TILT Holdings Inc.

Good afternoon, everyone, and welcome to Tilt Holdings' second quarter 2021 earnings conference call and webcast. This call is being recorded today for replay purposes. A replay of the audio webcast will be available in the investor section of the company's website approximately two hours after the completion of the webcast and will be archived for 30 days. I would now like to turn the conference over to your host today, Tilt's Director of Investor Relations, Taylor Allison. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our second quarter 2021 earnings press release. The press release, along with our quarterly financial statements and MD&A, are available on CDAR as well as on our website at tiltholdings.com. Please note that during this afternoon's webcast, remarks made regarding future expectations, plans, and prospects for the company constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, which we disclose in more detail in the Risk Factors section of the MD&A for the three and six months ended June 30, 2021, filed with the applicable Canadian Securities Regulatory Authorities, which can be found on CDAR.com. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by applicable law. On today's call, we will refer to certain non-IFRS financial measures, such as EBITDA, adjusted EBITDA, and gross profit and margin, excluding changes in the fair value of biological assets and inventory. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Management considers these certain non-IFRS measures to be meaningful indicators of the performance of our business in addition to, but not as a substitute for our IFRS results. A reconciliation of such non-IFRS financial measures to their nearest comparable IFRS measure was included in our press release issued earlier today. On today's call, our TILT CEO, Gary Santo, our CFO, Brad Hoke, and our COO, Dana Arvidson. Following our prepared remarks, we will open up the call for questions and answers. With that, I will now turn the webcast over to Gary.

Thank you, Taylor, and good afternoon, everyone. As we reach the midpoint of our fiscal year, there's been no shortage of activity here at TILT. We entered 2021 having made a strategic decision to redefine our business-to-business approach to the cannabis industry by leveraging our plant-touching businesses to support MSOs, local retailers, and independent brands seeking to enter the markets we serve. Building off of our legacy of developing strong partnerships through Jupiter, our inhalation, accessories, and technology business, we designed a wholesale strategy that will be able to withstand the headwinds that you have heard a number of other market participants mention over the past few weeks. Many question why, if we were selling through whatever we produced, we would consider sharing some of our margin with brand partners. It is a conversation that I have had numerous times since stepping into my role, and my answer remains the same. But the best time to think about 2.0 is when 1.0 is going well. Hockey enthusiasts call it skating to where the puck is going. Football fanatics call it leading the receiver. I call it good business. Since launching our B2B strategy, have you noticed how many discussions around brands and wholesale are now occurring in the cannabis industry? We continue to believe that as the dust settles, after all of the M&A and rapid expansion this industry is undergoing, in a normalized, legalized cannabis marketplace, MSOs, retailers, and brands will need a partner who is dedicated to supporting their growth, not fighting them for relevance and shelf space. Coke does not like to buy from Pepsi. Apple does not like to buy from Microsoft. Why should cannabis be any different? While we are still in the early days of implementing our strategy, we continue to hear positive feedback on our approach. And while we left a few chips on the table in the second quarter, which Dana will comment on shortly, We continued to execute our B2B strategy with another quarter of record results, and, as you may have noticed, we've had a very active start to Q3. Tilt generated more than 30% year-over-year revenue growth during the second quarter and more than doubled its adjusted EBITDA. This was entirely organic growth, pure and simple, which is a stark contrast from many other companies in the space that have been heavily acquisitive. Our ability to drive synergies across our business segments is bearing fruit through cross-selling and deepening customer relationships. At the end of last year, approximately 20% of Tilt's revenue came from customers accessing the full spectrum of our inhalation, accessory, and cannabis offerings. By the end of the second quarter, that number has increased to over 30%, which tells us that our strategy is working. In addition to driving growth from existing relationships, such as our expanded partnership with Arrow Brands, We have signed several new high-profile partnerships in our cannabis business over the past few months, including agreements with 1906 and Old Pal. The latter is particularly relevant as it represents our business model at full throttle. Old Pal is a lifestyle brand that Tilt did not have a previous relationship with, yet we were able to cultivate that relationship to the point where not only will we launch some of their existing cannabis SKUs in Massachusetts later this week, but we have collaborated on a classic edible that will launch in the weeks to come. Even better, they've agreed to use hardware from our inhalation and accessory business for their vape products in the state. And to top it off, we have already agreed to expand the relationship and bring their products to Pennsylvania later this year. A new customer accessing the full spectrum of our offerings and positively impacting all aspects of our business. We are enabling each of these brands, which have proven success in their Western home markets, to enter highly sought-after, limited-license states at a much lower cost than they could otherwise do themselves. We remain in the early stages of driving growth through these partnerships and look forward to providing updates as we launch their various products, ranging from whole flour and oil cartridges to pills, edibles, and more. As I mentioned last quarter, we have plenty of runway for growth in Massachusetts, Pennsylvania, and Ohio. You have also heard me mention our desire to create a northeast corridor linking our existing states in order to create a nexus where our cannabis operations are all within a few hundred miles of each other. And I could not be more excited to announce another step in achieving that goal through an incredibly unique opportunity to both enter a new market, New York, and simultaneously sponsor a historic social equity partnership. I will discuss this partnership with the Shinnecock Indian Nation in more detail later in the call, as I want to take this moment to shine a light on our recent efforts in Massachusetts, which have been a long time coming. Earlier this month, we received four new provisional adult use licenses from the Cannabis Control Commission, in addition to a final medical dispensary license for our Brockton location. I cannot tell you what a pleasure it is for TILT to be able to say that after seemingly sitting in limbo since the spring of 2019. Over the past two years, the team worked diligently with the Commission to resolve an investigation that stalled our licensure, reaching an amicable resolution that will allow TILP to move forward with its plans to serve many new patients and retail consumers in the greater Boston area later this year. Equally important will be the shelf space that we can offer our customers, MSOs, and brands seeking to expand their reach. The four provisional licenses provide for cultivation, manufacturing, and adult use sales at our Taunton location, which is currently licensed for medical only. They also include the addition of adult use sales in our Brockton location, which, at the same meeting of the Commission, was granted its final license to operate as a medical dispensary. Brockton is fully built out and in the process of hiring staff, adding product to its vault and to its point-of-sale systems, in anticipation of a final inspection and approval to open its doors in the weeks to come. We have already requested final inspections for the co-location of adult use at our Taunton and Brockton dispensaries, and while there will be a few more steps in that process, we believe they will be completed later this year. Our medical dispensary in Cambridge is also fully built out. However, improvements to the exterior of the building by our landlord there have delayed our ability to schedule final inspection by the Commission. We remain hopeful that we will have that location operational in the near to medium term. Needless to say, it's been a busy few months, and the demands on our team have been tremendous given how far we have come in so short a time. While it is to be expected for a company transitioning from being a holding company to an operating company, it is also important to know when to obtain help. To that end, in the past few months, we have continued to deepen our bench with several key new hires, including David Catanzano, our new SVP and head of cannabis operations, who is a former colleague of mine at Columbia Care, and most recently spent the past year at Holistic Industries, where he was in charge of their cannabis operations across nine different markets. Joining David is our new head of cultivation, Sean Kute, who is a military veteran with more than 20 years of experience as a grower and cannabis cultivation consultant to companies throughout the U.S. Most recently, he was head of cultivation at Affinity, which was acquired by GTI earlier this year. Together with our head of processing, Sean Harrison, who helped build and run multiple cannabis companies over the past five years, they will all set the standard for our cannabis operations, ensuring that our capabilities and efficiencies are the same whether at our Massachusetts, Pennsylvania, Ohio, or now New York facilities. Overseeing all of our operations, and last but certainly not least, we added Dana Arvidsson to serve as our new Chief Operating Officer. Before handing the call off to Dana for an operations update, a few quick words about my trusted colleague and longtime friend. Dana and I last worked together eight years ago at the first Marblehead Corporation, where we helped to deliver B2B products and services to the financial services industry. Leading the capital markets and investor relations efforts, together we were responsible for product development, executing financings, and helping grow the company's equity and debt investor base. And at first marvel head, it was not possible to perform those duties without a deep understanding of operations at every level. At TILT, Dana will be instrumental in driving both operational and financial growth across our core businesses, while spearheading market expansion opportunities. We're thrilled to welcome him to the team. And with that, I'll pass the call over to Dana.

Thank you for the kind words, Gary, and good afternoon, everyone. Let me begin by saying how incredibly excited I am to be joining the Tilt team. When Gary approached me about the opportunity at Tilt, the first thing that stood out to me was its unique B2B strategy and positioning in the cannabis market, as well as its excellent base of assets and long runway of growth opportunities. Leveraging the 700-plus customer base and know-how from Tilt's inhalation and accessory business to drive growth in cannabis is only scratching the surface. Tilt's ability to partner with brands, MSOs, and LPs alike across both hardware and cannabis solutions is a recipe for plentiful growth in a market that is already expanding at a strong rate. On the call today, I'd like to briefly touch on each of our core operations, beginning with Jupiter, our inhalation and accessory business. As many of you know, we've referred to this business line as being more mature with lower margins than our cannabis business produces. but we are still growing revenue year-over-year at a healthy 30-plus percent rate, outpacing overall industry growth for the vape hardware segment. This growth is driven by both deepening existing customer relationships and forging new ones, particularly with some of the large and fast-growing MSOs. Consumer demand for vapes has also continued to recover and grow from the low points in 2019 following the vape crisis and, of course, the subsequent pandemic. Moving on to our plant touching segment. As we continue to develop these strong assets, we press the team to identify opportunities for continuous improvement, putting ourselves in the best possible position to control what we can while trying to minimize the impact of whatever we cannot. The reality is that nothing ever happens in a straight line. And there are a few things that Gary and I think we could have done better during the second quarter in our cannabis segment. where we left some chips on the table in terms of product mix and work in process in Massachusetts. That said, we have been busy there these last few months. We completed new harvests from our recently expanded cultivation facility, albeit six weeks later than originally planned due to the delay in obtaining regulatory approval. We also won key provisional licenses and recently brought back in-store sales at our Taunton Medical Dispensary, which was only doing pickup and home delivery for the last year. Sales continue to improve as our Taunton store currently projects to a $10 million annual revenue run rate selling medical only. With our adult use sales expected to begin in Q4, we anticipate doubling that based on the typical multiplier seen in the marketplace when going from medical to adult use. The same goes for our Brockton location, which will be opening for medical in the weeks to come, and we hope to add adult use sales in Q4. On the wholesale and B2B front, demand for flour continues to be strong. However, we are seeing a shift in product mix from bulk flour to packaged. Later this week, we will be launching Old Pal into the Massachusetts market, and if presale orders are any indication, we anticipate very strong retail demand. And just a couple of weeks ago, we announced our partnership with 1906 to bring various products to market for them as well. Our partnership with Her Highness continues to grow as we look to provide additional products and services designed to deliver more of their product to market in a faster timeframe. Overall, our wholesale penetration in Massachusetts continues to be very strong, as we currently sell into 95 of 163 dispensaries in the state, up from 76 at the end of Q1. We continue to be in the very early innings of achieving the true potential of our largest facility, and while we may have ended with higher inventory than we are normally accustomed to seeing, the good news is that it translates to ample product and biomass supply at a time when we are launching brands and opening stores in the second half of the year. And moving on to Pennsylvania. Pennsylvania is still a relatively small piece of our total business today. However, we see plenty of room for growth through our brand strategy. We've announced several marquee partnerships over the last couple of months that we expect to go live soon, including expanded partnerships with Arrow, 1906, and Old Pal. There's been a lot of discussion this earnings season about competition heating up in the state. which is precisely why we believe our brand strategy was the right direction to take. With so many MSOs fighting to build their own brand and or play in the premium flower space, our intentional approach to partnering with the right brands all across the value, quality, and form factor spectrum best positions us to supply the 25 to 30% of their shelf space dedicated to third-party products. Recent upgrades to our extraction capabilities and HVAC systems have resulted in record harvests and increased production, which could not have come at a better time given the speed at which we have added brand partners and the challenging growing conditions this summer. While we await regulatory approval for brands new to the state, we will be sure to keep you posted as they launch in the marketplace. In Ohio, we're in the process of adding distillate and hydrocarbon processing capabilities to our expanded 20,700 square foot facility in preparation for bringing our brand partners into the state. We have launched five new Standard Farms products to market subsequent to year end, including topicals, RSO, honey sticks, chocolate drops, and shortbread, and expect to launch additional SKUs later this year. We continue to believe that filling out a comprehensive menu of SKUs, both our own and some of our brand partners, will be a great way for us to plant our flag in that market. And finally, rounding out our cannabis markets is the newly entered state of New York. I will let Gary speak to the details of the transaction, but we are working with the team on finalizing designs and planning and looking forward to breaking ground on construction later this year. This concludes my prepared remarks. I'll now pass the call to Brad to review our financials in more detail. Brad?

Thanks, Dana, and good afternoon, everyone. As a reminder, all results discussed today are in U.S. dollars. Second quarter revenue was $48.5 million, up 33% year-over-year. Revenue in our accessory business was $38.5 million, and revenue from cannabis was $10 million, up 34% and 31% year over year respectively. Gross profit before fair value of biological assets was $13.1 million, a gross margin of 27% compared to 28.9% in the year-ago quarter. Similar to many other companies across various industries, our second quarter was impacted by supply chain expenses related to higher freight costs in our inhalation and accessory business. I want to commend our team for their swift action and response to these supply chain issues that importers have been dealing with. We don't expect these supply chain challenges to ease in the back half of the year, especially when it comes to imports from China. As a result, we decided to begin our cyclical inventory buying earlier this year to ensure that we have the products our customers demand. Our customers rely on us to come through for them, and we consistently do when others cannot. That plays a big part in why we earn their business and it truly separates us from other providers in the industry. As we get our customers what they need, when they need it. Turning to operating expenses, TILT's total operating expenses for the second quarter was 15 million compared to 15.1 million in Q2 of 2020. Essentially holding operating expenses flat while driving material revenue growth As we stated in the past, we are going to continue to run our business as a lean and efficient organization. Net loss during the quarter was $4 million or negative $0.01 per share, an improvement from the net loss of $9 million or negative $0.02 per share in the year-ago quarter. Adjusted EBITDA more than doubled this quarter to $6.5 million compared to $2.4 million last year. Adjusted EBITDA margin was also significantly improved to 13.5% compared to 6.7% as we continue to drive strong operating leverage. Cash flow used in operating activities was 0.3 million compared to cash flow provided by operating activities of 6 million in the year-ago quarter. Our cash flow was impacted this quarter due to the purposeful inventory buildup I mentioned earlier. We expect this to normalize going forward and return to positive operating cash flow. We ended the quarter with $9.6 million in cash, up from the $7.4 million in cash at December 31, 2020. And subsequent to the quarter, we entered into a new $10 million revolving credit facility that bears interest at prime plus 3.5%, which is a very favorable rate for the cannabis industry. Also subsequent to the quarter, last week we graduated from the CSE and listed our stock on the more senior NEO exchange. We are grateful for our partnership with the CSE over the past few years, but given where we are at now as a more mature company with greater financial controls and corporate governance, we felt it was appropriate to transfer a Canadian listing and join other senior organizations on the NEO. We believe this will improve our visibility with the institutional community given NEO's stringent listing and reporting standards. And it also better prepares TILT for U.S. GAAP reporting down the road when we believe we can list on a major U.S. exchange. At this time, we are reaffirming our 2021 guidance of 205 to 210 million of revenue and 30 to 32 million of adjusted EBITDA reflecting year-over-year growth of approximately 31% and 83% respectively. We remain comfortable with our annual guidance and look forward to delivering on these forecasts with a strong inflection in Q4 as various assets come online across our markets and multiple brand partners are launched. With that, I'll turn the call back over to Gary for a few comments regarding our entry into New York.

Thank you, Brad. Before opening the call to questions, I want to take a few moments to discuss our partnership with the Shinnecock Indian Nation, which we announced earlier today. This partnership is exciting for us on a number of levels. First, it allows TILT to enter another vibrant cannabis market poised for explosive growth. Second, it allows us to do so at incredibly affordable terms. And third, and perhaps most importantly, it reaffirms TILT's commitment to social equity in the cannabis industry. In terms of transaction details, at closing, we paid $700,000 in cash and stock to obtain a 75% interest in a joint venture with Connor Green, the nation's cannabis project development firm. Upon achieving certain milestones, Connor Green may earn up to an additional $2.65 million in tilt shares for a total compensation of $3.35 million in cash and stock. Even with all those milestones met, this is arguably the lowest initial cost of entry to participate in a market like New York, which many industry experts believe will be one of the largest cannabis markets in the country. Through the agreements between the JV and Little Beach Harvest, the nation's wholly owned cannabis business, TILT will provide management services for the establishment of vertical cannabis operations on Long Island. including planning, design, build-out, and funding of up to approximately $18 million in capital expenditures. The 9% debt financing will be repaid through cash flows and is secured by the assets of the project, which will include a 60,000 square foot cultivation, processing, extraction, and packaging facility, a two-story dispensary with a drive-thru, and an adjacent wellness lounge. The dispensary and lounge are being built on Montauk Highway, just minutes from Southampton's business district, Cooper's Beach, and Shinnecock Hills Golf Club. Once operational, the nation will retain 75% of free cash flow from all Shinnecock cannabis operations during the initial term of up to nine years. Tilt will receive 11.25% of the nation's gross revenue, as well as 18.75% of free cash flow in exchange for providing management services. The management agreement may be extended up to 10 additional years pending accomplishment of certain performance-based milestones related to revenue and profitability. What makes this project particularly compelling is that it is the Shinnecock Nation's. We expect this partnership to create hiring and career development opportunities for members of the nation, offering an economic engine for the local job market, contractors, and the community as a whole. At TILT, we have been very vocal about our responsibility to develop the next generation of leaders in the cannabis industry. So it is only natural for us to provide our operational expertise and resources as the basis for the nation to launch a venture that we believe will have a profound, positive effect on a group that has lived on the margins of one of our country's wealthiest places. As we will be operating on tribal land, our approvals will be issued by the nation, including approval for adult use sales, which we anticipate to occur in the coming weeks. Several industry reports anticipate adult-use sales in New York to begin in 2023.

However, it would not surprise us that in addition to commencing operations prior to 2023, One moment as we deal with some technical issues. Please remain on the line.

come in so short a period of time, and I look forward to updating everyone on the second half of 2021 as it unfolds. This concludes our prepared remarks. We will now open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you.

Our first question comes from Aaron Gray with Alliance Global Partners. Please proceed with your question.

Hi, good evening, and thank you for the questions. Sounds like you guys have certainly been busy. So first question for me is on the New York license. You know, first off, just like, you know, I'd love to get your guys' mindset as you went into this in terms of entering New York. You know, with this license being fully vertically integrated, does that impede your ability, just given how the structure is through the JV, for you guys to potentially, you know, get your own, you know, license within the state of New York? I'll leave it just to that question first before I ask another one.

Sure. I mean, obviously right now getting into New York, it's a tough ticket. And it's a very expensive one. You look at the deals that have been done over the last 12 months and the amount of dollars that have been spent just to get in and have to invest more money. For us, because we're not as focused on the retail footprint, it's about having access to vertical cannabis operations that we can not only help operate on the reservation itself, and certainly there's plenty of business to be done there, but again, in a fully legalized market in the state, we're hopeful that we'll be able to also sell wholesale off of that reservation as well. which would then allow us to reach everyone in the state. So from that perspective, we thought it made a lot of sense. If we were focused on having retail locations at specific locations throughout the state, then probably that might not have worked. And that might be why other MSOs did not step up to the plate. For us, again, it's a B2B play. It's a wholesale play. So it makes a lot of sense for us. And we think we have great opportunities not only in the state, but also in helping the Shinnecock be able to trade amongst other nations throughout the U.S.

That's really helpful, Kyler, in terms of the wholesale there. And then just quickly on New York then, so for the funding of approximately $18 million in CapEx, just for you guys staying now, I think it was about $9.5 million on the balance sheet today. So what about the timing of that? Is that going to be a need for additional capital for you guys outside of the credit line there?

Hello?

One moment. As we are dealing with some technical difficulties, please remain on the line. Aaron, would you just mind repeating the second part of your question, please?

Yeah, no problem. It was mainly just around the $18 million in CapEx for New York that I believe the PR said that TIL would be providing just in terms of where you guys stand now, just in terms of balance sheet potential capital needs there. And then actually I'll add on to that, too, just in the ability to potentially increase ownership over time through this agreement. Thanks.

Sure. In terms of the financing of this, remember, this is going to be built out over a 12 to 18-month period, so there's no immediate need to fund that up front. As Brad mentioned, we now have access to a $10 million asset back line. We ended the quarter with about $9 million. I think we have a few other items that we're not able to discuss at the moment. But for us, we're not concerned about our ability to finance this. We are in control of the build-out and of the design. And while we do know exactly what the dispensary will look like, we are in that process, as Dana mentioned, of planning and working on what cultivation and manufacturing look like. Equally as important is if we do think there's an opportunity to open up the dispensary earlier and maybe do some wholesale sales, we might even entertain that, and that would allow cash flow to come in. So we have multiple levers we can pull, and really $18 million over a 12- to 18-month period is a very affordable build-out, and it all goes to actual building out operations. So we think that's important. As for purchasing additional amounts, that's what makes this so unique. I think when you look at a lot of other management services agreements that MSOs do, it's usually with an intent of someday increasing ownership or eventually buying or taking over the enterprise entirely. That's not what we signed on for here, and it was intentional. We think that there is plenty of revenue to be had by everyone involved with the current structure we've rolled out. And we're excited to see the Shinnecock really build this out into something that will be a sustainable economic boost for them. And, you know, we're happy to participate in that. And if things are going well, we would fully expect extensions on our contract nine years from now down the road.

Okay, that's helpful. And then last one for me before I jump back in the queue. So you mentioned product mix and some work in progress left on the table in Massachusetts. So it sounds like you might be able to have some revenue realized in the quarter if you might have wanted. So number one, could you just kind of quantify that? And then number two, you mentioned kind of the inventory levels, but just looking at 2Q versus 1Q, it looks like the big increase was actually regarding cartridges and power supplies. So it seems like it was more of that WIP and product mix. You mentioned it for Massachusetts, but it looks like the balance sheets look like it might have been more of a Jupiter inventory buildup in the quarter. So if you just provide some clarity there, that'd be helpful. Thanks.

Sure. And I'll take the last piece of your question first regarding the inventory. So yeah, you're absolutely correct. The majority of the inventory increase was on the inhalation accessory business. increasing by 58% quarter over quarter, where our cannabis inventory increased about 18%. And the big increase, like I talked about in my prepared remarks, was regarding the issues at ports and just making sure that our customers aren't left holding the bag in the back half of the year. We believe the supply chain issues we're seeing now will continue and And it's really a function of making sure our customers have product as well as making sure that we have revenue to report in the back half of the year as well.

I'd like to amplify that a little bit. I mean, you've certainly heard other folks talk about the challenges in shipping and the lumpiness of some of the deliveries. And this is what we get paid to do. We get paid to manage complex supply chains. And our customers don't want to hear that we're stocked out or that it's going to be a delay. They need what they need. If we can't do that, then we've got no business being in this business, and we're not providing any value to our customers. So it's intentional. We're glad that we have the ability to do that, and we're happy to be there to support not only our customers, but what we suspect will be some of our competitors' customers who will be calling us in the months to come. I think switching gears on the Massachusetts front and the work in progress, really that's tied mostly to the delayed harvests. So the six weeks that Dana talked about, a lot of those harvests would have otherwise hit during the second quarter, and we would have sold at least some, if not most, of that flower. Instead, it got harvested at the tail end into the third quarter. So you are correct in that it does provide us with ample biomass, both in the form of flower and also concentrate, etc., And we're able to then leverage. And as we think about opening up our Brockton store, as we think about adding adult use in the second half of the year, and then even launching all of these brands that we announced over the past few months, it's actually somewhat serendipitous that we're able to have some of that supply.

Okay. That's helpful, Culler, and makes sense in terms of having a little bit of buffer on the inventory there. All right. I'll jump back in the queue. Thanks for Culler again.

Thank you.

Thank you. Our next question comes from Bobby Burleson with Canaccord. Please proceed with your question.

Bobby Burleson Hi. Thanks for taking my questions. So, you know, I guess the first one is just trying to understand the margin structure around some of these partnerships that you guys are engaged in versus kind of your normalized margins when you go it alone.

Yeah, I don't know. We've not really disclosed all the margins, right? I mean, the way we generally look at it from our wholesale businesses, we report roughly 40, 50-plus percent margins on the growth side, about 50 percent margin on the growth side. So when we do a brand partnership, it can come in a few different flavors. It could come in just a pure licensing play where it's just a cut off the top. What we tend to favor more recently are the gross profit shares, and that's where we're basically both taking a cut of the gross profit. And the thinking there is, As wholesale prices start to come down, we're trying to partner with folks who will allow us to be able to sustain higher wholesale prices based on the status of their brand in the marketplace. So in other words, it's a price we couldn't achieve on our own. So while we are sharing some of that margin, we would not have that top-line revenue to start the math assignment with. So that's sort of how we approach it. So definitely sharing a little bit of that. You know, we haven't gotten into the details of each of the agreements because they do tend to be on a case-by-case depending on the products themselves. So it can differ from flour to a pre-roll to an edible on down the line, but that's how we look at it.

And the other piece that impacts this is the level of involvement of the brand partner on a go-forward basis. whether they've got specialized equipment that they want their people to be involved in and using, whether they're going to be heavily involved in marketing and in-market branding opportunities. That level of interaction or that level of involvement is going to help determine who gets paid what at the end of the day.

Okay, great. Thanks. And then on the subject of wholesale pricing and your plans there and what you're seeing, you know, is supply-demand balance looking favorable still, you know, as you look out in the second half to supporting, you know, solid wholesale pricing in Massachusetts? And then what are your plans as you bring on adult use in that state in terms of, you know, what the optimal kind of mix is of wholesale and kind of sales through your internal stores?

Well, I think the demand for flour is certainly there. It's very strong. The question, and we alluded to this during the prepared remarks, the question is in what form. What we've seen in more recent months is sort of a shift in terms of the demand away from bulk flour more into pre-packed components. You know, for that reason, you know, we've started to obviously shift in that direction, which means you've got to have a greater ability and a greater emphasis on your production capabilities, packing capabilities, you know, just putting a lot more of your shoulder into building out that capability. So, again, the demand is still very strong. It's there. It's just a question of in what form it takes.

Okay, great. So it sounds like it's a little bit more capital intensive for you guys going forward.

Maybe not capital intensive, but it's more labor intensive, I would say. I mean, I think it requires more, you know, personnel who've got to be available to pack the product as opposed to, you know, selling a 15 pound bag of bulk flour. You know, now you've got to, you know, pack it into eights. It just requires a bit more work from the production team standpoint to get it ready for sale.

I think it's all one of those opportunities. Some of the equipment that we have and we've invested in over the last six to 12 months also helps us with that, right? So you think about packaging, prepackage aids. We have a machine that really helps us manage our way through that pretty effectively. So, you know, it's sort of where we saw this market going, that selling bulk wholesale flour just wasn't going to last forever. You do it for as long as you can. But this is really why we put the strategy in place we did.

And just this is more kind of a global question on your operations. What are you guys seeing in terms of potential supply chain disruptions, labor disruptions, anything kind of relevant to the current environment that we're kind of seeing just broadly in other industries where things are slowing down and getting more expensive?

On the cannabis side, I think we're doing quite well. I mean, the thing about folks who work in this industry is it's one of those industries, one of those rare industries where you have so much passion the entry levels usually you know the leaders are the ones with the passion and you're desperately trying to get everybody on board including the rank and file here it's almost inverted where we have so many people who just want to work in the industry they want to work somewhere where quality matters you know where we care about the customers that we have and that we're trying to run a company a certain way so there's a lot of reasons that bring people to us beyond just you know the desire to work in general so I think overall from a cannabis perspective, we've not really experienced much difficulty on that front. As we've needed to go out and bring folks on board, you know, we just had a hiring fair in our Brockton location just over the weekend and came away with, you know, I think enough applications to staff our dispensary almost two-thirds full in basically a one-day event. So, you know, I don't think we're experiencing anything there. Brad, on the Jupiter side, anything to report?

Not on the labor side. I think we're all set. On the supply chain side, and we've kind of already hit this one already, but it's really about we've stocked up on the inventory to handle our stock inventory, but we're also working directly with our customers and working on their demand planning so we can really take advantage of the lower cost, more economical ocean rates rather than air freighting things, and that way it saves not only our customer, it saves us and the margins as well.

Great, thanks.

Thank you. Our next question comes from Howard Penny with Hedgeye. Please proceed with your question.

Thank you so much for the question. I apologize, Gary. My line went out. I think there was technical difficulties as you were beginning to talk about the timing of the dispensary in Shinnecock and when it was going to open or when it was going to be completed and opening relative to what New York was doing in general.

Well, good. So at least it didn't cut off. We heard that there were some technical difficulties, but that was almost at the very end, so I'm excited about that. So I think... The thing to remember operating on tribal land is really all of our approvals will be issued by the nation. And that includes the approval for adult use sales. They already have the medical use sales, includes building permits, the whole nine yards. So we anticipate in the next few weeks to see some movement on the adult use sales front. So the comment I had made is a lot of folks in the industry are calling out 2023 as the time when adult use sales will begin in New York. I think for us, not only do I think we will be commencing operations medical-wise well before that in 2022, I also think there's a very good chance adult use sales could be part of that as well.

So, and this question is really the level of ignorance associated with this. So, if I was driving down the Montauk Highway That's the Shinnecock Nation. I could stop in there sometime in 2022 as a recreational.

Yeah, so right there on Montauk Highway, basically, that's where the location for the dispensary and the wellness lounge is. The cultivation and manufacturing is further back on the property, so a set of ways. But you would be able to pull up, and you would be able to either use the drive-through window or show up. And if it's adult use, obviously, you wouldn't need your medical card, and you would be able to then leave safely. leave the reservation with it. Much in the same way you see, you know, there's a lot of those cigarette stores along Montauk Highway there. Very similar.

So last question on that. I don't know if you're going to share this or not, but I assume you have calculated an ROI, a return on capital, of what that $18 million will generate over time. I was just wondering if maybe a range you might share with the return you expect.

The $18 million is actually a loan. So we'll be earning 9% on that, and that will be getting paid for out of cash flow. So that's part of it. If you have the top-line revenue, that will be part of the expenses that run down through the waterfall before you get to the free cash flow. So, you know, the timing for that repayment would be well inside of the nine-year term of our initial agreement. Obviously, it is somewhat dependent on, you know, what the revenues look like, but I think Overall, we anticipate that being paid off in probably five years or less just based on some of our early projections. And that's assuming that all we get is the ability to sell on the reservation property and not wholesale outside into the greater New York area. So that's separate and distinct. That's what makes this so unique in that we're not just putting $18 million in and then hoping something good happens. It's being structured as a loan. It's being repaid as a loan. And then everything else we're doing, we're just earning straight up fees out of that. We're not putting additional capital in that's not in the form of a loan.

Plus on top of that also.

Right, right. So, I mean, when you think about it that way, our management services fee would come the way I described it. We get a piece off the top line revenue. We get a percentage off the free cash flows underneath. So as that loan gets paid down, there's more free cash flow that we then start sharing with on the bottom end. So, you know, it was a very intentional design that would sort of look a little different than how most people might get into a space where they just throw the money first and then hope for positive outcomes after.

Appreciate the question. Thank you.

Thank you.

Thank you. There are no more verbal questions at this time. I would like to turn the call back over to Taylor Allison for any web questions.

Thank you, Paul. So, we have a couple of online questions. The first one that comes through is regarding Chinnecock. And the question is, could you discuss the transactional details regarding the partnership with Chinnecock in a little bit more detail?

Most of the detail we did provide on the earnings release, and I think we want to be a little bit cautious there, as with all of these deals, in terms of how deep we go into those details. But I think the critical ones that matter is what is TILT putting in? As we just talked about a few minutes ago, we'll be providing up to $18 million in a loan that will be used to build out the facility. That will get repaid out of cash flows. Once the facilities are operational, we will begin sharing in the revenues that come from that. Initially, we'll start with 11.25% top line revenue right off the top. And then after all expenses are paid down through to the extent there's additional free cash flow below that, then we will share in that. We'll get about, I think, 18.75% of the cash flows there. There's no real cap on what those numbers could go to. I think what's important is that this will be a Shinnecock-run facility, so we will be responsible for training the folks there. So we will be focusing on bringing members of the tribe on board first and foremost, training them up, developing them into leaders that can begin to run the facility more and more, and then we just take more of a management role at that point. Initially, we may end up having to put some of our own people in there just to get the ball rolling. But, you know, our intent is to really make it a true economic ecosystem on the reservation for the Shinnecock tribe. Perfect.

The next question is regarding Massachusetts and the provisional licenses. Questions, there's two. When do you expect Brockton to open and when do you expect these locations to be able to contribute to revenues?

We are really in the homestretch in Brockton for medical. So after you get your final license, the next step is you have to then get product on the premises, load it into the vault, load it onto your point-of-sale system, and then the state will come down one last time to watch you conduct a front-to-back sale on the system to make sure it's tracking properly. Obviously, this is something we do every day in our Taunton medical dispensary, so we're not too worried about that. But it does involve some timing. So I think we're anticipating probably, you know, by October at the latest, we would expect to see Brockton Medical open. The question mark for us then becomes for the adult use, when can we add that to both Brockton and to Taunton? So we do still have to schedule an inspection. The state will come down. They'll look at our two operating dispensaries. They'll make sure that we've taken the necessary precautions to add adult use. There is a slightly different process involved there. hopefully that's a faster turnaround time than we went through on the medical side. So we're feeling somewhat confident that before the end of the year, we should be able to add adult use to both Taunton and to Brockton. Cambridge is the only one that I'd say our line of sight is a little bit opaque on, only because, again, we're waiting for something that the landlord is doing, has nothing to do with our build-out, in order for us to be able to schedule one of the last inspections that are necessary to get to final licensure. So that's sort of our anticipated schedule right now.

Thank you. And the last question is regarding the debt structure. Can you shed some light on your debt, short-term and long-term?

Sure. So, you know, we have roughly about, I think, $75 million, give or take, of long-term debt. Half of it is at 8% scheduled to mature in November of 2022. The other half is also at 8%, and that's scheduled to mature in 2023. Tremendously low cost of capital. It did come with a fair amount of warrants, you know, at the time, which made sense. This was back in 2019. The company had a different credit profile. I think for us, we've been cautiously optimistic looking at the deals that are getting done in the marketplace, true debt deals, where we might have an opportunity to do something non-dilutive and refinance that and maybe extend out the maturity dates. Do I think we'll get 8% rates? I think that's wishful thinking. But that said, again, we do have good free cash flow, and we can support, you know, a certain amount of debt service costs. So if there is an opportunity to step in before the end of this year, refinance that entire stack, maybe even add a little bit to it, I think that's something we would look at very seriously. In terms of short-term debt, really all we have is that ABL line that we just engaged with. It's a $10 million line. I think that rebalances on a weekly basis based on inventory at Jupiter, the non-cannabis touching inventory. For all intents and purposes, that's our capital structure, plain and simple. Brad, did I miss anything on that? You got it.

Okay.

Perfect. Thank you.

Great. It looks like that is the end of our questions for the moment. So apologies for some of the technical difficulties. I'm sure we'll be getting a bunch of phone calls from some of you to fill in whatever gaps got missed. Happy to do it. But thank you again for listening to our call today. We look forward to providing you with additional updates and continuing to execute on a bunch of new exciting projects that we announced. So thanks again. Thank you. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.