner, who can help to cultivate and provide us the biomass and the strains that we need, or whether that's us doing it ourselves, both options are on the table. And so that's what we continue to evaluate the opportunities there. For Glass House in particular, it was really more of a timing issue. Our investment was based on concurrently participating in their qualifying transaction, which ultimately occurred sooner than either party had expected and the negotiations related to our plan 10-year off take and retail agreements, just couldn't get consummated in that time, we continue to be on good terms with Glass House and have those conversations. But we'll explore all access points to cultivation, whether that's these cost advantage off take agreements, or whether that's acquisition and direct ownership of the cultivation assets, recognizing that our balance sheet gives us a competitive advantage and being able to really strike the best deals there.

[Bobby Burleson:]

Sure makes sense. Just one last one on the mix you guys have, it's still heavily wholesale and you need, obviously, retail distribution to really pick up to get the margins going the way you want. And when we think about the second half, are you guys expecting kind of typical cannabis seasonality in the second half, a nice step function higher in the second half? Will that lift margins, or you guys based on kind of the timing of consummation of some of the deals you want to do still looking at a much more wholesale heavy kind of revenue mix?

[Dennis O'Malley:]

Yeah. Bobby, this is Dennis. So I think there's a couple ways to look at that. I think primarily, the focus obviously has been in the direct-to-consumer channel, where we do see increased margins. I think when you look at our product portfolio, in terms of everything from whether it's vape pens to high end ultra-premium products like MONOGRAM, you're going to see that we have a pretty diverse line of products that will help on a branded product basis, be able to weather any type of general seasonality from a direct-to-consumer basis. Really, a lot of the focus that we have, as Steve mentioned, is the online portion of that DTC, where we do see a lot of the consumers opting into that loyalty program, starting to purchase through the App, we're seeing increased conversion rates from that and increase spending from consumers around that. So I think you'll continue to see a focus from that direct-to-consumer channel, which will have an ongoing impact in terms of what our general margin mix is, but that's the focus area.

[Bobby Burleson:]

Okay, great. Thank you.

[Steve Allan:]

Thank you.

[Operator:]

Your next question comes from Eric Des Lauriers of Craig-Hallum Capital. Please go ahead.

[Eric Des Lauriers:]

Great, thanks for taking my questions. I was wondering if you could expand a bit more, you mentioned your strict acquisition criteria maybe just expand a bit more on that. And help us understand how the list of potential targets within California has either grown or shrunk since your De-SPAC process.

[Steve Allan:]

Yeah. Hey, Eric, how's it going? Yeah, so in regards our acquisition criteria, our acquisition criteria really is that it matches and fits within our strategy about putting more first party products through first party channels. And so by definition, that's going to be anything that supports our first party products, whether that's biomass or unique form factor opportunities, and then direct-to-consumer really about how we're producing more of those outlets themselves, and what that helps to drive there. But we're looking for things also that are priced correctly, and that we can operationalize. I think, specifically, when you think about things such as our direct-to-consumer, we're really been focused on retail locations that really haven't taken advantage of the totality of the delivery market that exists out there. And us being able to leverage our proprietary software and the App that Dennis was describing, to be able to help drive increased sales volume. We've seen that about two thirds of our total sales come online, with about a third and being delivering a third being a pickup. And so when you really look at that opportunity, we see that as a great chance to drive enhanced revenues and profitability, and total product flow through these different locations. In regards to the list of targets, and that has been growing and frankly, it's been growing with higher quality assets that really are meeting more of the combination of operating performance and financial expectations around valuation that make for good acquisition opportunities. I think we're coming into the tailwinds from the De-SPACing process, and what was taking place from the November election to the Georgia runoff in January, I think there was a little bit of additional excitement out there in the market that may be caused for either potential targets to believe that there's more opportunities, either from a funding perspective or from an acquisition perspective that slowed that pipeline down. And so while the pipeline was full, the pipeline wasn't full vertical call qualified targets at that point in time. It really what we've seen over this last 90 days is that the qualification of those targets has significantly increased. And we're very excited about what that pipeline looks like and, and do expect that if things continue as they currently are, that we'll be able to execute upon our inorganic strategy, specifically within that direct-to-consumer basis.

[Eric Des Lauriers:]

Okay, that's helpful color. Thanks for that. Next question for me is on integration, costs margins. So one of the opportunities you guys called out was being able to get over 70% gross margin on your value to your vapes here. I know that there was a pretty significant integration process in those early months here. So with margin still being lower than what we're seeing with some of the other cannabis companies here. I was wondering if you can comment on where you are in the integration process from a cost perspective. Is there room for gross margin improvements beyond shifting the product mix, just kind of trying to understand where you guys are in the cost and margin synergies within this integration and kind of just helping us understand where those synergies are and if there's room for some gross margin improvement beyond shifting the product mix or channel mix here. Thanks.

[Mike Batesole:]

This is Mike. Yeah, that's a great question. And it's something that we're heavily focused on. I think, from the integration standpoint, we continued to make solid progress in Q2, we just added another leader, supply chain leader to the business, which I believe is going to help us on the distribution side, so the inventorying, and distribution and buying side. And then we've made progress in cultivation, we've just added a new cultivator to lead cultivation for us. And so in our 27,000 square foot facility, I expect to see yields improve over time, significantly, actually. And I think that in manufacturing, we've already - we've consolidated the LCV manufacturing to our San Jose. So we're actually able to leverage that facility across a broader portfolio, which is allowing us to, one, save money on labor and then two, will allow us spread overhead over a greater number of units. So we should see improvement there in addition to - for layouts, and things of that nature. So I do think that there is going to be improvement on the margins on all three of those legs of the stool, and they are not going to be dependent on whether it's first party or third party sale.

[Eric Des Lauriers:]

Okay, that's helpful color. And I guess just last one for me here. Can you just help us understand where you guys are in negotiations for licensing your brands in states beyond California? Should we think of you guys focusing on executing on this California strategy first, before you look to license your brand out into additional states? Or is this sort of higher on the priority list? Just as we kind of look out towards the second half and '22 and beyond, sort of what we should expect first just you guys to continue developing DTC portfolio in California or any of these states beyond California licensing the brands out if that's anything that is on any near term horizon here. Thanks.

[Steve Allan:]

Yeah, another great question. Really, we don't view these as sequential, we view these as concurrent and clearly the opportunity within California is present. And we have the ability to play our balance sheet accordingly to be able to move through the vertical execution there. So you'll see faster progress there as you've seen thus far, but we continue to be in negotiations with several operators across several different key geographies that are important to us. And so we continue to work our way through that. My expectation is that we would have the first of those deals completed here on the second half of the year. So you'll start to see us announcing what those deals are, but then the monetization from those deals, given the time that it takes to get their products, facilities, up to the standards that we see here within California, likely means that its products that will be launched on the second half of 2022. So really, when we look at the financial performance for the business, they'll be predominantly dependent upon the California operations over the next 12 months. But you'd start to see some increased significance on that asset-light licensing approach as you get into the back half of 2022.

[Eric Des Lauriers:]

Okay, and just to clarify there, so we could see some announcements sort of in the second half of this year, but not to expect any monetization from that until the second half of next year. I just want to make sure that I understood your answer correctly.

[Steve Allan:]

That's exactly correct. Yes.

[Eric Des Lauriers:]

Okay, great. All right, thanks, guys. That's it for me.

[Steve Allan:]

Yeah. Thank you, Eric.

[Operator:]

Ladies and gentlemen, this concludes your conference call for this afternoon. We thank you for participating and ask that you please disconnect your lines.