TILT Holdings Inc.

Good afternoon, everyone, and welcome to Tilt Holdings' third quarter 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 Ritchie. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our third quarter 2023 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 CDAR Plus at www.cdarplus.ca, and 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. 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 our most recent 10-K File 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 TILT financial results prepared in accordance with GAAP. 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 Plus today and can be found in the investor relations section of our website. On today's call are CEO Tim Condor and Interim CFO Brad Hoke. Following our prepared remarks, we will open the call for questions. During today's prepared remarks, 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 measures in the future. With that, I will turn the call over to our CEO, Tim Conter.

Thank you, Lynn, and good afternoon, everyone. We continue to make progress on our financial and operational goals in the third quarter as we once again increase adjusted EBITDA reduce operating expenses by nearly 20% and further strengthened our market position in both our plant touching and Jupiter vape hardware businesses. We are also beginning to realize the benefits of refining our brand partner strategy to create a flywheel between our hardware and plant touching businesses, increasing the value of tilt to our platform partners, a strategy that we will continue to emphasize in the coming quarters. Before getting into our results and operational updates, I would like to take a moment to thank the Board of Directors for entrusting me to lead TILT as the company's full-time CEO and to the entire TILT team for their warm welcome and continued determination to achieve our collective goals for TILT. We are problem-solving together every day, so I'm grateful to be surrounded by such a wonderful team. Thank you. During the quarter, we continued to evaluate every area of our business to identify improvement opportunities for refined execution. We made operational adjustments to reduce waste, better manage our inventory, decrease production costs, and allocate capital to areas of our business with the highest probability of immediate return. Although it is still early in executing these changes, The actions we have taken over the past several months to improve our operational efficiency have begun to meaningfully contribute to our financial results. In Q3, we realized nearly a full quarter benefit from right-sizing and expense rationalization initiatives implemented in Q2 across our corporate and plant-touching businesses. We are now running a leaner, more focused operation, and we are continuing to look for ways to further reduce costs while increasing production throughput. In Massachusetts, for instance, we reduced harvest to product packout cycle time by more than half, right-sized our lab and production areas to meet current demand, and were able to increase available biomass while also consistently seeing higher flower potencies and lower failure rates. In addition to our focus on reducing costs, We are working to grow revenue to drive operating leverage and further improve our bottom line. To that end, we continue to evaluate our portfolio of brand partners and products, adding new brands while parting ways with those that are not the right fit for TILT financially or strategically. We are actively recruiting new brands to our roster that align with our focus on inhalation and round out our product offerings. Earlier this month, we announced a new partnership with Flower by E.D. Parker, the leading fashion-focused cannabis lifestyle brand. Flower by E.D. Parker is the ideal brand partnership to showcase Tilt's strategic focus on inhalation with its flower, pre-rolls, vape products, and unique line of product accessories that E.D. Parker leverages to build community through fun, on-site, and digital activations. We look forward to bringing Edie Parker to the Pennsylvania market in the near future. As we have consistently articulated, our long-term strategy is designed to realize the benefits of aligning our plant touching assets and cannabis distribution expertise with our vape hardware businesses to create a flywheel between the two that drive higher sales and deeper relationships with our brand partners. When we help our vape hardware customers expand into new markets, we not only deepen our moat around our hardware business, but we also capture the increased revenue as they sell more vape products. Inhalation categories, vape, flour, pre-rolls, and concentrates, make up over 80% of the consumer wallet for cannabis. And that is where our business can provide the most value to our partners. The construction of our brand portfolio is key to maximizing margins and profitability. Turning to our plant touching operations by market. In Ohio, as many of you are aware, adult use was approved through a ballot measure in last week's election. We have operated in Ohio since 2016 and are well positioned to expand with adult use sales. We recently doubled our manufacturing footprint through an expansion of our existing building lease and will begin CapEx improvements in 2024. I have been pleased by the progress our Ohio team has made in the past six months, beating budget, achieving profitability, and expanding our catalog to include both flour and edibles. In Pennsylvania, The market has been contending with pricing pressure, particularly due to an oversupply of biomass from seasonal harvest. That said, we believe that by partnering with the right brand, we will be able to maintain margin and drive growth well into the future. As mentioned earlier, we recently signed E.D. Parker and are actively exploring partnerships with other brands that fit both our inhalation focus and the buying habits of the Pennsylvania market. As we optimize our brand and product portfolio in the state, we are well positioned to grow in Pennsylvania in 2024 and beyond. We are also proud to have recently partnered with the Pennsylvania Breast Cancer Coalition, further cementing our commitment to the well-being of all patients in the state of Pennsylvania and continuing to build community and bring focus to important health and social initiatives. Massachusetts has seen a similar dynamic to Pennsylvania with seasonal harvest. However, we are beginning to see pricing stabilize in the state. We are able to compete in a mature market like Massachusetts because of our product selection and brand partner strategy, and we are working to shore up gaps in our catalog with new products and partners. As a tangible example, based on BDSA data in September, since the start of 2023, we have seen the Old Pal brand move from number 25 for flour in the state to the number seven spot for flower brands and achieved 34% revenue growth, highlighting our ability to create value for our partners. On a whole, there are still challenging dynamics underway in Massachusetts and improvements to be made, but it is important for us to optimize our portfolio with inhalation customers like Old Pal and focus on additional efficiencies in order to succeed in this competitive market. When I started my role of interim CEO at the end of April, I paused new cannabis product development in order to evaluate our catalog. We needed to ensure that we were selling the right product to the right customers at the right price. Now that the evaluation is largely complete and we have taken steps to clean up our product offerings, we are accelerating our product development and plan to release several exciting products in the near term. Some of these include toast diamond-infused pre-rolls, new flour pack sizes and blunt offerings from Old Pal, and live rosin bait product in the Jupiter VOCA Pro all-in-one cartridge. Our strain performance has improved, and we are bringing to market higher-testing THC-level flour for our Standard Farms house brand, and we'll look to source an additional premium flour brand partner in the near future. To touch quickly on New York. During the quarter, we announced the end of our partnership with the Shinnecock Nation. TILT initially partnered with the nation in 2021 and provided financial investment and operational mentorship and oversight as we worked to establish the Little Beach Harvest Dispensary. Due to macro market conditions in New York, we ultimately decided to step away from this project to redirect resources to areas of our business with a more clear and immediate return. As previously disclosed, TILT recouped $1.4 million from the transaction, which provided much-needed liquidity for our business. I'd once again like to wish the best to the Shinnecock Nation as they work to complete the dispensary project and open their doors to Long Island residents and visitors. Looking ahead, we will continue to identify opportunities to bring products to market as efficiently as possible with market-leading inhalation brands. Given the news out of Ohio and the possibility of Pennsylvania converting to an adult-use market as well, we are excited about the growth ahead of us in our existing markets, and we are beginning to explore expansion opportunities in new markets as well. By further expanding our footprint and continuing to support leading inhalation brands, we will see our unique flywheel increase in scale and output. Now turning to our Jupiter Vape hardware business. In Q3, Jupiter sales were up 14% compared to the second quarter and 16% year-over-year. This represents the strongest quarter for Jupiter in over a year and significantly narrows the gap in year-to-date performance compared to 2022. As we look at Jupiter sales across North America, we see strength coming from our neighbors to the north in Canada. For the first nine months of 2023, Our vape sales in Canada generated growth of an impressive 57% year-over-year compared to the same period in 2022. For the third quarter, Canadian vape revenue is now approximately $6 million, or approximately 18% of Jupiter revenue and 13% of Tilts overall revenue. And according to BDSA, the Canadian vape market is on track to grow 13% in 2023. That said, there is always a seasonal impact to our vape hardware business in the fourth quarter due to Chinese New Year. We have worked hard with our Chinese manufacturing partner to smooth out this seasonality and with our customers to help navigate their intercontinental supply chain in accordance with their business forecast. In 2024, Chinese New Year falls later than usual on February 10th. So we do anticipate the flow of product shipments from China will go out in January as opposed to November and December as we have seen in previous years. If this is the case, fourth quarter revenue will be lower than normal with an expected pickup at Q1 of next year. In addition to a focus on growth that is yielding results in certain markets, the team has also worked diligently to maximize and normalize margins. This has been achieved by executing master services agreements with many of our largest customers, helping to secure favorable pricing while also guaranteeing sales exclusivity. Along with some blocking and tackling within Jupyter, we have also focused our efforts to align our vape hardware business more closely with our plant touching assets to better serve brand partners across our platform. As previously mentioned, we are leveraging Jupiter to release products like a live rosin all-in-one vape product, the Jupiter VOCA Pro device. We are also deepening our partnership with S'more, our hardware manufacturing partner, to help expedite the introduction of new and innovative vaporization products. To that end, we are excited to announce an extension of our relationship with S'more in Massachusetts, which will enable us to launch a new product innovation in that state soon. Lastly on Jupiter, we will begin testing certain product lines with our manufacturing partner out of their Indonesian facility at the beginning of the year. If all goes well, this could reduce tariffs and avoid seasonal supply chain pressures, further strengthening our operating capabilities and potentially having a positive impact on pricing. The landscape for vaporization hardware has become more competitive. but we are making the necessary adjustments to maintain our pole position and capture market share quickly. As we look to close out 2023, we will continue with our operational refinement plan in both our plant touching and vape hardware businesses, while remaining acutely focused on maintaining adjusted EBITDA profitability and generating positive operating cash flow. I'd now like to turn the call over to Brad to review our financial performance in more detail. Brad?

Thanks, Tim, and good afternoon, everyone. As a reminder, all results today are presented in U.S. dollars and are on a year-over-year basis, unless stated otherwise. Jumping into our results. Revenue in the third quarter of 2023 increased 10% to $44.6 million, compared to $40.5 million in the year-ago period. For the Jupiter Vape hardware business, we generated $32.8 million in revenue, compared to $28.3 million in the year-ago period, representing a 16% increase. For our cannabis operations, revenue in the third quarter was $11.7 million, compared to $12.2 million in the year-ago period. The increase in revenue for the quarter was primarily driven by higher Jupiter sales volume for both legacy and new customers, partially offset by price normalization in Massachusetts and customer credits issued by a brand partner in the Pennsylvania market. Gross margin in Q3 was 18% compared to 24% in the year-low period. The decrease in gross margin was primarily due to price compression in Massachusetts and Pennsylvania. Excluding non-cash inventory write-downs, adjusted gross margin was 20% for the third quarter. We will continue to work through older inventory in the coming quarters, which will have a similar effect to margins. Operating expenses, less non-cash adjustments for stock compensation, depreciation and amortization, and impairment charges in third quarter decreased 17% to 8.6 million compared to 10.3 million in the year ago period. The decrease was primarily due to lower legal and professional service expenses, as well as lower administrative costs as we have shifted our strategy to focus our resources more efficiently. Net loss in the third quarter improved 45% to 8.7 million compared to a net loss of 15.7 million in the year-ago period, with the improvement primarily driven by a tax benefit related to net operating loss carry-forwards and lower operating expenses. Adjusted EBITDA in Q3 increased significantly to $2.2 million compared to $0.6 million in the year-ago quarter. The increase was primarily driven by continued progress with our strategic refinement and optimization initiatives. This maintains a positive adjusted EBITDA trend, and we expect to remain positive and to continue growing EBITDA moving forward. Cash flow from operations in the third quarter of 2023 was $1 million compared to $4.5 million in the year-ago quarter. At September 30, 2023, we had $2.8 million of cash, cash equivalents, and restricted cash compared to 3.5 million at December 31, 2022. Notes payable net of discount at September 30, 2023 was 53.5 million compared to 59.7 million at year end. Lastly, in August, we filed a claim with the IRS for employee retention credits, a refundable tax credit that provides employers with an offset against payroll taxes for qualified wages paid during the height of the pandemic. During the quarter, we took an advance payment on the claim and received $2.9 million while we await the IRS to officially approve the claim, which we expect in the next 12 months. With that, I'll turn it back to Tim.

Thank you, Brad. We continue to make progress in the third quarter and are just beginning to unlock the flywheel potential between our plant touching and vape hardware businesses. Even with the cannabis headwinds and macroeconomic environment, those synergies will be the backbone for profitability and growth in coming quarters. While there are still daily challenges, I remain optimistic about TILT's prospects. And I believe that our differentiated vision and strict focus on execution will continue to yield positive results for our stakeholders. I would like to recognize and thank our resilient team for their hard work and our shareholders and partners for their continued support. I look forward to reporting on our progress during our next conference call. We will now take questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Aaron Gray with Alliance Global Partners. Please proceed.

Hi, good evening, and thank you for the questions. First question for me, just at the high level, some of the commentary you gave in terms of the competitive environment for the Jupiter business, how do you think about, you know, getting back or gaining market share? Sounds like you've had success in Canada. Sounds like U.S. in overall is getting competitive. So how do you think about profitability versus market share gains, you know, in a sense? Can you just kind of give us at the high level how you're thinking about it and maybe your discussions with S'more as well? Thank you.

Yeah, for sure. Thanks for the question, Aaron. So I would start by saying that capturing market share sort of relies on three components, price, innovation, and supply chain management. And, you know, I think that we are the best in the business when it comes to supply chain management and, or in other words, customer service. And we have some work that we've identified that we're doing from a speed to innovation standpoint and a pricing standpoint. And so those are the areas in which we're going to focus to capture market share. And I would also say at an even more high level, it's about selecting the right partners, right? So, you know, we've had the experience over the past several years that when we identify partners, set up sort of milestones or gating items to deepen our partnership and continue to invest in those partnerships, it yields the right results. as long as some of the key indicators are present. So that's what we're going to continue to do. Those are conversations we have directly with our manufacturing partners more in China about how we can support one another in that effort. So it's an active conversation. Those areas that I just highlighted, we've sort of identified internally and collaboratively working on all three together.

Okay, great. Thanks, Michael. I appreciate it. Um, turning to the plant touching businesses, right? So, uh, some pricing pressure, you know, some of the markets, um, you know, Massachusetts and Pennsylvania, you called out and even seems Ohio some from some of the state data. Um, but just, you know, in the interim, as we, we wait for Ohio, you know, potential adult used to turn on and maybe, you know, Pennsylvania, you know, getting legalized as well. And how do you think competing in those markets, you know, amid the pricing pressure, and achieving, you know, the right amount of profits that you would like from the plant touching businesses. Do you think there might be more need to get vertical? Are you comfortable with kind of the B2B and more asset, you know, more asset line not being vertical in the states outside of Massachusetts? Or just your overall outlook on the plant touching side would be appreciated there. Thanks.

Yeah, absolutely, Aaron. So, again, appreciate the question. And I'd say that we're always looking to be opportunistic as it relates to supporting our brand partners, and bringing more inhalation products to market. Those categories make up over 80% of the customer wallet. And so assortment is going to be key in driving growth in any market. And that's at a high level. But at a sort of more granular level, looking at opportunities to be vertical is something that we'll do, assuming that it, like I said, benefits our partners and our long-term strategic vision. We have a lot of opportunity, I think, in all three states. Yes, there's some, you know, I like to call it pricing discovery happening in most markets today, especially in more nascent markets. So, you know, we are starting to see things sort of normalize in Massachusetts, but that's always kind of thrown off kilter from, you know, seasonal harvests, et cetera, new brand entrants. So I would say like we are, you know, keenly focused on product mix. And that means, you know, what has the largest opportunity with consumers? Where can we capture the most margin? And where do we have a specific expertise, you know, to bring those products to market better than anybody else? And that's what we're looking to, not just in any singular market, but in all our markets to drive growth long term.

Okay, great. Last question for me, if I could. You know, congrats on that, E.D. Parker. Just in terms of some more rationalization, it sounds like you might be doing for your current brand's portfolio to kind of, you know, allow for new ones to come in. Where do you think you are in terms of the innings of refining the brands that are currently in the portfolio and maybe, you know, rationalizing some out to make room for others? Can you just give us where you are right now in that process?

Yeah, I mean, I would say from a rationalization standpoint, we're near, if not already, reached completion. But from a sourcing of, you know, new and prospective brand partners, we're kind of just at the beginning, right? So we just added E.D. Parker. We're in sort of deep conversations with other brands that will, you know, we believe round out our portfolio. But we'll always be looking for, you know, to be opportunistic as it relates to brands as, you know, we start to see either certain brands, certain products, or certain product categories having success in any of our markets. So just again to reiterate, you know, from a rationalization standpoint, at the end, if not at the end, and from an onboarding standpoint, just beginning.

Okay, great. Thanks for the call. I'll jump back in the queue. Thanks so much, Aaron.

Our next question is from Pablo Zunes with Zunes and Associates. Please proceed.

Thank you. Tim, just regarding Jupyter, housekeeping first. In terms of the revenue for the third quarter, the $32.8 million, did that benefit from earlier shipments? I understand the fourth quarter is going to be down because you explained how much it needs a year, but was the third quarter in any way held by any timing issues? Can you clarify that? Thanks. I know you don't need exact guidance, but what's the number to think about for the fourth quarter in Jupiter? Is 26, 28 the right number? Thanks.

Yeah, so as far as... beneficial impacts to the third quarter based on shipment timing related to Chinese New Year, we don't see any. So the benefits that we will see from Chinese New Year generally are in December, but due to timing this year could push into early Q1. As far as where we think revenue will end up in Q4, like you said, we're not giving guidance, but if our assumptions would be flat to slightly down, without giving numbers. But again, if down, likely a pickup in Q1 due to shipment timing.

Right, right. So, you know, a follow-up on that. In terms of the market share gains you're having, obviously in the case of Canada, you are having market share gains. But in the case of the U.S., do you have data that would imply that you're recovering market share in general in the vape hardware business? or there's no good data to really calculate that?

No data that I would point to as of yet, but I think Canada is a good indicator of how we're thinking about the market and some of the gains that we've had in that market. I think we'll be indicative of those that we anticipate in the U.S. are already sort of achieving in the U.S. sort of at a smaller scale. But yeah, no data that I would feel comfortable pointing to quite yet.

Okay. And then just staying with Jupiter, obviously the all-in-one category is growing much faster than the overall Dave category. You know, that means that probably the buyers and manufacturers are even more price sensitive in the all-in-one. How are you adapting to that? And is that a challenge versus opportunity for you? Thanks.

I think it's an opportunity. You know, it's really interesting from our vantage point to sort of watch the market as it evolves. We are a leader at the outset of regulated cannabis inhalation, and we believe we'll be a leader going forward as the market matures and evolves to include new categories or newish categories like all-in-one. So it's an exciting thing for us. It's absolutely an opportunity. It's one that we're focused on intently with our Chinese manufacturing partner. And we believe that we have some exciting products that are either available today or that will be available soon. to really sort of lean in and take advantage of how the industry is sort of moving towards all-in-one while still, you know, appreciating the consistency and reliability of the 510 credit card.

Right. And if you can clarify, I think you said something in the prepared remarks about SMORE's Indonesian facility. I don't know if I misunderstood, but is that, you know, how significant is that in helping you, you know, I guess reduce tariffs and avoid the seasonality from Lunar New Year that you mentioned?

Yeah. I mean, we can't share, can't share exactly yet. I think what was important to us is signal to the industry that we understand that like there are certain challenges related to Chinese manufacturing that, you know, we're looking for solutions to overcome. Um, and you know, always looking for opportunities to better serve our customers. And we, we think that this could potentially be one such opportunity. Still early days. We haven't quantified it yet. We are just starting some testing from a production run standpoint at the beginning of the year, but looking forward to quantifying that and talking more about that in the future.

One last one, if I may. Just in terms of cannabis brands, do you take into account whether your potential partner is already in Ohio or Pennsylvania? My point is that ED Parker, I believe, is in other states. Even the accessories are already sold in Pennsylvania. But I'm talking more in general, right? You're thinking of, let's say, a brand X that's not available. I suppose a brand that's not available in either Massachusetts or Ohio or Pennsylvania would be more attractive to you than one that's only not in Massachusetts but already available in Ohio and Pennsylvania. I don't know if that makes sense to you, but thanks.

It does. I'd say yes and no, right? I mean, I think absolutely, you know, we believe in our, in the strength of our distribution in the three markets where we currently have cannabis operations. And so, you know, we want to support our brand partners best we can. And I think our belief overall is that if they're on our platform, we want them on our platform in every market. But what I would also tell you is that it creates sort of unique opportunities for us as a business to when a brand is already partnered with another operator, because there are opportunities to be sort of synergistic across markets, whether that's in things like reciprocal buying or sort of favored partnership from a retail standpoint, the opportunity to sort of launch products together across not just our retail stores, but other retail stores. And so we're always looking for an opportunity to be collaborative. It's what cannabis industry needs. from my perspective and what our business needs to be successful, right? Like we can't do this by ourselves entirely. And so in the event that things aren't, you know, sort of packaged up exactly the way that we would like them in a perfect scenario, you know, we always look for opportunities to find the upside.

Got it. Thank you.

Yeah, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Clem. Tim, for some closing comments.

Yeah, just again, want to thank everybody who was able to join. And for those that are going to read the transcript, thank you as well. We appreciate our stakeholders and shareholders' support and look forward to talking again in the near future. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.