TILT Holdings Inc.

Good afternoon, everyone, and welcome to TILT Holdings' fourth quarter and full year 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. I would now like to turn the conference call over to your host today, TILT's head of investor relations and corporate communications, Lynn Ricci. Please go ahead.

Thank you, Sean Lee. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our fourth quarter and full year 2021 earnings press release. The press release, along with our quarterly financial statements and MD&A, will be available on CDAR as well as on our website at www.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 12 months ended December 31st, 2021 and 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 other 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 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. 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 TILTS CEO Gary Santo, CFO Brad Hoke, and COO Dana Arvidsson. Following our prepared remarks, we will open the call for Q&A. With that, I will now turn the call over to Gary.

Thank you, Lynn, and good afternoon, everyone. 2021 was a transformational year for Tilt as we embarked upon the first full year of the brand partner B2B strategy that we introduced in late 2020. That strategy was based upon our belief that over a 12- to 18-month period, the wholesale cannabis marketplace would ultimately shift from bulk flower and distillate sales to to more traditional consumer packaged goods. Edwin's in the wholesale market during the second half of the year accelerated this shift, testing the agility of the Tilt team to transition its operations from bulk to packaged goods. I'm proud to report that the team was up to the challenge. And while we are still in the early stages of that transition, our ability to quickly activate the brands we signed during the year was nothing short of remarkable. Whether activating Her Highness within 30 days, Old Pal within 60 days, or Aero within roughly 90 days of signing, the team adapted quickly, modifying standard operating procedures live time, and by year end, branded product sales neared 20% of total wholesale revenue despite limited initial production runs. To do this meant putting our brand partner products on equal footing with our own products in terms of allocating biomass, production cycles, and in the case of our stores in Massachusetts, shelf space. This is a key attribute of our strategy, separating tilt from other operators in the space. More importantly, we have not experienced the softness in those branded sales that we and others in the marketplace have seen in their traditional wholesale business. This was our original premise when we first launched our strategy, and while the sample size is still small, we could not be more pleased with the results. With predominantly the same assets for most of the year, the company experienced strong organic growth, posting record revenue of $202.7 million for an increase of 28% year over year, as well as record adjusted EBITDA of $22.5 million for an increase of 33% year over year. And we did all of this while only increasing our cash-based operating expenses by 3%, demonstrating the scalability of our business. To put this in perspective, Historically, our wholesale cannabis mix was made up of 20% brands and 80% bulk flower. With the progress made in 2021 and brands ramping in 2022, we are targeting a brand-to-bulk mix closer to 80% brand and 20% bulk over the longer term. And the response from our brand partners has been nothing short of humbling, with Tilt quickly becoming the partner of choice for independent brands looking to scale their businesses. Turning towards operations, while Dana will provide more details regarding the significant improvements made during the fourth quarter of 2021 into the first quarter of 2022, a few words about each of our business lines. Beginning with our inhalation and accessories division, Jupiter Research, we were excited to be part of S'mores' annual strategic planning process for the first time. As you may remember, S'more is the largest vaporization hardware manufacturer in the cannabis space through their line of premium C-cell products, of which Jupiter is the largest U.S. distributor, having close to two times the C-cell market share of its nearest competitors. This represented the latest step in a renewed commitment between Tilt and S'more to grow C-cell's already dominant position in the market through the development of next-generation technologies designed to address a vape market that is transitioning from traditional concentrates towards higher terpene extracts. At the same time, our in-house R&D team, together with Jupiter founder and chair of our board, Mark Scatterday, have a number of proprietary products in various stages of development, with the potential for some to debut in late 2022 or early 2023, pending successful QC and QA testing. The market has mistakenly labeled Jupiter as nothing more than a distributor of third-party products. And in 2022, we look to change that misconception by demonstrating our full set of capabilities, which, when coupled with our cannabis operations, make Tilt a true full-service partner to all in the cannabis space. Speaking of our cannabis operations, on the plant-touching side of our business, we doubled our canopy in Massachusetts and now hold both medical and adult-use cultivation and manufacturing licenses in the state. We also launched medical and adult use sales in our Brockton dispensary in early Q4 and added adult use to our existing Paunton dispensary by year end. Our Cambridge dispensary is awaiting final inspection in order to commence medical sales sometime this summer. As I mentioned earlier, we continue to take a unique approach to our retail operations in that we choose to showcase brand partner products as well as those of our best MSO customers, helping them extend their shelf space while solidifying our role as a supporter of their businesses and not a competitor. In Pennsylvania, we are experiencing tremendous improvements in our gardens, both in terms of available strains and potency. But our value add to our brand partners is no more evident than in the ability of our corporate development team to find ways to navigate a challenging product approval process. This core competency has allowed Tilt to launch a number of branded SKUs for Old Pal and Arrow that have taken off in 2022, resulting with our wholesale business in the state up 30% from Q4. With the acquisition of Standard Farms Ohio, we entered our third limited license market, and Standard Farms is quickly becoming a robust launch platform for brand partners such as 1906 and Timeless Refinery. who are both in the midst of initial production runs that will allow them to introduce their first products to the state through their partnership with TILT. We are excited to unlock the growing Ohio market for additional brands possessing unique products and formulations in Q2 and beyond. And of course, we cannot move on from cannabis operations without mentioning our entry into a fourth market through our historic partnership with the Shinnecock Indian Nation of New York. This first of its kind partnership establishes Tilt as a social equity leader in the indigenous community, offering the company a very affordable entry into what many experts believe will be a top two cannabis market in the United States in the years ahead. We are currently working with both New York State and the Shinnecock Nation to allow for wholesale trade outside the sovereign land and are hopeful to have the Southampton dispensary operational before year end, with the new cultivation coming online in 2023. This replicable business model allows TILP to create great value for our shareholders at the same time as providing an exceptional opportunity for economic growth for the Shinnecock Nation. As I've stated in the past, the Indigenous community has been left out of most social equity conversations in cannabis, and we are proud to be at the forefront of enabling prosperity for so many in their great community. With that, I will turn the call over to Brad to review our financial results before coming back for closing remarks. Brad?

Thanks, Gary, and good afternoon, everyone. As a reminder, all results discussed today are in U.S. dollars. 2021 was a strong year for TILT, highlighted by 28% year-over-year revenue growth to $203 million and 33% adjusted EBITDA growth to $22.5 million. The revenue growth was driven by a 33% increase in Jupiter and an 11% increase in our plant-touching business. At the end of 2020, we had 20% of our customers utilizing services from both Jupiter and plant touching. Throughout the year, we made it a priority to leverage the customer base for cross-selling. As a result, we ended 2021 with 43% of customers utilizing both sides of our business. Gross margin before fair value of biological assets for the year came in at 25%. compared to 29% in 2020, with the decline primarily driven by lower margins at Jupiter due to increased freight costs in 2021 related to shipping congestion at the ports. In addition, we experienced margin compression due to customer mix during the fourth quarter. Margins in our plant touching business were impacted by lower wholesale prices, delayed product approvals in Pennsylvania, and growth challenges in our added capacity in Massachusetts, which Dana will touch on shortly. At the operating expense line, OPEX less non-cash adjustments for stock compensation, depreciation and amortization, and impairment charges in 2021 totaled 37.7 million, compared to 36.6 million in 2020. As a percentage of revenue, OPEX excluding these non-cash adjustments was 19% in 2021 compared to 23% in 2020 with the improvement reflecting our continuous commitment to lean operations and efficiencies. Cashflow used in operations for 2021 was 8.8 million compared to cashflow provided by operations of 9.7 million in 2020. The difference was primarily driven by an incremental $32 million investment in inventory Roughly half of that was attributable to offset supply chain bottlenecks at Jupiter. This was a strategic decision to ensure we had supply for our partners, and it continues to pay off as we remain the clear market leader in C-cell vape hardware distribution. Given PILT's growth in 2021 and the expanded canopy that was approved at the beginning of 2021, the other half of that inventory increase I just touched on was related to cannabis. Our work and process cannabis and cannabis oil is running higher given these changes compared to last year at this time. Looking at the primary quarterly results, Q4 revenue was up 28% year-over-year to $54 million, with adjusted EBITDA up 6% year-over-year to $4.8 million. Sequentially, we saw modest growth in revenue and a slight decline in adjusted EBITDA versus Q3. Overall, Q4 results came in a bit short of our expectations due to the market softness and pricing in Pennsylvania and Massachusetts. Turning to the balance sheet, we ended 2021 with $7 million of cash compared to $8.9 million at the end of 2020. Working capital at December 31, 21 was $41.1 million compared to $57.4 million at year-end 2020. as $35.8 million of long-term senior debt has now turned into a current liability. We are in active negotiations with our banking partner and note holders as we look to refinance our debt and extend maturities in the quarters ahead. Regarding our 2022 guidance, we currently estimate annual revenue to range between 255 to 265 million, and adjusted EBITDA to range between 27 and 32 million. At the midpoint, this reflects approximately 28% revenue growth and approximately 31% adjusted EBITDA growth over 2021. With that, I will now turn the call over to Dana for operational updates.

Thanks, Brad, and good afternoon, everyone. I'd like to start off by taking a closer look at our operations within each of our key markets. Jupyter Research continues to be a strong and steady business for us. We enjoy being the leading C-cell partner in the U.S. We'll continue to value the C-cell business as a cornerstone of our inhalation and technology business. Jupyter's commitment to customer service is unmatched in the industry. Anecdotally, we recently lost a large customer of Jupyter due to pricing. as we were not willing to match a competitor's price and concede to a much lower margin. However, this customer came back within two months when it became clear to them that their new product not only had quality issues and inferior performance, but the support and customer service they received was not up to par. Companies want a reliable partner who they can trust, and we've earned that trust as a leader in the vape hardware market since our inception. The ordering patterns that we are seeing from customers has adapted since the onset of supply chain disruptions driven by COVID. As customers now expect Jupiter to hold a certain level of stock and custom inventory on hand, especially with new markets coming online, such as New York and New Jersey. These changes have a direct impact to Jupiter's demand planning process and our need for warehouse space. Having said that, it is a reminder of the fact that Jupiter is inherently levered to grow as states introduce new medical and adult use programs. In addition to New York and New Jersey, several other states are gearing up to add adult use programs in the coming one to two years. As our customers begin to order product into those new markets, Jupiter stands ready to grow right alongside them. Now I'd like to transition to our plant touching business, focusing on Massachusetts and Pennsylvania. At the top of the call, Gary pointed to 2021 as being a transformational year for TILT. This can be seen from the markets we entered, the early successes with our B2B strategy, our historic partnership with the Shinnecock Nation, and the team we've built to ready us for anticipated growth. What has also been transformational behind the scenes are the new initiatives and best practices we've implemented in our cultivation facilities. When our newly hired heads of cannabis operations and cultivation took stock of the gardens last summer, quite frankly, they found problems. Inconsistent watering, subpar lighting in some rooms, and imperfect biosecurity protocols resulted in increased pest pressure and plant yields that were less than ideal. To re-energize our gardens in both Pennsylvania and Massachusetts, our leadership team has taken several key steps. We recently installed new market standard LED lights in several grow rooms and plan to update additional rooms with these lights in the coming weeks. We instituted a complete reset of our genetic profiles, introducing 25 new resilient strains proven to test at high levels. We've also invested in new cloning techniques and organic feedings to reduce time to harvest. We've drastically reduced crop fail rates. We now have more high-quality flour available for sale than we ever have before. For example, Standard Farms PA was putting out 7 grams of flour per square foot during Q2 2021. Now that figure is closer to 28 grams per square foot and growing. Over the same timeframe, potency ratings at Standard Farms PA grew by 85%. Rooting times decreased from 20 days to 10 days, and our time to flip harvested rooms declined from five days to four hours. On the production side, we'll be introducing additional automation to vastly improve capacity. In Q3 2021, we were producing 1,000 prepackaged apes per week. Today, we can do 10 times as many. These changes have been no small feat, and I would like to commend our cultivation and production teams for their hard work and dedication to their craft. As we shift more and more into a brand-driven environment, the investments we make in the garden today will prove highly beneficial as we look to meet the needs of our increasing roster of high-quality, unique brand partners. Now let me provide some color in how these changes have impacted each market. Starting with Pennsylvania, where we've recently seen growing volumes of orders following the launch of Old Pal and Arrow, as well as from the vape product recall announced in February, We can proudly say that we did not have any products recalled, as we've always focused on product safety, consistency, and effectiveness for our patients. This has allowed us to respond to the needs of operators and dispensaries who may have been impacted by the recall. Furthermore, our corporate development team has done a remarkable job of navigating the complexities of the regulatory process in order to get our partners' products to market. In Massachusetts, we're experiencing material improvements and significant traffic increases in our retail businesses following the launch of adult use in Taunton and Brockton. Our customer retention rate has grown to over 70% in retail. As Gary mentioned, we are utilizing our dispensaries as a platform to further showcase our brand partners and expect to increase the mix of branded sales versus our own products. Before turning it back to Gary, I want to commend our team in Massachusetts for taking home a gold and silver award at this year's Nikan competition. Our jelly bean live resin was awarded the gold medal for solvent concentrates, and our vegan peanut butter cups took second in the edibles category. Two top wins in such highly competitive categories is a reflection of our commitment to creating quality products. especially given that these awards are voted on by our expert peers in cannabis. With that, I will now turn the call back over to Gary for closing comments.

Thanks, Dana. Before opening it up for Q&A, I want to reiterate how proud I am of our team for persevering through whatever is thrown their way. We cannot control the macroeconomic backdrop and inflationary pressures or delays in regulatory approvals and market wholesale pricing. Our team continues to roll up their sleeves day in and day out to deliver for our brand partners, customers, and patients alike. It is clearer than ever that we made the right choice to emphasize CPG and brand enablement, and it was equally important that we partnered with brands that sell products all along the value chain. We have an offering for customers regardless of price point, which is critical in this inflationary environment where many cannabis consumers are trading down as opposed to paying up for ultra-premium products. Tilt's plant-touching business was on the verge of being sold when I started in 2020, but the moves we have made are attracting proven talent from all parts of the cannabis industry. In 2021, we retain new heads of cultivation, cannabis operations, processing, market general managers, and most recently, our new head of investor relations and corporate communications, Lynn Ricci, who joins us from Trulieve, and Donnie Ryan, our new head of FP&A, who joins us from Cresco. We entered 2021 as a collection of disparate parts undergoing significant change, but exited the year as a single unified entity with an incredibly talented and deep team possessing a single vision and a relentless commitment to execution. As we continue to drive organic growth across all business lines, the increasing levels of consolidation throughout the cannabis marketplace are creating all manner of inorganic expansion opportunities that would benefit from the efficiency and the operational expertise that TILT offers. all but ensuring that our best days lie before us. With that, we'll now open the call for questions. Operator?

Thank you. And at this time, we will 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 start keys. One moment, please, while we poll for questions. Our first question comes from the line of Aaron Gray with Alliance Global. Please proceed with your question.

Good evening. Congrats for the finish of the year, and thank you for the question. So first question for me, just on the revenue guide, 255 to 265, just to provide some additional color, what's embedded within that, particularly spaced out between the Jupiter accessories as well as the plant touching businesses in terms of the growth outlook and better with the sales guy. Thank you.

Brad, you want to take that?

I can take that one. So what, as Gary mentioned in the prepared remarks, we have our Cambridge offices or Cambridge facility, medical facility, which will be opening in We're projecting the summertime right now. So that one is the only kind of new piece. We're not expecting anything in that guidance for New York. As far as what we're looking at for Jupiter versus the other plant touching operations, we're looking at a roughly, about a 20% growth on the Jupiter side, and then the rest being the cannabis operations.

I think one of the things you have to consider, Aaron, are a couple of factors. Obviously, we're all seeing all the same things that the other operators are seeing in terms of compression in pricing, compression in margins, right? So how many units do you have to sell to get to the same level of revenue? So I think we feel very comfortable that we will grow at least with the market and probably exceed the market. I think the latest BDS estimate is somewhere around 17 or 18% vaping growth, and we're trending to more like 20%. Certainly, as we activate our dispensaries, and more importantly, as we activate more SKUs within our brand partners, that's going to really start to drive things. If you think about how we exited the year, I think we had about 17 new SKUs that we added from our brand partners, which is just sort of scratching the surface on what they can offer. let alone the new brand partners. So, you know, I think the combination of events there, especially since the brand partners do seem to be bucking the trend of the wholesale weaknesses we've seen in the non-branded products, I think set us up for the guidance that we provided.

And, Aaron, just a little further on that. When I'm looking at the full guidance, you know, the full year guidance we're saying is at basically a 28% revenue growth When I was looking at that, that 20% is really what we're looking at on a kind of an average basis across everything. If we look at just the inhalation, the Jupiter business, it's probably going to be a little bit lower than that as we ramp up, like I said, on the plant detection side and have a full year of our Brockton facility and adult use in Taunton. and then a part year of Cambridge.

Sorry about that. No, no, no, that's really helpful detail. I appreciate that. So same question for me, you know, going on regulatory. I believe you said you're still being impacted by some of the regulatory delays on product approval in Pennsylvania. So could you just give me a couple of heads up. Is there any expectation on timing of that being resolved? I think that Preview was resulting in some inventory not being ready but not sold. And then also for PA, you know, you guys put out a press release back in February talking about none of your products were impacted, you know, by the recall. So any type of near-term, you know, benefit that you guys might be seeing in the market there. So that would be helpful to cover in terms of the Pennsylvania market. Thank you.

I'll jump in on the PA market initially and then Dana or Brad. I think taking them almost in reverse order there, you're right, Aaron, in that we did put out that press release in February, and we did see strong demand for both our bulk terpenes, which are cannabis-derived, as well as our carts that we had filled, both the Standard Farms brand and our brand partner carts. And that sparked some significant growth in February. Around the time that growth was starting to work its way through the pipe, we launched Old Pal in the state, which then took right up. And as a result, I think we launched them in the last two weeks of March, and they quickly became almost 30% of all wholesale sales in that month. So, you know, we have more brands that we're looking to launch. We have a SKU with 1906 that we look to be going into production on later in, I think, the second quarter, possibly early third quarter. So we expect those brands to start to really take hold and drive that Pennsylvania business. It does seem like it is a SKU starved market right now. Obviously, the vape issue has slowed some things down for some providers who rely on non-cannabis derived terpene mixtures. But certainly we feel very confident with the brands we can take in. I don't know, Dana, if you want to add any more.

No, I mean, the only other thing I'll say around the regulatory piece is, you know, we feel like in the interactions we've had and the dialogue we've had more recently that, you know, we've probably got the battle scars to prove that, you know, we have a better understanding of how to navigate and to get the right information in front of the right people in order to get products approved. It's obviously never – Never easy, but I think we feel like we've got that playbook down to a much better extent than we did maybe six, nine months ago.

I'm going to give a special shout out. Nikki Moyers was in our regulatory compliance group, and we shifted her into the corporate development group under Christina DiTomasi, and the intent there was as we activate brands to have somebody who is firmly rooted in what is required to submit any of the product requests that we have. And Nikki has done an unbelievable job breaking down the product almost as well as the actual brands themselves in terms of understanding the formulations, what's been approved by the FDA, what hasn't, what's the daily allowable amount. So by the time we submit on behalf of our brand partners, We've already made a case that's hard in most cases for these regulators to refuse. It takes a little longer up front. It's not the prettiest thing you have to work on, but it's resulted in getting, I think, all of the SKUs for 1906 approved in Ohio, getting SKUs approved in Pennsylvania when really not many others are. So, you know, I think that's a key core competency, as Dana pointed out.

Great. Very nice to hear. Last question for me. I'll jump back in the queue. A lot of the other MSOs have been, you know, cautioning in terms of flat to down for 1Q. So just any color in terms of the frequency of growth within the guidance and some color on 1Q specifically? Thank you.

You know, as far as the growth, we're looking at very similar. You know, I think it's our growth really, it's going to be back half driven. You know, there's always seasonality, especially in the, on the inhalation side, you know, when we look at the buying patterns and, you know, really shifting buying patterns of some of the MSOs. So I would say it's, you know, Q1 is, you know, I would say we're going to echo the comments of some of the prior MSOs.

Yeah, I mean, and, you know, on the Jupiter side, again, I go back to the prepared comments where, you know, I'd indicated a lot of the you can almost look at the status of different states in terms of introduction of a new medical program or adult use and recognize that that's a growth opportunity in and of itself with Jupiter, right? Because if we've got MSO customers who are gonna then open cultivation and dispensaries within those states and take advantage of the new market, You know, that puts us in a position where they can start ordering from Jupiter for that specific state. So there's some natural growth in there.

One other thing I would add, Aaron, is as we look at all the improvements that Dana talked about earlier in our gardens, a lot of those genetics are planted. Our first harvest out of those 20-some-odd genetics, we expect probably maybe late spring, early summer growth. So as we look ahead to what our offerings are going to be, not just on the brand partner side, but even just in terms of all of our own SKUs, it really sets us up nicely across our retail network as well to really be able to push that growth.

All right, great. Thanks for the color.

Best of luck in 2022, and I'll jump right into the queue. Thanks, Aaron.

And as a quick reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. Our next question comes from the line of John DeSorcery with Viridian. Please proceed with your question.

Hey, guys. How are you? Thanks for taking the questions. Just to piggyback on that last comment about kind of the seasonality and sequential nature of results, You know, can you kind of just elaborate a bit further on, you know, how much of that kind of implied second half ramp is anticipation for new markets versus for customers buying Jupiter as well as, you know, kind of how much of a boost will the Cambridge Medical Dispensary kind of bring on board here as well?

Yeah, I mean... We continue to support organic growth at this point. We've made no real acquisitions, right? We talked about the move into New York. We're hoping to get the dispensary open towards the end of this year, but the cultivation really won't come online until 2023. So you figure there's not really much of anything baked in on that front. Certainly we expect to see some ramping in Ohio as we start introducing products. Ohio was virtually a non-contributor to our bottom line last year. We expect that to change this year. I think the improvements that we are seeing in our efficiency and our throughput and in the quality of what's coming out of our cannabis operations Massachusetts and Pennsylvania are going to be big drivers I mean we we took advantage of the softness really in q4 into q1 to hit that reset button on on cultivation I mean we actually we called some of our mother rooms we took some dramatic steps because we felt ultimately we could have kept what we had and reached a certain level where we would never get any better or we could hit the reset button take advantage of the softness in the market and And as the market starts to come back, be ready and raring to go with some serious high-quality genetics. And that's what we did. So I don't know that it has much to do with new markets. On the dispensary front, you know, I think there, you know, the hope is Cambridge is all built out. We get through our process. And if by the end of the summer that's open and medical, we would expect the Cambridge store to be every bit as good as the Taunton store as far as medical is concerned, if not better given its location. There's really no other dispensaries nearby. So, you know, it's a TBD until it gets open. I don't like counting it before it hatches. But, you know, certainly that will play a role in it. But I think it's still going to be more organic growth spreading our assets.

Okay. Now that makes sense. All right. And then, you know, kind of just back to those, you elaborated a lot on the quality controls and the quality improvement at the cultivation facilities in Massachusetts and Pennsylvania. Can you just kind of talk us through, you know, what does that – how does that translate to results? Is this more of a – you know, is it a better scale of revenues for what you're doing? You know, getting more output out of your canopy? Is it better pricing by just having, you know, higher quality product? What is the primary – what is kind of the read-through there with these enhancements you're getting? Yeah, I think there's –

I think the result is a combination of everything you've just said. I think having higher potency flour is significant. There is a set of consumers out there that are obviously very potency-focused, very flavor-focused in some other instances. Having the ability to turn rooms over more quickly so that you can get An additional, you could potentially get an additional half turn out of a particular room than you might have otherwise. Obviously, that means, you know, you're able to harvest more plants over the course of the year. And so, what, you know, the end result of all of those changes is higher quality flower, better testing flower, less likelihood that you're going to have flower that's subject to remediation, right? and a lot more diversity, a lot more diversity in what you can do and what kind of products you can put out on the shelf where, you know, if you're limited to sort of two strains that are consistently, you know, sort of subpar, that limits a lot of what you could put out from the standpoint of products for people to buy.

I would actually add a couple other things. I mean, the Pennsylvania stat is the one that jumps off the page. When you can go to 7 grams per square foot to 28, that's just getting so much more throughput out of the existing infrastructure that you expect margin improvements to come out of that. If the quality is better, obviously you hope to get pricing improvements at the same time. But I also think the other piece has to do with our brand partners. As we work with brands more and more, they are looking for strain-specific solutions. So the more strains we are able to offer, the more blends of strains, custom strains, and the experiences associated with the strains, I think just continues to enhance our attractiveness to the brand partners, both for their existing SKUs, and then as they look to these markets, almost everyone we are working with now is already talking about expanding to SKUs they might not even have in other markets. So if we're doing that right, that's kind of the proof of the pudding for us. So it's a cascading effect, as Dana said.

Okay. No, that makes sense. And then, you know, you guys have had success so far in bringing brands into Massachusetts and Pennsylvania. You know, how is that translating to wholesale demand? And, you know, kind of similarly to the cultivation question I just asked, is it a drive-through of greater demand or are you guys seeing better pricing there?

So I think there it starts with the demand. I would say that we continue to sell through our branded partner products in all of our markets. Now, we haven't launched in Ohio yet, but we have every reason to believe when 1906 hits the shelves and Timeless behind them, that demand is going to be pretty hot and strong just based on what we're seeing in other markets that those products are in. So, you know, as I look at that compared to, say, our legacy wholesale products where we've seen that same softness that others have seen, that's really why we partnered with these folks, right? We're fighting for that part of the MSO shelves that they dedicate to third-party products, then bringing third-party products that the consumer want is important. Now, as far as the pricing is concerned, our general feel is, overall, these brands would attract a better price point than if we produced the same exact product under our own brands. So while we might be sharing some of the economics there, we're also sharing a larger pie, so to speak. So that's sort of the two-step prongs as we look at the brand throughput. It was really prepping for what we thought was going to be a much more mature wholesale market. We always thought this is what would happen. The bulk and the sort of also-ran brands would struggle, but there would start to be some brands emerging. And, again, it's still early days, but, you know, certainly what we saw, even though the whole process accelerated faster than we anticipated, we've seen that strength in the brands on the sell-through and then also on the price points.

Okay. And then just one final question out of me. You guys, you know, everybody's kind of talking about Massachusetts pricing challenges and headwinds on the wholesale side. You know, how do you see this kind of going for the remainder of this year? You know, do you see things improving? And is there kind of a light at the end of the tunnel here? Or are we just going to continue with a bit more challenging? Obviously, not near as challenging as the western part of the country, but still more challenging than it's been in Massachusetts for a while.

Yeah, I mean, I think I go back to, not to sound like a broken record, but I go back to the points we've been making about leaning into brand, brand partnerships, brands that have proven themselves in other markets. Because one way to stabilize or even grow on the wholesale side is to bring new, unique products that haven't yet hit the market in that given state, right? Because you can differentiate yourself from everyone else who's selling the exact same flower, the exact same strains, the exact same potency. But if you can differentiate yourselves with new brands that have that uniqueness, you know, we think that that's the way that you maintain and grow those wholesale relationships is to continue to bring them diversity of brands, different form factors, different, you know, different composition, whatever is available. So I think that, again, it all comes back to having those partnerships.

Actually, the flip side of that, too, is I think in Massachusetts, there's one other piece that matters. If it's high quality and it's got a high potency, it's still going to carry a good price. If you are a great purveyor of mediocre flour, then you are feeling it worse than most. But if you're able to crack that high 20s, low 30s every now and then, you're probably still able to command some amount. So that 20% of our business that might be looking at the wholesale flower sales goes back to Dana's earlier comments about if we have the better products coming out of the better garden, not only does it help our brands, most certainly it does, but it also, I think, gives us a leg up to help combat those compressing prices. Okay. That's really helpful.

Oh, and actually, I do have one more question. You know, you guys have talked previously about New York and not wanting to step in front of the legal market in the state, even though technically you can with the Shinnecock partnership. You know, what happens if things get further delayed and there aren't social equity candidates in the fourth quarter? Would you still go ahead and open a dispensary, as you alluded to earlier in the call?

Well, I mean, a lot of that depends on what the Shinnecock decides. So they've already done the medical approval, and I think by all means we would open up the medical dispensary. The only gating factor in terms of the speed there is if we're able to work with both the nation as well as with New York State to get approval to be able to purchase wholesale product from other MSOs in the state. The great news is we've got a few MSOs that have written letters to the state in support of the Shinnecock project. Everyone just wants to make sure they won't be violating their existing New York State license the second they sell that wholesale product over the sovereign state line. On the adult use side, I guess that'll be kind of a game-time decision. You know, I think the Shinnecock know they have the ability, but also are very cognizant and aware of their relationship with New York State. You know, that said, you know, I don't know if that changes, if there continues to be delays, because obviously this is meant to be an economic engine for the Shinnecock, and we would support them every step of the way.

Yeah, and, you know, I think we feel, and the Shinnecock as well feel to a certain extent that the constructive dialogue with the state and OCM around this topic has been very, very helpful, very positive in nature. So obviously you can never you know, sort of predict the future in that way, but we've been very pleased with, you know, the openness of OCM to come up with a solution for the Shinneclark. Okay.

Great. Well, that's really helpful. Thanks, guys. Thanks.

And we have reached the end of the question and answer session, and I'll now turn the call back over to Gary Santo for closing remarks.

Thank you so much. Again, thanks, everyone, for joining us this afternoon for our report on the fourth quarter and a full year. We're already almost all the way through the first quarter. We're excited to be reporting back to you in probably four or six more weeks, give or take, on how things are going along the way. The transformation continues. It's going quite well. And we're excited for the traction we've made, but more excited for what lies ahead. So look forward to connecting with you again next quarter.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.