TILT Holdings Inc.

Good afternoon, everyone, and welcome to Tilt Holdings' third 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 over to your host today, Tilt's head of investor relations and corporate communications, Lynn Ricci. Please go ahead.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our third quarter 2022 earnings press release. The press release, along with our quarterly report on Form 10-Q, is available on the U.S. Securities and Exchange Commission's website at www.sec.gov, on CEDAR at www.cedar.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 SEC 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 TILTS financial results prepared in accordance with GAAP. The 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 CDAR today and can be found in the investor relations section of our website. On today's call are Gary Santo, Brad Hoke, and Dana Arvidsson. Following our prepared remarks, we will open the call for 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. As we near year end, TILT is not lacking in terms of in-flight initiatives, which range from signing new brands such as Coda Signature to launching new products with longstanding partners such as Old Pal, debuting new hardware at this week's MJBiz conference in Las Vegas, or negotiating refinancing that will put TILT on firm financial footing for years to come. At the same time, we continue to put in place the foundational elements necessary to support growth across all of our business lines. And we happen to be doing all of this with an active stock in a market suffering from macroeconomic headwinds, regulatory inconsistencies, supply and demand imbalances, and the cannabis industry that is entering its adolescence. Given the number of distractions readily available, I do remain impressed by the ability of our team to convert external noise into energy that drives execution throughout the organization. A few words regarding that organization. Earlier today, we announced several adjustments within our senior leadership team designed to reflect the demands of our business as we enter our next phase of growth. As we've previously said, and certainly as this quarter's numbers show, while we believe there is still growth to be had across TILT's existing assets, we can no longer rely solely on organic growth to achieve management's vision for the company. TILC will need to become more transactional, as evidenced by our sale, leaseback, and debt refinancing activities, as well as in pursuit of accretive M&A opportunities. We're fortunate to have the bench strength to be able to do that. Effective December 1, Brad Hoke will become our Chief Accounting Officer. Our transition to becoming an SEC registrant that resulted in U.S. GAAP compliance requirements has strained our finance organization. And with Sarbanes-Oxley compliance on the horizon, we need to have a dedicated senior leader focused on implementation and optimization of our accounting function. Since I joined Tilton 2020, Brad's been an incredible and selfless partner. So when he and I were discussing this need, I was not surprised when he offered his services in that capacity. Assuming Brad's former role of CFO will be Dana Arvidsson, with whom I've had the pleasure of working with since the early 2000s when we were both in the finance sector. Dana and Brad already have a strong working relationship, and over the past few months have been discussing how best to improve the capabilities of our finance organization. Dana's expertise in capital markets, debt financing, M&A, and financial planning and analysis position him for success, and together with Brad, we could not have a stronger finance team. Finally, I'm also pleased to announce the promotion of Chris Kelly to Chief Revenue Officer. Chris joined us earlier this summer after previously working at Trulieve, and his contributions since then have been invaluable in helping TILT develop a demand planning strategy designed to help guide our cultivation and production teams as we become more CPG-focused. I am proud of the work that Brad, Dana, and Chris have accomplished to date and look forward to seeing what they can do together as a team in 2023 under this new structure. Before discussing the quarter in more detail earlier today, we announced the extension of the maturity date of our remaining senior notes that total just under 10Million dollars until the end of December earlier in the quarter. We announced a similar year end extension with regarding the closing of the sale and lease back of our Pennsylvania facility. Through a series of ongoing negotiations with new and existing investors, TILT has reached an agreement in principle for a new debt arrangement that, when signed and closed, will allow the company to address not only the remaining senior notes but its junior obligations maturing in April 2023. While we are still working through transaction documents and usual deal mechanics, we look to have all related transactions ready to close at once and believe we will be able to do so by the end of this year. Addressing tilt capital structure has been a focal point of mine since stepping into the CEO role 18 months ago, as it is impossible to think about substantive growth without first addressing the balance sheet, and we believe these actions should allow us to do exactly that. Turning to the business, expectations for the cannabis industry continue to change with each passing quarter. At the start of the year, various sources had the sector growing north of 30% annually. That number changed to the low to mid-teens, depending on which analyst's estimates you looked at, and following the second quarter, where it was determined that there would not be a dramatic second-half recovery as previously thought, now sits somewhere in the low teens to single digits. The number of contributing macro and industry factors have been well-documented and do not require my repeating them, but suffice to say, being a cannabis operator is not for the faint of heart. As I mentioned earlier, I believe that the cannabis sector is entering its adolescence. And while many have spoken openly about commoditization associated with a fully legalized cannabis marketplace, I believe that is already happening under the current regulatory environment. The number of cultivation facilities coming online is outpacing demand in several markets, causing operators to rethink the value of maintaining large grow facilities. I suspect that retail will be next in line, as we've seen reports of store closings in more mature markets. And given the overhead needed to maintain a dispensary, it's not surprising at all. In short, cannabis is growing up, and consumer behavior is growing up with it. This anticipated change was the basis for the pivot in TILT's business model last year to avoid a commoditization by owning that middle space of craft cultivation, specialty manufacturing and processing, and maintaining a portfolio of hardware and plantware product offerings that consumers are demanding. Our asset-light approach has served to reduce our margin requirements, which in turn allows more margin stability. And by not limiting ourselves to our own retail footprint, we're able to develop deeper and more meaningful relationships across all retail outlets, not just our captive stores. So in the case of Massachusetts, instead of being limited to our own three stores, we have another 250 or so that we can sell into as well. To do this requires actively managing our brand partner offerings to ensure the broadest possible portfolio of products that cover as many form factors, quality, and price points as possible, and regularly evaluating the performance of each offering to identify opportunities to improve upon the status quo. That also means being tactical with our garden production, as well as processing and manufacturing to ensure that we maintain a regular inventory of all active products that our customers can depend on. Understanding the intended purpose for every strain selected, seed planted, and clone created requires demand planning and discipline for a company that only a year ago was primarily selling bulk flour and distillate. As a result, the ramp to scale is a little slower than many of us would like, but it is necessary not only for our brand partners as they learn new markets, but also for our operations in order to avoid becoming victims of our own success. Over the course of 2022, we have signed five new brands, most recently adding Coda Signature, one of the industry's leading infused confectioners, renowned for holding the top slot for adult-use chocolates in Colorado over the past three years. During the third quarter, we had four brand market launches with three more planned before year-end. We also added 10 new product offerings with another 23 planned by year-end, increasing the total number of brand partner product offerings to more than 145 across all markets. Each product offering rollout is done on a small scale to bench test strength of supply chain, pricing resilience, and sell-through capacity so that brands and tilt can adapt launch strategies without the need to discount product. To this point, we have not had the ability to optimize our portfolio offerings, choosing instead to activate brands as they became ready. In some cases, that meant first launching brands that tended to favor the value end of the spectrum due to their less complex specifications. However, once all products are in market by year-end, the next step will be to achieve portfolio optimization. There is no doubt that we experienced growing pains during this quarter, as our legacy products lacked differentiation in the marketplace, combining tired flower strains and old and dated packaging. Additionally, a change in the wholesale sales landscape required the addition of field marketers in support of salespeople in the field. And with deliveries going from 25 orders per week to as much as four times as many, a more robust approach to demand planning was required to ensure that the right products and the right quantities were available on time and every time. Before I turn the call over to Brad to review the financials, I want to spend a bit more time on the hardware side of our business than I typically do, as we just announced an important expanded partnership, and this is also a big week for Jupyter. Last week, we announced an exclusive manufacturing and distribution agreement with Curaleaf International to bring Jupiter's proprietary Liquid Q vaporizer to new territories abroad in 2023 and beyond. Curaleaf is and has been an important partner for Jupiter, and we look forward to continuing to strengthen that relationship with this five-year agreement in Europe and other global markets. As we continue to expand our portfolio of product offerings across use case and value spectrums, we have experienced an improvement in gross margin profile, and in the third quarter, saw our hardware margins rebound to levels not seen since 2020. Early indications appear to support this shift in strategy, with our hardware sales team successfully recapturing lost customers, as well as maintaining and improving our existing customer base. We believe Jupyter's innovation will help continue this effort. A few comments about the products we will be debuting later this week. We believe very strongly in the solventless sector on both the plant-touching and hardware sides of the business. Concept LVT was designed with this in mind, as it is a first-of-its-kind, rigless dab solution providing consumers with a higher level of cannabis taste from cannabinoids and terpenes in an on-the-go resin consumption format. Our patent-pending technology is a high-performance advanced vaporizer in the 510 format that heats products as a dab rig would, but looks and feels like a regular cartridge. Concept LVT is a convenient and approachable solution, meeting the market demand for concentrates at a price point better suited to the broader market. Future iterations are expected to incorporate wax and hash capacity and will likely be available sometime in 2023 as part of a Phase II rollout. Also debuting this week will be Threads, a power product by Jupiter and manufactured by S'more. A simple, intuitive, and patented stackable 510 cartridge, Threads allows two cartridges to be pulled on at the same time while utilizing the same 510 battery and cartridges that are already widely adopted in the industry. Consumers will be able to customize their experience, creating an opportunity for brands to experiment with different formulations, including non-cannabis products. Finally, Jupiter has also entered into a distribution agreement with Aden to make their patent-pending Blend Pen available throughout the U.S. and Canada. The Blend Pen is a precision device that holds two cartridges inside and allows for controlled dosing levels of CBD, THC, terpenes, and flavor between the two. In the future, we expect the Blend Pen to have an accompanying app that will bring the power of data to cannabis consumption. These new product innovations will be available at our Jupiter booth at MJBiz in Las Vegas later this week, with the expectation to officially launch each in the months to come. With that, I'll now turn the call over to Brad for more detail on our third quarter results.