Tpco Hldg Corp

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 or 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 U.S. Securities and Exchange Commission website at .sec.gov or CDAR at .sddar.com. Forward-looking information provided in this call speaks only as of the date of this call and is based on the plan's police 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 expressively required by actual law. In addition, during the course of this call, there may also be references to certain non-GAAP financial measures, including references to the adjusted EBATA, which do not have any standard meaning upon the GAAP and therefore may not be comparable to similar measures presented by other companies. For information about both forward-looking information and non-GAAP financial measures, including the reconciliation and adjusted EBATA to the most directly comparable GAAP measure, please refer to the company's quarterly report on Form 10Q, including management's decision and analysis available on the SEC's website and CDAR. 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 Dasher, Chief Executive Officer of the parent company. Please go ahead, Mr. Dasher.

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 successfully transformed our business in 2022, establishing a strong foundation for us to accelerate our growth plans in 2023. Then I turn the call over to Chief Financial Officer Mike Batesl, who will review our Q3 2022 financial results in more detail. Following Mike, Executive Vice President of Operations and Co-Sales, Lars Lipsy, will provide an overview of the operational optimization that's taking 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 is presented. I'm really proud that our team has come together and leveraged our strengths, 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 action we've taken is working, and I'm proud to see our company emerging as the California leader. The initial signs of our success are clear. As our third quarter revenue grew .5% over a 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 in gross margins, which improved to 34% in the third quarter compared to 26% in the third quarter of 2021. And well in line with our estimated objective of expanding gross margins 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 our sales by a significant margin. This next will further drive our profitability as our in-house brand products generate higher gross margins than third-party offerings. Looking at our brand building, in September, we hosted the exclusive launch of Recovery at a Como West Hollywood location. Recovery is a premium cannabis brand co-founded by a YouTube star and co-founder of the popular e-sports and entertainment organization, FaZe Clan. Recovery was developed by FaZe Rain in partnership with our premium cannabis brand, Cleva, and was created to support a lifestyle focused on wellness and creativity. Our priority as a company is to work with authentic leaders and innovators in this space. 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 of our first -of-state expansion partnership with Curio Wellness in Maryland. We were thrilled to announce to East Coast consumers that our premier West Coast brands will be available for the first time. We are excited that we are just weeks away from launching and consumers can expect to begin seeing our brands, a variety of brands, including Monogram, Cleva, Mariah by Santana, Cruisers, as well as others, at Curio's far and daughter dispensary soon. Maryland consumers will have a variety of form factors available to them such as jar of fresh flowers, pre-rolls, premium baits, and infused gummies. This exciting launch will also feature signature strains curated by Curio in collaboration with us. We anticipate broad distribution to dispensaries across the state the following 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 pot tables, smell before you buy opportunities, curated location-specific product menus, and a new blaze bar where consumers can learn how to roll a joint, dab, understand turpines, or take a workshop. During the quarter, we completed the acquisition of the remaining 15% equity of our Calma West Hollywood dispensary following receipt of all necessary regulatory approvals. Completing this acquisition was a fantastic milestone for the company. Calma West Hollywood is in a beautiful location surrounded by cultural destinations, church attractions, which boasts the best flower store 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 delivery depots. We intend to shutter one of the delivery depots as a part of our delivery network optimization plan. With both of these acquisitions completed, we now own and operate 12 dispensaries across California. Our product portfolio is a key part of the market and allows us to efficiently identify gaps in our product portfolio on a realtime 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 lineup that will feature significant value as the lowest price program of products. We are also working on the creation of a new product line that will allow us to incorporate new products into our entire portfolio. Additionally, we will be rolling out new pre-rolls, gummies, vapes, and flower varieties. Both improvements will include new looks and brand refreshes as well as the retirement of select on the performing product line and brand. We are incredibly excited about the innovation taking place right now. We can't wait for consumers to see what we ask to work with them. And at this point, I'd like to turn the call over to Mike. We'll discuss the financial results over the quarter. Thanks, Mike.

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 in MD&A contained in our quarterly report on the form 10Q. All figures are in U.S. dollars. 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. Net sales from continuing operations in Q3-22 was 19.6 million compared with 18.9 million in 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 omni-channel 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 expenses of 9.7 million, 9.1 million in revenue, 2.7 million in sales and marketing, which was flat compared with the prior quarter. Nine cash expenses included 1.1 million in share-based compensation, 722,000 in allowance for bad debts, 1.1 million in depreciation, and 10.4 million in Q2-22 and a loss of 14.6 million in Q3-21. We ended the quarter with unrestricted cash and cash equivalents of $107 million. The company has generated today approximately 8 million in cash through the sales lease stack of property and the settlement of $107 million. In the last quarter of Q3-22, we have invested $54.6 million in acquisitions, $6.5 million in share repurchases, and $140 million in operations and integrated scale of 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 of 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 softness has negatively impacted our ability to generate cash from operations. As a result, the company may immaterially deviate from its objective of maintaining a minimum of $100 million in cash at December 31, 2022 after considering cash expended on opportunistic partnerships and acquisition transactions. Nonetheless, Roswell discussed 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 Ros, who will discuss the profitability initiatives and cost saving measures that we have undertaken. Ros?

Thanks, Mike, and good evening, everyone. Since we began implementing our profitability initiatives, we have executed on numerous deliverables to simplify our business and to make sure that we are not losing money. We have been successful in implementing approximately $13.6 million in annual expense savings due to our long-term profitability strategy. Over the course of the year, this has included outsourcing our wholesale distribution activities to NABIS as we shared last quarter, and since that time, we have 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 CSU, 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 CSU's oil and flour brokerage services through a 24-month supply agreement, should California wholesale pricing improve. We are also pleased to find a buyer of CSU 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 cost 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 of certain redundant delivery locations, which can now be more efficiently managed by other facilities. These dispositions resulted in approximately $500,000 in growth sale proceeds and an additional annual cost savings of $1.8 million. We look forward to updating you and sharing our progress in the months ahead. I'd now like to turn the line over to the operator to commence the Q&A for questions. Operator? And

thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, please press star 1 to ask a question. And our first question will come from Bobby Burlson from Canaccord.

Hey, everybody. So I guess if I heard it correctly, you said materially different year-end cash balance than the $100 million that you had been projecting earlier this year. Is that correct? Immaterially. Immaterially. Okay. Thank you. That's an important syllable, 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, you know, what sticks out to you guys? You know, 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 -a-vis the landmines out

there in California? Yeah. Hey, Bobby. 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 California consumers. And as we stated before, we're taking all that data and information and it's informing our product lineup, 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 of 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 partnered with recently with a YouTube star gamer. That's a unique way to reach consumers and to cut through clutter and shape culture. It's 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 of quarters.

Okay, great.

That's really all I had. Great. Thanks, Greg, for being here for me this quarter.

And once again, if you'd like to ask a question, please press star one. And our next question is going to come from Eric. Does Larry's Craig Hallam Capital Group?

Great. Thank you for taking my question. 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, outsource distribution or wholesale to NABIS? And now you have that sort of increased efficiency on the delivery side. Could you just sort of talk about, you know, I know it's early days, but how much of an impact do you think this can have on your gross margin profile, you know, sort of going forward?

Yeah, Eric, thanks for this question, Mike. We're actually continuing to evaluate that now. We do see improvement there. There's, you know, easily 10 to 15 percent improvement that we're going to see in 2023 based on the initiatives that we've undertaken thus far. As long as the current pricing and everything in the market holds

true. 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. You know, as you guys mentioned, you know, one of your big advantages is the retail data that you have. I'm just wondering sort of what that is telling you at this point. I'm just wondering if you have any view or category, you know, places that you're underrepresented, if you, you know, 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, you know, what the data is telling you in terms of what you should be doing with your brand mix.

Yeah, I'll start and I'll jump in rather if you want to add any additional commentary. But everything for the question, you know, the data that I'll share with you as much as we won't get way in your secrets. How about that? But I'm excited about the fact that we the data is shared with 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 leads in that direction. But you're going to see a double down with that brand with more variety of form factors to reach a broader range of consumers. If you start a portfolio, there are some segments that we're clearly not playing in that that offers an opportunity. And one of the segments is, for example, is it infuse 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 from in the short term. So we're excited about that. But there's also a lot of exploration that the consumers asking us to to to take it to go on a journey with them on it. And we're excited about what that's going to allow us to to to do across the board. But to answer your question succinctly, we think value is 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.

I appreciate that. That's very helpful. And then just last one from me, any commentary on when we might be able to expect to see brand licensing revenue coming in? I'm not sure if you had alluded to that in your prepared remarks, but just with 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 specifically on Maryland, any help with expected 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 continue to optimize. Within California. Thank you.

Yes. So the revenue will start to start to see the revenue slowly build in in fiscal twenty three 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 twenty three. And I'll let choice expand on that program a little bit more.

Yeah, we're excited about the interest in our brand portfolio outside of the state of California. We've got a lot of interest in that comes from our ability to partners of influencers. You know, we were excited about the opportunity to take our brands to other states. And one of the important pieces of criteria that we talked about, Eric, is finding the right department 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 regulationally legal. We 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 Q1 will have more of an outlook in terms of the number of states for the for the for the entirety of twenty three. 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. They're 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 an opportunity to showcase our our brands and other states and to put them in the consumer's 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. And just just a quick follow up to that. So Curio revenue should slowly build in fiscal twenty three. Any any sense if that's coming in and you know, sort of Q1, Q2 or if that should be back up as well. And then just remind us if these should be like a true licensing fee, that's 100 percent margin. If there's perhaps any cogs in there that we should be aware of.

Yeah, so they're the products once they launch, obviously, they need to get in the market and sell through and then on a quarterly basis after that happens, we'll start to recognize the associated margin with that. They're in the first one. We actually are having some initial startup costs for doing document documentation, SOPs, things of that nature to 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.

OK,

great. Appreciate the help.

Thanks. 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.

So no more questions. I want to thank you and everyone for joining us on the call today. A big thanks to Rod 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. During 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 will follow us along the journey and thank you for your time and attention.

This concludes today's call. Thank you for your participation. You may now disconnect.