TILT Holdings Inc.

Good afternoon everyone and welcome to TILT Holdings third quarter 2021 earnings conference call and webcast. Today's call is being recorded 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. At this time, I'd like to turn the conference call over to your host for today, TILT's Director of Investor Relations, Sean Mansoury. Sir, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our third 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 law. 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 nine months ended September 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 is otherwise required by applicable law. On today's call, we will refer to certain non-IFRS financial measures, such as adjusted EBITDA, working capital, and gross profit and margin excluding changes in the fair value of biological assets and inventories. 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 are TILT CEO Gary Cento, CFO Brad Hoke, and COO Dana Arvidsson. Following our prepared remarks, we will open the call for questions. With that, I'll turn the webcast over to Gary.

Thank you, Sean, and good afternoon, everyone. The first three quarters of 2021, as it pertains to the legal cannabis industry, have been nothing short of fascinating. The year began with heightened expectations for some type of legislative reform sparked in part by last November's election results. With the majority of Americans supporting some type of cannabis legislative reform, the hope was that a Democrat-controlled executive and legislative branch would help break the logjam for reform. However, that hope was relatively short-lived as the split between the two bodies of Congress continued. with one side seeking to advance a steady stream of incremental reforms, such as the Safe Banking Act, while the other seeks to resolve all of the effects of the past 100 years of prohibition and social inequity in one sweeping piece of legislation. From a capital markets perspective, as the euphoria for a green wave of legislation began to wane, a number of custodians began restricting their clients as they would no longer hold shares of U.S. cannabis operators, effectively dislocating the sector from the broader capital markets. In the face of that dislocation, multi-state operators, including TILT, continued to post solid second quarter results, which went largely unnoticed. Heading into the fall, the combination of ongoing supply chain disruption and inflation has started to affect the consumer, and growth has slowed a bit, as one might expect. Trends that we are seeing in terms of increased supply in certain state markets and changes in consumer behavior are in line with what fellow multi-state operators have been reporting in their earnings calls. This tilts view that as the legal cannabis markets mature towards adolescence, these types of trends are inevitable and at the center of our current business strategy. While certain factors may have accelerated the maturation process, shortening what we envisioned to be a 12 to 18 month timeline, our top line performance in the third quarter clearly demonstrates that our thoughtful transition from a successful bulk sales strategy towards branded packaged goods was the right one. By targeting the 20% to 30% of shelf space that most MSOs reserve for curated portfolios of third-party products that their customers demand, we believe we have created a sustainable business model that can evolve with the broader cannabis marketplace. For the quarter, on a consolidated basis, TILT generated nearly 40% year-over-year organic revenue growth and was up double digits on a sequential basis. which was impressive given the broader market headwinds I mentioned earlier. And we achieved top-line revenue results without the benefit of any new markets or closing of any acquisitions. In fact, we did so with less assets in 2021, having shed our software and services business towards the end of 2020. While we are pleased with this performance, we did experience some margin compression due to a variety of factors, which Brad will discuss in more detail, that impacted our adjusted EBITDA guidance for 2021. For Jupiter, our inhalation, accessories, and technology business, it is no surprise that the global supply chain environment remains volatile. During the quarter, we continue to see heightened freight costs for product imported from China, as well as lower margins associated with customer mix. As we stated last quarter, we do not expect the supply chain headwinds to ease over the near term, however, remain committed to our customers and believe that it is extremely important for us to be there when they need us most. While it may impact Jupiter's profitability over the short term, we believe that the goodwill it creates is invaluable over the long term, and we have already started to see those benefits in the form of increased order size. Additionally, with some of our competitors continuing to struggle with supply chain management, our decision to increase our inventory position beginning last quarter is paying off, as we are able to step in when they falter, resulting in a number of new accounts based on the very fact that we have had product available to immediately ship. At our plant-touching businesses, our corporate development team, supported by our operations, regulatory, compliance, and legal teams, continue to do a fantastic job signing new brand partners across our markets, including Arrow, 1906, and Old Pal. We know that demand exists for differentiated products. However, much depends on our ability to identify the brands best aligned with market demand and activate the right SKUs in those markets in a timely manner. Part of that process involves regulatory approval. And in the case of Pennsylvania, that process has become opaque in recent months. While we are certainly not alone in this, it is especially frustrating given that we continue to carry raw materials in the vault to ensure that we are ready to manufacture our brand partners' differentiated products to spec as quickly as possible. To be clear, these delays are not the result of failing tests for a given product. It is strictly about getting the SKUs, packaging, and marketing materials approved by the state's Department of Health. While outside of our control, the persistence of these delays remain the primary reason for why we anticipate coming in at the low end of our 2021 revenue guidance range. Looking to those items within our control, I continue to view our plant touching operations as still in the process of scaling, creating numerous opportunities for TILT to improve upon efficiency as we strive to achieve maximum capacity at our facilities. In both Pennsylvania and Massachusetts, I fully expect to see improved grow yields, which is precisely why we added a new head of cannabis operations, head of cultivation, and promoted our head of processing, all of whom I highlighted during our last call. While only together as a team for a few months, I'm excited about the progress they have already made in terms of improved SOPs, streamlined workflow, and spotting opportunities to make modest investments in processing equipment and lighting fixtures capable of delivering better efficiencies and higher yields from our existing asset base. Dana will discuss these efforts in more detail, but suffice it to say that when it comes to margins in the plant-touching business, it all comes down to the garden and our ability to grow with intent based on market demand. Before passing the call off to Dana, I want to take a moment to highlight the progress we have made in demonstrating the complementary nature of our plant-touching and non-plant-touching businesses. We entered the year with approximately 20% of our consolidated revenue coming from customers of both parts of our business. Truthfully, that was more by happenstance than design. However, cross-selling has become a key component of our new strategy. And as a result, that number now stands at 40%, doubling where we began just nine short months ago and with plenty of room to run. Tilts has come a long way in a very short period of time. And while I will be back with a few closing comments before opening the call to Q&A, I could not be more proud of the commitment our team has shown in executing our strategy at such a high level. And we are just getting started. With that, I'll turn the call over to Dana for operational updates.

Thanks, Gary, and good afternoon, everyone. I'd like to briefly touch on each of our core operations, beginning with Jupiter, our inhalation, accessories, and technology business. It was a record quarter for Jupiter as we continued to drive meaningful growth with both new and existing customers. Revenue was up 42% year-over-year to $42.1 million. Our ability to consistently generate significant growth and cash flow from Jupiter is not only a function of being the market leader in C-cell product distribution, but also a function of the reliability that Gary alluded to earlier. Clients partner with us because they know we come through for them. Long-term partnerships aren't born out of thin air. If you're in this line of work and you can't manage a complex supply chain framework for your customers, then you're in the wrong business. It has been a tactical decision on our part to only pass a portion of increased supply chain costs through to our customers. As a result of these efforts, Jupiter gained two major new customers during the quarter without any meaningful attrition. We're confident these relationships will endure and grow as the macro environment normalizes. Moving on to our plant-touching segment. As we mentioned last quarter, our cultivation in Massachusetts is working through the typical growing pains from the first harvest of a newly expanded facility. One metric that we monitor is the number of grams of sellable flower per square foot. Currently, our oldest, most mature grow runes are at 70% of our optimal target, while our newer runes are significantly below that level. Our new cultivation and processing leadership team is refining our grow and processing capabilities to drive higher yields, greater strain variety, and an overall broader mix of form factors. And they've already made some fine progress. For example, our processing team in Massachusetts has more than tripled its production of pre-rolls and pre-packaged dates from the prior quarter. We are confident that these efforts will enable us to not only achieve our target grow metrics in the coming quarters, but to also meet the varied demands of brand partners, wholesale customers, and our newly opened retail store in Massachusetts. On the retail side, we opened our doors at the beginning of October for medical sales at our new Brockton dispensary, and the early foot traffic and patient feedback has been excellent. we are in the final stages of approval for adult use sales in Brockton and expect that to commence within days. In Taunton, we are still awaiting the final approval to begin adult use sales, and we hope to get that going before year end so that by 2022, we will have two stores open for both medical and adult use sales in greater Boston. On the wholesale front, our penetration in Massachusetts continues to be very strong. we currently sell into 103 dispensaries in the state up from 95 at the end of q2 just last week we announced an expansion of our brand partnership with arrow and will now be taking their products to market in Massachusetts in addition to Pennsylvania moving on to Pennsylvania as many of you know competition has been heating up in the state we continue to believe our approach of teaming up with diverse marquee brands like arrow and 1906, and Old Pal will be a defensible strategy in a market that has seen a significant increase in cultivation supply over the past year. Following the requisite product approvals, we are planning to stock products across the full spectrum of price and quality so that we can effectively fill the third-party shelf space in dispensaries that is typically reserved for external brands. Of course, larger MSOs want to stock most of their own products. But the 20% to 30% that isn't their own will not come from their competitors, as they don't want to help a competing brand. Our success with Old Pal in Massachusetts proves that the right SKU offered at the right price will allow us to more efficiently sell inventory in Pennsylvania. We look forward to providing updates as we get these new branded products approved and in stores. In Ohio, our 20,000-square-foot facility maintains extraction, processing, and manufacturing capabilities. Here, we continue to emphasize variety with three new SKUs launched in the last quarter. We are encouraged by the feedback and responsiveness of the state's cannabis regulator and hope that this will help facilitate a smoother and less time-consuming approval process for our key brand partners. And finally, rounding out our cannabis markets is the newly entered state of New York. For obvious reasons, we are very excited about the prospects in this state, as well as the potential for us to be one of the first operators to launch adult use sales on Long Island, given our partnership with the Shinnecock Indian Nation. We are working with the team on finalizing building designs and look forward to breaking ground on construction soon. 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. Third quarter revenue was $53.4 million, up 37% year over year and 10% sequentially. Revenue from Jupiter, our inhalation and accessory business, was up 42% year over year and 9% quarter over quarter to $42.1 million. Revenue from cannabis was up 19% year over year and 12% quarter over quarter to $11.2 million. Gross profit before fair value of biological assets was $12.7 million, a gross margin of 23.7% compared to 31.3% in the year-ago quarter. Similar to other companies across nearly all industries, our third quarter was impacted by supply chain expenses related to higher freight costs in our inhalation and accessory business. In our cannabis business, the margin contraction was primarily due to the grow challenges in our recently added capacity in Massachusetts and delayed product approvals in Pennsylvania. Turning to operating expenses, TILT's total operating expense for the third quarter was $16.3 million compared to $14.5 million in Q3 2020. As a percentage of revenue, OpEx improved to 30.5% compared to 37% in the year-ago quarter as a result of better operating efficiencies. Net loss during the quarter was $7.1 million or negative two cents per share compared to a net loss of $4.6 million or negative one cent per share in the year-ago quarter. Adjusted EBITDA for the third quarter was five million compared to 5.1 million last year, and adjusted EBITDA margin was 9.3% compared to 13.1%. The decline was driven by the previously discussed impacts to gross margin. Cash flow used in operating activities year-to-date was $4.3 million compared to cash flow provided by operating activities of $5 million for the same period last year. The change is predominantly due to the strategic inventory buildup in our inhalation and accessory business and inventory buildup in our cannabis business as we gear up for adult use at our Brockton and Taunton dispensaries in the near future. We've also had an inventory buildup at our Pennsylvania facility as we await product approvals from the Department of Health. We expect our operating cash flows to improve as we sell through this buildup of inventory. We ended the quarter with 6.7 million in cash, down from the 7.4 million in cash at December 31, 2020. However, working capital increased to 64.9 million compared to 57.4 million at year end. Moving on to our 2021 outlook, we are reiterating our annual guidance for revenue of $205 to $210 million, albeit at the lower end of that range due to the product approval delays in Pennsylvania. For adjusted EBITDA, due to these delays, as well as ramping cultivation in Massachusetts and higher freight costs for Jupiter, We are revising our annual outlook and now expect it to range between 24 to 26 million. At the midpoint, this reflects year-over-year growth of approximately 31% and 48% for revenue and adjusted EBITDA, respectively. With that, I'll turn the call back over to Gary for closing comments.

Thanks, Brad. As the next time we speak will not be until we report our full year results in early spring 2022. and we will have transitioned from IFRS accounting standards to US GAAP, poised to become an SEC registrant. I want to take a few moments to address the breadth of change that has occurred over the past year. When I joined the firm back in July of 2020, it was with the notion that TILT had some very strong underlying assets that could become foundational elements for growth in 2021 and beyond if tied to the right strategy. Identifying that strategy meant having to take a somewhat unique view of the marketplace. And when we publicly announced that strategy at the start of this year, we knew that it was likely to require tilt to trade basis points today for the prospects of stable and lasting growth tomorrow. It would mean having to change our overall approach to cultivation, manufacturing, and wholesaling as the status quo, while profitable, was not sustainable. As I stated earlier, our view has always been that the maturation of our markets would naturally lead to increased supply and heightened competition. but by leaning into a B2B strategy where we would service and not compete with multi-state operators, single-state operators, and independent retailers, we believe that we would expand our reach and the reach of our brand partners' products well beyond any retail footprint we could have ever hoped to acquire. We envision that maturation process to occur over the ensuing 12 to 18 months, providing time for TILP to continue to scale its operations, including doubling our grow in Massachusetts, and changing how and what we grow in Pennsylvania to better suit the market. And while no one could have predicted the acceleration of that timeline or the macroeconomic factors mentioned earlier, our team has done its best to match that velocity with the speed it has signed and activated brands. For a company that a little over a year ago had signaled to the marketplace that it might walk away from its plant-touching assets altogether, to be able to bring Her Highness to market within 30 days and Old Pal to market within 60 days of signing is a remarkable accomplishment and true testament to what our team is capable of. I cannot express how gratifying it is to have brand partners signed only months ago seek to expand their relationship with Tilt. Whether old pal expanding into Pennsylvania, Arrow agreeing to have Tilt assume its manufacturing and distribution in Massachusetts, 1906 agreeing to launch in all of our markets, or Her Highness looking to Tilt for supply chain management services nationwide, The word is out that TILT offers a differentiated partnership experience for those who choose to work with us. And with the work that we are doing with the Shinnecock Nation in New York, the word is also out that we seek to create socially responsible partnerships that allow diverse populations throughout the country to participate in the emerging cannabis industry. I need look no further than this year's MJBiz conference in October, where the sheer number of meeting requests from brands and potential social equity partners wanting to work with us to discover that our strategy, as described, is well-founded. Together with our ability to produce organic, double-digit sequential growth, TILT is on its way. Our margins will improve as mobilizing as quickly as we have over the past few months equates to trying to drive the car while still building it. Our operational goals remain before us and well within reach. TILT is a vastly different company than it was one year ago, and I cannot end this call without taking a moment to acknowledge our teams. Strategic visions are all well and good, but without buy-in or a demonstrated ability to execute, they are nothing more than lofty aspirations. That is where people come in. In our case, the manner in which our team has embraced leadership's strategic vision, buying in at every point from entry-level employees all the way up to our board of directors, has been humbling. We are attracting industry-proven talent, supplementing our homegrown talent, and with the team we are putting on the field today, we have no choice but to succeed. We are brand enablers. We are visionaries. We are engineers, scientists, and change agents working every day to turn possibilities into real work products, solutions, and services for our partners, our customers, and the markets they all serve. This is who we are. This is why we wake up every morning excited to come to work. This is TILT. With that, we will now open the call for questions. Operator?

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To answer all your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers to ensure the best sound quality. Once again, that is star and then one to ask a question.

We'll pause momentarily to assemble the roster. And our first question today comes from Howard Penny from Hedgeye.

Please go ahead with your question.

Hey, thanks very much for the question. Across the three different buckets of margin pressure, can you or will you segment out where they or how much they contributed to the margin pressure? So how much Jupiter contributed versus Massachusetts versus California?

Yeah, we can talk a little bit in more general terms. We, you know, it really boils down to, on the Jupiter side, the supply chain issues that we've seen, the higher freight costs. And then in the cannabis side, you know, Massachusetts, you know, as we expanded our facility there, you know, it obviously helped on the top line, but, you know, those new rooms, just not quite the quality that we need or expect here in the future. So that had an impact on our margins.

Brad, if you were to weight that, just kind of plant touching versus Jupiter, is it more one than the other?

Yeah, it's definitely more on the Jupiter side since that's more heavily on the revenue side in Q3. So it's definitely more heavily weighted on Jupiter.

Equal to... like what the revenue is, or would it be greater?

Yeah, a little bit greater.

The difference in percentage of your revenue. Yeah, okay, perfect. And then just on Massachusetts, I assume the fix is simple, and that might not be simple. Going to plan is not simple. But there's a timeline where you'll get up to your targeted?

Yeah, absolutely. You know, on our more stable or more our older rooms, you know, we're, we're, we're getting close to where we want to be, but the newer rooms, it's just, we're only on our first or second harvest in those rooms. So we're, we're still dialing in the genetics, the, the equipment, the lights. So it'll come. Um, we're like, so we're just really in the infancy on, on half of that facility.

And, you know, just to add to that, there is, um, We do have a new leadership team. So as there are changes that are coming in, for example, the new lighting in the new rooms, there's also a new leadership team that's come in with modifications to plant care and approach to how they're going to grow going forward. So there's a number of different balls in the air, but we think ultimately it's going to be significantly for the better.

Awesome. And then just lastly, on New York, I know this is one of those questions that you probably don't want to answer just because you're not going to hit the target. Not other than through the county control, but just like when you think you might be up and running with the Shinnecock Nation. Is that a second half for the year event for this year?

I think we've said before that we anticipate being operational by the end of next year. Now, the thing that might accelerate that is if New York State were to permit wholesale sales to occur, so MSOs could explicitly sell across sovereign nation boundaries, then we could accelerate the build-out of the dispensary, which is a much faster, cheaper, easier build. and begin wholesale operations sooner, purchasing third-party product and reselling it. So if we see the tea leaves start to break in that direction, you know, we're certainly looking at things building contemporaneously to begin with. So that could change that a little bit. But when you think about how we viewed it, how we modeled it, and, you know, I think how we've spoken about it to this point, it would be our anticipation to be done with the build-out by the end of next year.

Perfect. Thank you. Thank you. And our next question comes from Aaron Gray from Alliance Global. Please go ahead with your question.

Hi, good evening, and thank you for the question. So to start off, I wanted to speak more specifically on some of the PA dynamics. So first off, you guys expanded your partnership with Old Pal, which in other markets has been known more of a mainstream product line where we've seen more pricing pressure, at least according to what some of your peers have talked about. So just curious, too, whether or not You're seeing any, you know, wholesale or pricing pressure within that kind of mainstream, you know, brand line. And then also more specifically just on PA, did you see growth there too? Because I know you mentioned there was obviously growth overall within cannabis. Just wanted to know whether or not there was growth specifically within PA, just some of the dynamics that we're seeing within that marketplace and some slowdown there. And then, you know, lastly on PA, just how you think about the overall market and kind of as you talked about MSOs focusing on some of their own brands and you guys not currently having you know, retail in the PA market. Do you feel like that, you know, has an impact on not being able to barter or maybe, you know, put some of your brands on their shelves and then you putting their shelves on your own or their brands on your shelves? Does that have any impact on your ability to kind of get your brands penetrating into the state? Thank you.

Thanks, Aaron. I don't think, I'll take it kind of in reverse order. I don't think that the MSO behavior is prohibitive for us. We know that MSOs, with very few exceptions other than in states where wholesale is not allowed, will typically reserve some portion of their shelf space for third-party products. And their preference is not to purchase from a competitor. So I think in Pennsylvania, that gives us an advantage in that we're not competing with any of the retailers at that point. We're selling directly into their stores instead. And for us, it's about having the right product mix. That market has slowly evolved in terms of it's sort of decelerated from where it was not that long ago. It was a superheated market and everybody's darling. I think over the last three or four months, what we've noticed is a tremendous slowdown in the regulatory approval process. Flour is definitely still king. And I know a lot of the MSOs are hedging their bets going after that super premium flour market. I think as we stare down the muzzle of inflation coming into that region, I think having a wider breadth of products is going to be helpful to them. And, you know, they have to protect their margin. There are certain things they're going to carry. So as we look to the brands we bring in, Old Pal is dead on perfect, right? That value space play, which in Massachusetts, they've held their price perfectly. They came in, they set a price, you know, a good healthy price, certainly more than we could have sold the same flour under our own brand. And they've been able to hold on to that space, and the demand has been strong, even though we've seen some slowdown, as reported by some of the other MSOs out there. We think in Pennsylvania, the door is wide open for that as well. Obviously, it's a slightly different looking SKU because you can't sell the rolling papers and the other pieces, but certainly we can sell the flour. So we look forward to getting that in. The slowdown is really just DOH has really slowed down to a crawl for whatever the reason is, and the information they give back is opaque. So We've got a great regulatory team, though. They are keeping their eyes to the ground and looking for ways to leverage prior submissions that have been approved. The one thing we do know is if you want to keep rolling out the same product and different forms of the same products, that we can get approved quickly. That's not what the Pennsylvania market is looking for. They're looking to expand as they eventually migrate towards adult use. So the brand strategy, I think, is well-suited for where Pennsylvania is going. We just need to see what we can do to accelerate the approval process.

Thanks for that color. That's a, that's really helpful.

Um, so second question for me, uh, shifting, uh, to the accessories business and C-cell. So performed very well on the top line during the quarter. I know you had some margin impact. Uh, so first off, I know you spoke to the supply chain a little bit, uh, in the earlier question, but more seriously on, on the Chinese new year, are you changing up your, your buying habits, uh, you know, ahead of that because of some of the supply chain issues, I know you always like stock up ahead of time. And then second question, uh, You know, I know S'mores, you know, filed with the International Trade Commission, who's begun an investigation against some patent infringement on CISO. So just any impacts you guys believe that might have, you know, on your own business as maybe some of your competitors who historically had been, you know, offering similar products at a lower price might be impacted by this filing. Thank you.

I'll take the first part. Gary, you want to take the second part? As far as the Chinese New Year issue, We kind of separate that buying into two different ways. Our stock product versus our white labeled or branded product. We really started gearing up for Chinese New Year in Q2 and you've seen that with our inventory build up in Q2 and still seeing it there. Pretty flat in that business, quarter over quarter. We foresaw this supply chain blood happening at the ports, and so we placed our orders so we could get all of our stock shipments to the US via more economical ocean transport. Granted, it took a little longer than normal, but we got it here. That strategy of bringing that in early, given those supply chain issues, has already paid dividends as we were able to bring over two pretty large MSOs into the fold, now buying from Jupiter. And then the second piece of that is with our white label products. We're really working hard with our customers to – really understand and help them understand their demand planning in order to get those orders in early enough so as to take advantage of some of those more economical ocean rates rather than trying to bring everything over on air. Because the air shipments, it's about 18 times what it is to bring it over on the ocean. So it's a very large, large difference. And in order to not have to charge for freight surcharges on that, we're really looking to partner with our customers to bring those margin impacts kind of back in line.

I think on the ITC front, I think Jupiter has always had a very unique position in relationship with S'more in that its founder, Mark Scatterday, the chair of our board, was really instrumental in helping S'more adapt its previously used technology for the tobacco space into the cannabis space. So I think the ITC case was a long time coming. I think there's a lot of innovation that can occur in the vaping space. It's unfortunate when those efforts are put into doing knockoffs. I think it opens the door to inferior quality and potential safety issues. So we were happy to join with Green Lane in supporting that suit in terms of what it could mean. Certainly there were some named entities that, depending on how that suit goes, could have to rethink that. how and what they sell. So I think for us, we just continue to pound the pavement to connect with a number of our customers and new market entrants to do what we can to have product ready and available for them, albeit genuine C-cell product and not knockoff C-cell product. So we'll do whatever we can to support. There's no doubt on that front, but we certainly were encouraged to see S'more take that step to file that suit.

All right, thank you for answering the call, and then I'll go ahead and jump back into the queue. Thanks.

All right. I think that, Jamie, I'll take over from here. It looks like that wraps up the conference call portion of the questions. We do have a few questions coming in from the webcast audience, though, so why don't I kick this off. Brad, this one's likely for you. There was an increase in OpEx for the quarter, but it was down significantly as a percentage of revenue. So what's the background there?

Sure. A lot of that is due to some one-time operating expenses as well as some severance that we experienced this quarter. We also had some insurance go up within the quarter over quarter as well. We're looking at, I think we have right around that $15, $16 million run rate, I think, is pretty sustainable on a go-forward basis.

Got it. And, Gary, Dana, this one's likely for you. Recognizing the wholesale market is heating up competitively in Pennsylvania, how would you characterize the market dynamics in Massachusetts? Is it equally competitive to what you're seeing in PA?

I think Massachusetts has been a bit more resilient because obviously it has the benefit of adult use. So naturally there are other ways that that market can grow. But I do think we've seen, at least in some of the other folks who've reported, that do have adult use, some deceleration, which when you think about the macroeconomic factors out there, it stands to reason that if inflation is starting to take hold and prices are going up, Disposable income is probably being affected in the first place that would hit, I would suspect, is on the adult use side more than the medical side. I think for us, though, what we've noticed overall is SKUs matter. I think taking a look at what brands are in market, they matter. The price points all matter. Certainly, while we've seen others reporting slowdowns in certain types of sales, our rollout of Old Pal would indicate that if you've got the right brand priced at the right point, you can sell through pretty much everything you produce. So I think it just highlights to us the importance of what I said earlier, which is growing with intent, understanding the market, and then tailoring your product set. Everybody can't just chase super premium all day long. There's got to be some other form factors and other price points. So I think that's sort of our initial view of what we've seen. Flower continues to be a strong seller. There's no doubt about that. I think there's a number of ways that our brand partner is going to help us tap into that market.

And I think as the market continues to mature, as more cultivation comes online, as more dispensaries open up, the need for having distinctive brand characteristics and form factors to differentiate yourself from others is going to be paramount. As Gary alluded to earlier, the sort of days of selling bags of flour as sort of the primary you know, source of revenue are likely behind us. And, you know, now determining what is the consumer demand, what is the consumer asking for, and meeting that demand is what we're looking to achieve.

And, you know, I'd add one last piece that occurred to me as you were saying that, Dana. I think the additional supply on the market is actually great for us because it now allows us to be very tactical with what we grow and what we buy. With more and more biomass coming online and more and more grades of biomass coming online, It really allows us to widen our SKU base, I think, on what we can produce that is not just limited to our own four walls. I mean, we're at about 56,000 square feet of cultivation capacity. We've got the room to flex out to the full 100,000 square feet allowed by the state. But, you know, I think how you allocate that space and what you want to grow in that space is always going to be the high-quality pieces. So knowing that we can access other grades of biomass that can then support our branded product lines It just allows us to be very tactical and allows us to actually bring product to market that much faster instead of having to just work through our own growth cycle. So I think there's still a lot of room to run in Massachusetts. We're excited to hopefully add adult use in Brockton in the next few days and in Taunton in the weeks to come. And I don't want anyone to forget about Cambridge coming online, hopefully by the end of the first quarter of next year.

One last question here from the audience with respect to Massachusetts. With adult use sales expected to launch in two of your stores, what kind of revenue lift do you typically see out of that type of medical to adult use conversion?

Traditionally, I think you saw a doubling. So anytime you had, like if you take a look at our Taunton dispensary, which is on a run rate of roughly $10 million a year, you'd expect to see that double up and have a total of $20 million. Now, it does depend a little bit by location. I could certainly make an argument that in Cambridge, for example, our medical is liable to be much higher than it is in Taunton. I think we go in with that expectation of doubling. It'll be interesting to see if any macroeconomic currents change that a little bit, whether it's basket size or whether it's frequency of visit. I think that's going to come back again to what you're carrying and where you're choosing to cater your SKU set to. But at least that's what we'll go into the launch looking for at this point.

Great. That wraps up the webcast Q&A here. Gary, I'll toss it back to you for closing remarks.

Thanks, Sean. Once again, I want to thank everybody for joining us for our call today. I know we're one of the last ones to report, but we look forward to continuing to deliver throughout the remainder of this quarter. We're excited about our retail store openings, as you heard Dana and I speak about earlier. And we look forward to reconnecting with everybody after the new year when, again, we'll be on U.S. GAAP and ready to move over to SEC registrant status. So thanks again and take care.

Ladies and gentlemen, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.