TILT Holdings Inc. (PNK:TLLTF) Q3 2023 Earnings Call Transcript

TILT Holdings Inc. (PNK:TLLTF) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: 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 Investors Section of the company's website approximately 2 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.

Lynn Ricci: 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 SEDAR+ at www.sedarplus.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 filed by TILT with the SEC and on SEDAR+.

A laboratory with white-coated technicians carefully measuring out cannabis extracts.

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's 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 8-K that we filed with the SEC and SEDAR+ today and can be found in the Investor Relations section of our website. On today's call are CEO, Tim Conder; and Interim CFO, Brad Hoch. 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 Conder.

Tim Conder: 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 increased adjusted EBITDA, reduced 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 returns. 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 rightsizing 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 pack-out cycle time by more than half, rightsized 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 Edie Parker, the leading fashion-focused cannabis lifestyle brand. Flower by Edie 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 Edie 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, flower, 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 6 months, beating budget, achieving profitability and expanding our catalog to include both flower 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 brands, we will be able to maintain margin and drive growth well into the future. As mentioned earlier, we recently signed Edie 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 flower in the state to the number 7 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 flower pack sizes and blunt offerings from Old Pal and live rosin vape 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 flower for our Standard Farms house brand and will look to source an additional premium flower 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 neighbours to the north in Canada. For the first 9 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 TILT's 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 10. 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 previous years. If this is the case, fourth quarter revenue will be lower than normal with an expected pickup in 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 Jupiter, 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 Smoore, 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 Smoore 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?

Brad Hoch: 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 from 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 ago period. The decrease in gross margin was primarily due to price compression in Massachusetts and Pennsylvania. Excluding noncash 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 noncash adjustments for stock compensation, depreciation and amortization and impairment charges in the 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 carryforwards 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 our 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 advanced 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.

Tim Conder: Thank you, Brad. We continued 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?

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