TILT Holdings Inc.

Good afternoon, everyone, and welcome to Tilt Holding's third quarter 2024 conference call and webcast. Today's call is being recorded for replay purposes. A replay of this 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, Tilt. Head of Investor Relations and Corporate Communications, Lynn Rickey. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our third quarter 2024 earnings press release. The press release, along with our report on Form 10-Q, is available on the U.S. Securities and Exchange Commission's website at www.fcc.gov. on CDAR Plus at www.cdarplus.ca and our website at www.kiltholdings.com. Please note that during this 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 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 GAP. During the call, management will also discuss certain financial measures that are not calculated in accordance with GAP. We generally refer to these as non-GAP financial measures. These measures should not be considered in isolation or as a substitute for TILT financial results prepared in accordance with GAP. 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 CDAR Plus today and can be found in the Investor Relations section of our website. Joining on today's call is our CEO, Tim Ponder, and our Interim CFO, Brad Hokes. Following the prepared remarks, we will open up 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 metrics in the future. With that, I will now turn the call over to our CEO, Tim Ponder.

Thank you, Lynn, and good afternoon, everyone. The cannabis sector is under an extreme amount of downward pressure. In order to address market challenges and to continue to navigate the challenges within our own operations, we must focus. In order to focus, we are seeking to narrow the scope of our business. In our press release earlier today, we announced that we are exploring a range of potential actions, including divestitures, partnerships, and other strategic alternatives related to our plant touching assets. which will enable us to focus on the largest segment of our business, Jupiter Research. We believe these plant-touching assets hold true value as we have undertaken a great deal of work to reduce our cost structure, refine our product portfolio, and invest in differentiated areas like solventless production. However, our continued investment will cause additional strain on our balance sheet and limit our ability to grow our inhalation hardware business. We need to explore paths to continue to restructure our balance sheet, address our debt stack, and ultimately grow our business. We believe that focusing on Jupiter alone will give us the best opportunity to do this. Over the past year, we have undertaken an aggressive transformation process, dramatically reducing costs while making incremental investments into neglected maintenance capex in our plant touching assets, and several other changes previously discussed. That process is still underway, and at this point, addressing our balance sheet has become paramount to continuing our efforts. Exploring strategic alternatives for our plant touching assets will likely have the added benefit of further reducing our op-backs. As a reminder, in 2022, TILT executed sale leasebacks of its properties in Massachusetts and Pennsylvania. The capital raised was used to pay down senior debt at the time, but had the adverse impact of increasing monthly operational expenses by nearly half a million dollars. In the current cannabis environment, this creates an untenable cost structure given our current market position. We hope that by exploring strategic alternatives for our plant touching assets, we will be able to unlock the value of Jupiter. In addition to our operational efforts within CAC and Standard Farms, we have also worked to evolve our operation at Jupiter to regain market share and better leverage our long-standing customer relationships and product development capabilities.

Let me share a few of the changes we have made.

In early August, we completed a sales reorganization at Jupiter to better adapt to evolving market dynamics. This effort enhanced our focus on further supporting existing customers while creating a dedicated team focused on new business and emerging markets. We have also made some critical leadership updates that we alluded to on our Q2 call, which support our long-term vision and strategic goals for TILT and Jupyter. Specifically, Ken Yuen has joined our team earlier this year as Jupyter's Chief Operating Officer. Ken has a strong and relevant background in strategic growth, restructuring, and financial operations. Ken served as the head of strategy at FedEx Supply Chain and was an operating partner for various private equity firms, including TPG, for over a decade. Ken has been pivotal in shaping our operational framework and evolving our partnership with our Asian suppliers. We're confident he'll continue to add tremendous value as we reshape the organization. Additionally, Khalid Al Nasser recently joined to head up our commercial efforts for Tilt and Jupiter. Khalid brings deep expertise in cannabis product commercialization and go-to-market execution. Khalid is the co-founder of Raw Garden, one of Jupiter's largest customers, and a brand that has long-shaped advances in the cannabis vaporization space. With Khalid's expertise, we will continue to supporting their growth and the growth of all of our customers in the rapidly evolving cannabis market. Welcome to you both. During the third quarter, we advanced our asset light model for Jupiter, which we initially introduced in Q2. This model emphasizes just-in-time production and shipping, which we anticipate will improve working capital and reduce our trade payable with our Asian supplier. As we evolve Jupiter's operating model, we are also evaluating near and long-term growth opportunities. We have identified ways to better serve our customers by giving them a unique advantage over their competitive set just by working with Jupiter. To do this, we are evaluating Jupiter's services, focusing on those that drive profitability and differentiation for the brands we work with. We have done this by deepening our operations and customization focus while evolving our portfolio to include new devices and technology either directly developed by Jupiter or exclusive to Jupiter. It is critical that we have a robust portfolio of products that meet our customers' evolving needs, particularly on price and innovation. We continue to be excited about the opportunity in Europe, and we hope to have in the short term positive news on both of our inhalation devices focused on the medical market there, the liquid medical and Q medical, the latter of which is an exclusive partnership with KiraLeaf. I cannot underscore the complexity of bringing a device of this kind to market given the rigorous approval process and our understanding that in the case of liquid medical, it is the first device of its kind under a revised regulatory structure for the notified body we are working through. As part of the transition plan that we discussed last quarter, our top accounts at Jupiter are now directly invoiced by S'more, our Asian supplier. We expect this approach will help bring down our trade payable with this supplier, in addition to the benefit of alleviating import-export insurance challenges as previously discussed. I'm pleased to report that our customers are experiencing limited impact to service since the transition as we remain the primary point of contact operation. We're continuing to meet their needs with the same high standards of service that they have grown accustomed to. For the plant touching side of the business, as announced earlier, we are exploring strategic alternatives to better position tilt with regard to our balance sheet and operational expenses. I want to thank our team and leaders for all of the work they have done over the past 18 months to realign each of these businesses and set them up for success. Our employees are a key stakeholder and I want to give them the best opportunity to thrive, even if that means being separate from TILT. The plant touching business overall has made positive headway operationally over the past year, but has had its challenges too. In short, We are deep in markets where we may want to be shallow and shallow where we may want to be deep. Ohio has been a bright spot with the addition of adult use. However, our lack of integrated cultivation negatively impacted us due to the material hoarding that occurred in the market as it prepared for the transition to adult use. Severe limitations on marketing and advertising have also wanted growth. We hope to see a new rules package at the end of this year or the beginning of 2025 that will address this issue and others so Standard Farms Ohio can realize the full value of adult use consumption. For the third quarter, Massachusetts continued to experience competitive pricing challenges and market saturation. As we exit the outdoor harvest season, flower prices have been especially depressed. We are seeing pound prices as low as $650 for mid-range flour and only a couple hundred dollars more for top-tier buds. Despite this, we experienced decent wholesale sales velocity in Q3, specifically in August and September, with September being our best month year-to-date and an increase in new doors as we start the fourth quarter. Pennsylvania is also seeing market dynamics lead to challenges for state operators. As neighboring states begin to allow adult use sales and the hemp and delta-9 market grows without regulation, dispensaries are losing sales and revenue. As a result, vertical operators are further restricting shelf space to standalone brands in favor of in-house, higher margin offerings. This is particularly true for dispensaries in Philadelphia where New Jersey cannabis ads dominate advertising in the city. However, The third quarter delivered more favorable greenhouse environment growing conditions and continued our increase of rosin production. Our rosin production has been received well in Pennsylvania and Massachusetts. We are continuing to expand our solventless offerings across vape and concentrate categories with offerings like a 3.5 baller jar and half and full gram live rosin vape carts and all-in-one devices. Again this year, our live rosin, VOCA Pro, won first place at the Harvest Cup in Massachusetts. These plant touching assets have come a long way, implementing improvements and expanding relationships within their respective states. Although I am encouraged by their teams and future growth outlook, we have chosen to explore strategic alternatives as we believe it is the best path forward for our balance sheet, for Jupiter as our core business, and ultimately for all of our stakeholders. Again, I want to sincerely thank our employees for all of their efforts and assure them that our exploration and subsequent actions will be done with as minimal disruption as possible and with thoughtfulness and transparency.

With that, I'll let Brad take us through the quarter's financial highlights. 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 for the third quarter was $27 million, slightly up from Q2 and down from $44.6 million in the year-ago period. The decrease in year-over-year revenue was primarily driven by our Jupyter hardware business. For Jupiter, revenue increased sequentially to $16.8 million from $15.7 million in Q2 and decreased from $32.8 million in the year-ago period, mainly driven by lower sales volume related to delays in shipping from our primary supplier, as well as a result of the new direct invoicing model with SMORE. Additionally, cannabis operations revenue, which includes Massachusetts, Pennsylvania, and Ohio in the third quarter was $10.1 million compared to $10.9 million in Q2 and $11.7 million in the year-ago period. Gross margin in Q3 was 14% compared to 16% in Q2 and 18% in the year-ago period. The decrease in gross margin was primarily driven by increased logistics costs related to shipping delays, as well as product mix. Adjusted gross margin, which excludes non-cash inventory adjustments in the third quarter, was 15% compared to 17% in Q2 and 20% in the year-ago period. Operating expenses less non-cash adjustments for stock compensation, depreciation and amortization, and impairment charges in the third quarter decreased 15%, 7.3 million, compared to 8.6 million in the year-ago period. The year-over-year decline was primarily driven by lower headcount, legal and professional fees, as well as lower administrative expenses as part of our cost reduction initiatives. Net loss in the third quarter was $12.6 million compared to $35.9 million in Q2 and $8.7 million in the year-ago period, with a sequential improvement driven by the impairment charge last quarter and the year-over-year decline driven by lower revenue and gross margin. Adjusted EBITDA in Q3 was negative $1.6 million compared to negative 1.2 million last quarter and 2.2 million in the year-ago period. Cash flow from operations for the third quarter was 2 million, compared to 1.4 million in Q2 and 1 million in the year-ago period. At September 30, 2024, the company had 3.9 million of cash, cash equivalents, and restricted cash compared to $3.3 million at December 31, 2023.

With that, I'll turn it back to Tim. Thank you, Brad.

As we continue to work through balance sheet challenges and market pressures, we believe that our exploration of strategic alternatives and Jupiter's evolution will give us the best chance to succeed going forward. Building on the foundational steps we have taken and efficiencies that we are implementing throughout the organization, this review and subsequent actions will better align our resources and emphasize our strengths. It is a testament to the size of the opportunity and our approach to capitalizing on that opportunity that we have been able to add key contributors to our team like Ken and Khalid. And while our business has no shortage of challenges, We are working tirelessly to address those challenges. Sometimes success is about survival. That is the moment we find ourselves in. But if successful in executing our plan, we believe the resulting business will be an enduring market leader managed by a team with bonds forged in fire and prepared for anything that may come.

Operator, we will now open it up for questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you'd like to ask a question, please press star then one on your telephone keypad. A confirmation turn will indicate that your line is in the question queue. You may press star two to leave the question queue. Our first question comes from Public Zunich of Zunich and Associates. Please come ahead.

Thank you. Tim, can I ask in terms of this question, the idea of focusing more on the Jupiter business. So is this like something that was just announced today, or have you already been taking inbound calls from bankers? Have you appointed an advisor to help you sell the assets? I'm just trying to get a sense of the response so far, or is it just way too early to tell?

So, yeah, appreciate the question, Pablo, and thanks for joining. So this was a directive from the board when I joined the organization or rejoined the organization 18 months ago, was to evaluate what opportunities might there be for all of our assets. And as we sort of undertook that process, we engaged with certain advisors, in some cases brokers, in some cases bankers, to get sort of a cursory idea of the potential for the sale of certain assets. And all of that, as we discussed earlier, is in service of addressing the balance sheet challenges that TIL has had for some time. So it's a process that we've been engaged in in varying degrees of aggressiveness, but is now one that we are moving along in earnest. So hopefully that answers it. We are still engaged with certain advisors and bankers to evaluate these assets.

Okay, that's good. Thank you. And then when I think of the Jupiter side, I guess a two-part question. One, sales improved sequentially, but it seems that they were below your expectations, that these issues with the supplier had not been expected to be as bad, and that the transition in terms of invoicing to new customers would not be an issue. I'm trying to understand the third quarter for Jupiter in terms of sales. Should we be glad that it improved sequentially and that's good, or was it well below your expectations because the one-off issues of the second quarter were not fixed as quickly as you expected?

No, I wouldn't say it was well below our expectations. We achieved and even overachieved as it relates to our internal sales targets. And yeah, still seeing some impacts just from the transition that we undertook over the past quarter or so with our main Asian supplier. But we expected the decrease in revenue with the shifting of invoices or invoicing to those limited number of customers.

Okay, thank you. Just two more questions. One, in terms of the balance sheet, I guess it's a two-part question. Does Moore slash CSAIL get it in the sense of how bad things are? And could they take a stake in Jupyter at some point just to help the balance sheet issues? Or is that just out of the question? Thanks.

I mean, I can't speak for them as to whether or not they'd take a stake in Jupiter. What I would tell you is we are actively working with them to address the balance sheet issues that have existed for a few years now. So when I joined the organization 18 months ago as interim CEO, the trade payable with S'more was roughly $36 million. Today it's $32 million. So it's been reduced and we have entered into a series of agreements since February of this year to really outline the path to reducing it to a place that ultimately meets their expectations and our collective level of comfort. And they understand that it's important that a healthy Jupiter means a healthy and growing C-cell. We're still the largest distributor in the C-cell network by far. And you know, one of, if not the largest distributor of hardware devices in North America. And so we see a massive opportunity together, but Jupiter is very important to their long-term success. And so we're working collaboratively to address the challenges that we inherited, and this is the next step in that process.

Okay, thank you. And just one last one, maybe down in the weeds, in terms of the vape segment. We continue to see the decline of 510 cartridges and a very strong growth of all-in-ones in most geographies. Just remind us of how is CECL positioned for that? How are you adapting to a new trend? Thanks.

Yeah, I would say Jupiter and CECL together, right, recognize that trend. Our business from an all-in-one standpoint has grown dramatically over the past year. We're excited about some of the new products that both Jupiter and C-Cell are bringing to market to meet the sort of rising shift to all-in-one devices. And I think we're going to see sort of continued evolution and even sort of some cyclical return, whether it's in pod devices or even in the 510 threaded segment. So I think lots of interesting technological evolutions and advances. that ultimately expand the category, but the most near-term growth opportunity is absolutely in all-in-ones.

Okay. And then, look, I'm going to add one more. I know it's too early to tell what's going to happen with the tariffs, right? But, you know, how are you and how are CECEL thinking about that in terms of how you adjust to that?

Yeah, we feel like we're well-positioned. It's an area that we have sort of aggressively... Moved our partners to Expand into you know, they're they're manufacturing operations outside of China He saw as an example manufacturers a large number of devices in Indonesia and is looking to increase that for the next year or so and Ultimately have the lion's share of their production happening in Indonesia number of other suppliers whether it's from you know companies that we work with for accessories, et cetera, are also making a similar shift.

That's good. Thank you. Understood. Thank you very much. Thank you, Pablo.

Our next question comes from Erin Gray of Alliance Global Partners. Please go ahead.

Erin, your line is open. You can ask your question. Erin, unfortunately, we're not hearing you.

Going on to the next question, which comes from James Cook of Cook Capital. Please go ahead.

Good evening, gentlemen. How are you doing? Good, James. Thanks for joining. Guys, I'd like to ask you, what is the current market cap of Tilk Holdings? In U.S. dollars or in Canadian dollars? U.S. dollars, please. One second. I'm pulling it up as of today. Current market cap is roughly $3 million. And what is the current price per share? The current price per share is less than a penny, so 0.008 cents. My question to management is, how does that make you guys feel? Obviously, it makes us feel like we have a lot of work to do. Do you have anything to say to your shareholders?

Absolutely. I would say to our shareholders, of which I am also one, that you have a team that is committed to working on behalf of stakeholders. very diligently to address the challenges that in many cases we inherited, but signed up to rectify. And I think that it is going to take time, but I sincerely hope for all stakeholders, including shareholders, common shareholders like myself, like our employees at TILT, like members of my family, that we're successful in that objective.

How come there's been no insider buying at these rock bottom below penny prices?

I can't comment on behalf of the rest of the management team, but I think one reason is that we are privy to certain information. like we announced today, the exploration of certain divestitures or other strategic alternatives that may preclude us from those types of purchases.

Thank you, sir. Our next question, we've been rejoined by Aaron Gray of Alliance Global Partners. Please go ahead.

Hi, good evening. Thank you for the questions. Apologies for before. My phone must have gone out. But I want to circle back in terms of the strategic alternatives for the plant touching assets. Just in terms of how we think about, you know, the portfolio company, if you were to divest all the plant touching. I know this is something that you guys evaluated back in early 2020, I believe. And at that time, you still would have had blackbirds, and there still might have been some issues in terms of being fully non-plant touching at the time. But now in the case of just having Jupiter, if you were successful in divesting the plant touching, could that offer more opportunities for you, be it from a listing perspective, being joined with other ancillary companies that are on larger exchanges? Just what are your thoughts on that and how did that work into the equation with evaluating these strategic alternatives? Thank you.

Yeah, thanks, Aaron. It's absolutely an important and critical part of the calculus, right? I don't think it's any secret that plant touching assets, one, preclude a large number of investors, et cetera, from supporting TILT as a whole, right? And so, you know, in the absence of plant touching assets, we think there is more opportunity for Jupiter from an investment standpoint from a listing standpoint, et cetera. So that was absolutely an important part of our calculus.

Okay, great. Appreciate that.

Next question for me, just in terms of the competitive dynamics that you're seeing within Jupyter, just if you had some issues over the past two quarters, be it supply or otherwise, can you just talk about the customer retention? How strong has that been? how they've been receptive as you kind of communicate you working through, you know, some of these issues and hopefully, you know, keep that retention, potentially grow with them via new SKUs, whether it be all-in-one or otherwise. Thank you.

Yeah, thanks, Aaron. So I would say our relations with our customers are strong, and it's really a testament to the team that we have with Jupiter and the service that we've provided, in some cases, for seven-plus years, right? And so... The reason that we've been able to retain those customers is because Jupiter has great service and is supported by our primary supplier with fantastic technology, usually market-leading technology. I think we both, meaning us and our supplier, recognize that there's an opportunity to compete with our competitive set more directly on price and portfolio. And so we've been working aggressively to ensure that, you know, as I always said, our team, we have the right product at the right price for our customers as they, you know, evaluate new product lines, etc. And so that I think is a really important thing to know for Jupiter's business going forward. We service many of the largest MSOs and brands in the space. Those brands are growing and are expanding into new markets and are doing so, you know, with Jupiter as the foundation for their hardware growth and their vaporization segment development. And we don't see that slowing down. We're bullish on Jupiter's opportunity because of that customer set.

Okay, great. Appreciate that, Colorado. And I'll go ahead and jump back in the queue.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now hand back over to Tim Kondo for closing remarks.

Great. Thank you. Just wanted to thank everybody for joining the call and have a great rest of your week. Appreciate it.

Thank you. Ladies and gentlemen, that concludes this afternoon's conference. Thank you for attending, and you may now disconnect your lines.