TILT Holdings Inc.

Good afternoon, everyone, and welcome to the TILT Holdings second quarter 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, Shmali. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our second quarter 2022 earnings press release. The press release, along with our quarterly report on Form 10Q, is available on the U.S. Securities and Exchange Commission's website at www.sec.gov, on CDAR at www.cdar.com, and 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. 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 Amendment No. 2 to the Form 10 Registration Statement filed by TILT with the FCC and on CDAR. 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 law. As of today's call, we are presenting our financial results in accordance with the United States Generally Accepted Accounting Principles, or GAAP. During the call, management will also discuss certain financial measures that are not calculated in accordance with GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for TILT financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their nearest equivalent GAAP measure is available in our earnings press release that is an exhibit to our current report on Form 8K that we filed with the SEC and CEDAR today and can be found in the investor relations section of our website. On today's call are TILTS CEO Gary Santo and CFO Brad Hoke. Following our prepared remarks, we will open the call for a Q&A. During today's prepared remarks or during the Q&A session, we may offer metrics to provide greater insight into our business and or our financial results. Please be advised that we may or may not continue to provide these additional metrics in the future. With that, I will now turn the call over to our CEO, Gary Santo.

Thank you, Lynn, and good afternoon, everyone. The first half of 2022 was a challenging period for the cannabis industry as a whole, as the second quarter improvements that some thought would happen turned out to be muted at best, and the reduction in expectations for the remainder of the year by operators and analysts alike has been well documented over the past few weeks. As a company that does not look to compete with our operating peers, but to be their supplier of choice for plantware and hardware, it is only natural that we would be affected by their now revised expectations. Our hardware business, Jupiter Research, and the basis for the B2B strategy we undertook beginning in 2021, was most affected by this market softness. As after getting off to a fast start in April, we saw orders slow significantly, with some of our largest customers who have historically placed sizable orders in the second quarter still working through inventory orders at the end of last year. Digging into the hardware side of the business a bit deeper, for the second time in three years, we are experiencing a significant change to how our customers are purchasing. While COVID-19 and supply chain issues required Jupiter to carry more stock on its balance sheet in order to accommodate historical purchase trends, customer order size remained large enough to justify the working capital required for such an approach. As we continue to work with our customers to refine their demand planning process, we are now seeing a shift towards smaller, more frequent orders, often placed just in time. That comes with its own working capital requirements, but Jupiter's longstanding excellence in supply chain and inventory management affords us the opportunity to pivot quickly, and over the next few months, we believe we have a strategy that will allow us to more cost-effectively manage the inventory necessary to support this change. Equally as important, as the largest distributor of C-cell hardware in the U.S., we spent the first half of this year working closely with S'more International, the owner of the C-cell patent and our manufacturing partner, developing a new pricing structure for C-cell products that will allow Jupiter to provide premium hardware at much more affordable prices while stabilizing margins. I am pleased to report that this new pricing structure is going into effect as we speak, and we have already begun to take orders. As product ships and is delivered, we expect related results to start appearing in our fourth quarter financials. At the same time, our R&D team continues to develop new technology that is aligned with vape marketplace trends. We are actively developing products designed to meet the changing pace of formulations now in the market, reestablishing Jupiter as a leader in vaping hardware innovation. These new technologies remain on track for introduction before year-end. Our goal is to position Jupiter as the vendor of choice for hardware with a broad portfolio of offerings that cover a variety of form factors, quality, and price points, all backed by the superior quality control and assurance, customer service, and supply chain management that Jupiter is known for. As a result, we look to enter our busiest sales season with a better selection of products at more competitive prices and terms better suited to meet the demands of our customers. Turning to our plant touching operations, it is no secret that we operate in some of the most challenging markets in the U.S. Several data sources confirm that growth, while still present, has slowed in those markets. According to data provided by the Massachusetts Cannabis Control Commission, cannabis sales in Massachusetts increased approximately 6% from the first quarter to the second quarter. In Pennsylvania, BDSA Market Analytics reports that sales grew only about 1% over the same period. Ohio, however, remains a bright spot as their medical program continues to ramp, with sales growing 16% from Q1 to Q2. That said, our sequential growth outpaced all of these markets, significantly in the case of Ohio, and all on an organic basis. When TILT first announced its B2B strategy to the marketplace, it was with an eye towards the increasing competition in our markets and the associated price volatility we believed would occur by late 2022, early 2023. By focusing on wholesaling consumer packaged goods and establishing partnerships with brands that had authenticity, depth of brand architecture, and a proven ability to compete in highly competitive markets, we believe that we could become a one-stop shop for third-party products that operators previously had to curate on their own. As we have previously reported, the speed at which the market began to transition was quite a bit faster than anticipated, with the first sign showing in the second half of 2021. exacerbated in 2022 by what looks to be waning consumer demand in more mature markets, likely the result of macroeconomic factors that we have all been enduring since the start of the year. This has made for a difficult environment in which to be scaling a new business model, but early results continue to validate that model. As a result, we are doing what we can to accelerate the scaling of our operations while keeping TILT as lean as possible, continuing, as we have since 2019, to fund our business out of cash flow from operations. Speed does cost, though, and Brad will speak more about the impact of the increased headcount necessary to support our retail stores in Massachusetts and provide depth in our leadership team. However, the near-term margin impact is something we feel is necessary to achieve long-term success. During the second quarter, we signed two additional brands, Heisman and Black Buddha, bringing the total number of TILT brand partners to eight. To date, we have activated approximately 35% of the available SKUs across six of those brands. And by year end, we expect to have all brands in market with 100% of their available SKUs, a sizable lift. As you might imagine, bringing brands into new markets can be challenging, especially medical markets such as Pennsylvania and Ohio, as packaging, formulation, and marketing requirements vary from market to market, resulting in both regulatory and supply chain issues. For most brand partners, that can prove challenging, but this is a core competency of TILT. While that may not eliminate those challenges, our team is at its best when identifying near-term, mid-term, and long-term solutions, allowing us to activate brands in new markets quicker than most. In fact, as our brand partners have worked through the activation process with us, not only is our team regularly recognized for providing a best-in-class experience, but we have received requests from these brands to provide advisory services and help manage their supply chains across all their markets, not just the ones where TILT has cannabis operations. I am pleased to report that at present we are in negotiations with certain brands to provide those services nationwide and are excited to begin developing this emerging line of business. This ability to provide such a differentiated approach continues to draw interest amongst brands, with inbound inquiries from potential brand partners up almost five times from what it was at the start of the year, keeping our corporate development pipeline strong. By the numbers, Tilt experienced over 20% growth in our cannabis business on a year-over-year basis. Retail operations played a large role in that increase, as did our brand partner products, with bulk sales and Tilt-branded products most affected by price volatility in the marketplace. That last point is a key one, as it was for precisely that reason that we launched our strategy last year. For example, per BDSA, quarter-over-quarter retail unit pricing was down approximately 7% in Massachusetts and 11% in Pennsylvania. As you might imagine, this has a trickle-down effect on wholesale pricing. And while this is what we experienced on our bulk and tilt-branded products, pricing on our brand partner products was relatively flat. Remember that a core tenet of our strategy was to reduce volatility in wholesale pricing. And while still a small sample size, those brand partner products that we have activated are doing exactly that. With Timeless now in market in Ohio and 1906 launching in that market later this week, Heisman and Black Buddha scheduled to launch in multiple markets by early fall, and many more SKUs to come across all brand partners and markets, in my opinion, we cannot activate and scale these brands fast enough. On the retail side of our business, where customer retention remains north of 70%, you may remember that part of our strategy includes using more of our available shelf space for brand partner and third-party products for some of our top customers. We have been targeting year-end 70-30 split with 70% of our shelf space supporting non-tilt products, and I am pleased to report that we are ahead of schedule, having hit that split already in the second quarter. On the operational side of things, on prior calls, you heard our COO, Dana Arvidson, talk about the reboot of our gardens that took place at the start of the year in order to provide better strain diversity, increased potencies, and improved harvest yields. While such a reboot normally takes up to 18 months, our cultivation team has us on schedule to complete that reboot in 12, with new genetics planted in January being harvested and tested as we speak. In the span of eight months, we have increased available strain diversity by over 75%. And while we are still in the midst of the phenol hunting process, the early results on the first harvests of these new genetics has been encouraging, with a 100% success rate on seeds planted in Massachusetts, a 70% success rate in Pennsylvania, and most strains having THC levels in the low to mid-20s right out of the gates. These numbers tend to improve as part of the phenol hunt process, so as you might imagine, we are excited by these early results. Yields have also increased by three times in Massachusetts and seven times in Pennsylvania and continue to improve. We've also doubled production capacity in both markets, meaning we now have more clean, high-quality flour available and can turn that flour into more SKUs than we've ever produced before, all while leveraging the same assets. We expect the efficiencies gained from these improvements to become more apparent in the coming quarters. Before turning the call over to Brad at a high level, I want to emphasize that going forward, as brand partner sales continue to become a greater portion of our total revenue mix, we believe that the strength and resilience of our strategy will become more evident in our consolidated financial results. That said, we need to be realistic about the current market environment discussed at the outset of my commentary and whether this eventual shift in our revenue mix can be reasonably expected to occur in time to overtake the macro trends in 2022. While we continue to drive our brand partner sales through ongoing launches, management does not feel that the pace will be sufficient to completely overtake sector and macro headwinds. As a result, per our press release issued earlier today, we believe it prudent to revise our 2022 outlook to better reflect their impact, noting that we expect to continue generating positive EBITDA on a more modest revenue growth. Most importantly, we expect to remain cash flow positive and will continue to internally fund our business and growth objectives. With that, I will now turn the call over to Brad for more detail on our second quarter results.