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Edited Transcript of TILT.CD earnings conference call or presentation 18-Nov-20 10:00pm GMT

·38 min read

Q3 2020 TILT Holdings Inc Earnings Call Nov 19, 2020 (Thomson StreetEvents) -- Edited Transcript of TILT Holdings Inc earnings conference call or presentation Wednesday, November 18, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brad Hoch TILT Holdings Inc. - CFO & Corporate Controller * Gary F. Santo TILT Holdings Inc. - President & Head of IR * Mark Scatterday TILT Holdings Inc. - Chairman & CEO * Taylor Allison ================================================================================ Conference Call Participants ================================================================================ * Aaron Thomas Grey Alliance Global Partners, Research Division - MD & Head of Consumer Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to TILT Holdings' Third Quarter 2020 Earnings Webcast. (Operator Instructions) This webcast is being recorded for replay purposes. A replay of the audio webcast will be available in the Investor Relations section of the company's website approximately 2 hours after completion of the webcast and will be archived for 30 days. I would now like to turn the conference over to your host for today, Taylor Allison, TILT's Director of Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Taylor Allison, [2] -------------------------------------------------------------------------------- Thank you, Devin, and good afternoon, everyone. Thank you for joining TILT Holdings' Third Quarter 2020 Earnings Webcast. With me today are Mark Scatterday, Chief Executive Officer; Brad Hoch, Chief Financial Officer; and Gary Santo, President. Earlier this afternoon, we issued a press release announcing our results for the fiscal quarter ended September 30, 2020, a copy of which is available in the Investors section of our corporate website at www.tiltholdings.com. We've also filed our release with the applicable Canadian securities regulatory authorities on SEDAR. Please note that during this afternoon's webcast remarks we'll make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian securities laws. 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 the Risk Factors section of management's discussion and analysis for the 3 and 9 months ended September 30, 2020, filed with the applicable Canadian securities regulatory authorities, which can be found at www.sedar.com. 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 any such forward-looking statement in the future, we specifically disclaim any obligation to do so unless otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-IFRS financial measures, such as EBITDA, adjusted EBITDA and gross profit margin, excluding changes in the fair value of biological assets and inventories. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. TILT considers these certain non-IFRS measures to be meaningful indicators of the performance of its business in addition to but not as a substitute for our IFRS results. A reconciliation of such non-IFRS financial measures to the nearest comparable IFRS measures is included in our press release issued earlier today. Mark will begin with a high-level review of our third quarter, followed by Brad, who will provide an overview of our financials during the quarter. Gary will then discuss recent developments and operational highlights, after which, the team will take questions. With that, I now turn the webcast over to Mark. -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for participating in our third quarter earnings webcast. I'd like to start the call by reviewing the performance of our business lines: Jupiter Research, the market leader in inhalation technology; and our plant-touching businesses, Commonwealth Alternative Care and Standard Farms. Next, I'll be passing the call to Brad to discuss our financial results in detail. Following Brad's remarks, Gary will discuss management's strategic vision for TILT as we focus on our highest-potential assets to create shareholder value, including our decision to divest from Blackbird. I would also like to congratulate Gary on his recent promotion of President and Brad on removing his interim title and making the move to permanent CFO position. In the third quarter, our business returned to growth after experiencing a strain of macro headwinds, including concerns about illicit vape products in the marketplace and the global pandemic. Revenue for Q3 was $40.4 million, a 5% sequential increase over Q2. We also generated record adjusted EBITDA for the quarter of $2.8 million. We drove revenue growth from our 2 most profitable business lines, Jupiter and plant-touching, partially offset by a decline in Blackbird. Jupiter is our largest business and the market leader in the sale and development of inhalation technologies. In Q3, Jupiter returned to generating positive top line growth, and with its lean, centralized and highly productive operating footprint, it continues to be a steady positive cash flow engine for TILT. Momentum picked up throughout the quarter as order patterns returned to normal and large customers continue to increase their order size. In September, we shipped a record number of total cartridges. Our disposable product category is still being impacted by the effects of COVID, where tourist-centric markets like Nevada are still feeling the effects. The true strength of the Jupiter platform is its well-diversified client base, which sells to customers in 35 states and 15 countries. As new states adopt cannabis legislation and more Americans get comfortable with the idea of using cannabis for wellness, we expect the addressable market for our inhalation technologies to increase significantly over the next 2 years. This is supported by the recent election cycle with 5 new states adding cannabis legislation, increasing the adult-use population by 20%. Both Mexico and Israel are also poised for broader legalization. This is trending worldwide. As a category leader supporting MSOs, LPs and independent cannabis companies, it is imperative that we continue to drive innovation and growth of this product sector. The opportunity for Jupiter is global, and outside the U.S., we're continuing to make significant strides. In the third quarter, revenue from Canadian customers grew nearly 20% sequentially with the continued rollout of Cannabis 2.0 in that market. We've also taken meaningful steps this quarter to drive the next wave of Jupiter's growth, both in the U.S. and internationally, including our partnership with Kanabo Research to enter the growing European medical market, which Gary will touch on later. We are thrilled by the growth we see from our 2 plant-touching businesses that operate in 2 of the fastest-growing cannabis markets in the U.S. In Massachusetts, Commonwealth Alternative Care was up 31% sequentially, and our Taunton medical dispensary displayed strong same-store sales growth in Q3, with an 8% increase sequentially and 41% increase year-over-year. Bottom line, Massachusetts is well on its way to being a $1 billion market with the very attractive supply-constrained dynamics that CAC's wholesale operations and expanding cultivation footprint are helping to address. Gary will talk further about our cultivation and the status of our retail expansion. But we are excited about the potential regulatory approval to enable further growth in this market. Our Standard Farm's cultivation and processing business also demonstrated strong growth in Pennsylvania. Our expanded product offering and revised pricing strategy contributed to a new monthly record in sales in September. During the third quarter, Standard Farms sold product to over 90% of the dispensaries in the state. These achievements reflect Standard Farms' well-established reputation in Pennsylvania's wholesale market as one of the oldest operators in the state. Overall, the 2 main business lines that drive our business are complementary, resilient and high margin. Jupiter's highly efficient operating model continues to provide a foundation of consistent profitability and broad customer reach. This is supplemented by the healthy growth of our plant-touching business focused on B2B sales. With that, I will now turn the call over to Brad, who will break down our quarterly financial performance in more detail. -------------------------------------------------------------------------------- Brad Hoch, TILT Holdings Inc. - CFO & Corporate Controller [4] -------------------------------------------------------------------------------- Thanks, Mark, and good afternoon, everyone. Revenue for the third quarter was $40.4 million, up 5% sequentially driven by 3% growth in Jupiter's quarter-over-quarter revenue and 24% growth in plant-touching revenue from Pennsylvania and Massachusetts. I'll note that Blackbird only represented 3% of overall revenue in the quarter and 4% of TILT's overall revenue year-to-date through Q3. Our 2 biggest, most profitable verticals are driving growth. As Mark mentioned, September was one of our strongest months for Jupiter, Standard Farms and Commonwealth Alternative Care. We are happy with where these businesses are trending and expect further revenue growth. We generated record adjusted EBITDA of $2.8 million in the quarter, more than double TILT's $1.2 million adjusted EBITDA in Q2. Excluding Blackbird, our pro forma adjusted EBITDA would have been $5.4 million, almost doubling our current adjusted EBITDA. Gross profit before fair value of biological assets was $12.2 million, a gross margin of 30.3% compared to 28.3% in Q2. The improvement in gross margin was driven by a shift in revenue makeup away from lower-margin Blackbird revenue to higher-margin revenue from Jupiter and our plant-touching businesses. We expect continued improvements in gross margin as CAC and Standard Farms achieve greater scale and efficiency. Total operating expense for the third quarter was $17 million compared to $17.2 million in Q2. Cash-related operating expense declined to $10.6 million compared to $10.8 million in Q2. On a year-over-year basis, our cash related operating expense has declined by 17% from the prior year period. We've done a great job over the last year of streamlining our business and reducing costs, and we expect the divestiture of Blackbird will reduce our quarterly operating expense by $3 million. The company recorded a net loss of $4.6 million compared to a net loss of $9 million in Q2. We continue to view adjusted EBITDA as a better view of true profitability because it adjusts for change in biological assets, which fluctuates quarter to quarter. Adjusted EBITDA was $2.8 million in the quarter, a 134% improvement sequentially and our third quarter in a row with positive adjusted EBITDA. We expect continued improvement in profitability as we generate more operating leverage from our 2 plant-touching businesses and especially after our divestiture of Blackbird. Cash flow used in operations in Q3 was $5.2 million. This sequential decrease in cash from operations was attributed to an $8.3 million increase in inventory to fill order volume and a $4.9 million decrease in accounts payable. After responding to the initial stress test of COVID-19, TILT is emerging as a leaner, more profitable business with a runway of accretive opportunities to reinvest in our footprint to drive growth and shareholder value. With that, I'll pass the webcast over to Gary for an in-depth look into what we are doing to drive additional growth. -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [5] -------------------------------------------------------------------------------- Thank you, Brad, and good afternoon, everyone. I'd like to spend the remainder of our prepared remarks focusing on management's strategic vision for TILT and how we seek to create shareholder value by focusing on becoming the preferred B2B partner for MSOs, LPs, independent cannabis dispensaries and brands. As the cannabis industry continues to expand across the U.S. and throughout the world, our aim is to ensure that TILT is well positioned to support that growth. First, a few words about management's decision to divest Blackbird. It is clear that the cannabis marketplace needs a comprehensive technology solution capable of bringing brands, retailers and consumers together on one platform. We continue to believe that the Blackbird platform has the potential to be that solution. However, the marketplace is heavily fragmented and hyper competitive with multiple players offering disparate systems at irrational prices, making it difficult to achieve sustainable profitability. We put this into the context of M&A. At only 4% of revenue year-to-date, Blackbird is effectively a start-up company that requires additional capital and significant resource commitments in order to achieve scale. Presently, start-ups and early-stage assets are not the typical acquisition targets for TILT. While the returns on such investments can be outsized, the time, resources and uncertainty associated with their development creates potential opportunity costs for other parts of the business that offer a higher ROI and near-term growth prospects. Digging a bit deeper into the pro forma metrics provided in our earnings release filed earlier today. Had we divested Blackbird at the start of 2020, the 4% decrease in revenue through September 30 would have been more than offset by a 170 basis point increase in gross margin, excluding the fair value of biological assets. Operating expenses would have decreased 15%, while cash burn would have also decreased by more than $7 million. Overall, this would have resulted in a 120% improvement in adjusted EBITDA from $5.7 to $12.7 million through the first 9 months of the year. Most importantly, it would have allowed us to redeploy resources towards accelerating growth in our inhalation and plant-touching businesses, which have been a steady source of cash flow and profitability despite being resource constrained for the past 12 to 15 months. It is important to note that while the proposed transaction does result in Blackbird becoming a private, stand-alone entity under its founder, Tim Conder, its structure will allow TILT to participate in any upside should Blackbird achieve scale. As much as it is bittersweet to see Tim leave the TILT family after the incredible job that he has done since joining the firm, we cannot think of anyone better suited to lead Blackbird into its next phase. Moving on to our inhalation business. We saw record cartridges shipped in September and are encouraged by the continued growth at Jupiter, especially as we appear to be on the cusp of further market expansion. It is important to note that Jupiter is more than a distributor and a reseller of CCELL products. While that is certainly a significant part of our business, at our core, we are a leading solutions provider and a technology innovator, having been at the forefront of developing disruptive, foundational technologies designed to address the ever-changing needs of consumers. As many of you know, Mark helped pioneer the application of CCELL technology to high-viscosity THC and CBD concentrate vaporization, the first of 3 pillars upon which Jupiter was founded. Jupiter's addition to the TILT family was intended to provide Mark with the additional resources necessary to fulfill his vision. However, the inverse occurred, with Mark spending the majority of his time at the corporate level leading TILT's successful turnaround. This was an opportunity for the competition to grab market share. However, 18 months later, it proved a lost opportunity as Jupiter has maintained its dominant market share in the CCELL category, delivering profitability, stable margins and consistent cash flow. And now with our recent management changes as well as the divestiture of Blackbird, Mark will finally get the time and the financial resources originally promised, allowing him to once again focus on delivering the types of innovation that has made Jupiter a leader in the space, further distancing us from the competition, both domestically and abroad. We have established ourselves as the preferred partner for everyone from large multistate operators to small independent businesses in nearly every state in the U.S. as well as Canadian LPs, international distributorships and brands worldwide. Jupiter builds trust through quality, consistency and reliability. Our expertise managing supply chain complexities has made us a dependable go-to source for products throughout the year, even when competitors have struggled with inventory shortfalls, something we have seen in the first and third quarters of this year alone. Helping our customers get to market faster is a key component of our strategy. Through partnerships with Convectium, combining their automated filling and capping system with Jupiter's exclusive prerack solution; as well as with Denali to provide their Kinder-Safe premium child-resistant packaging solutions, we continue to add to a growing suite of products designed to further simplify the supply chain for our customers. With a renewed focus on our plant-touching assets, we now have the opportunity to add another dimension to what we can offer current and future Jupiter customers in limited license, supply-constrained markets. On the international front, building upon our success achieving medical certification for our L-9 device in Israel, we recently announced the expansion of our partnership with Kanabo Research to develop a similar medically certified device for the European Union. Our team in Canada has done a fantastic job scaling our business north of the border, supporting LPs as they enter Cannabis 2.0 and being part of their customer-focused solutions for inhalation. As Mark mentioned earlier, third quarter Canadian revenue improved 20% compared to the second quarter and now represents 7% of overall Jupiter sales. We are excited about the prospects of repeating this process in Europe as that market continues to grow and moves beyond just flower. Turning to our plant-touching assets. Our Pennsylvania and Massachusetts facilities continued to deliver positive adjusted EBITDA and cash flow with top line sequential revenue growth of 24% compared to the second quarter and year-to-date top line revenue growth of 32% compared to the first 9 months of 2019. The Standard Farms, our Pennsylvania operation, reported its highest quarterly revenue ever in the third quarter; while Commonwealth Alternative Care, our Massachusetts operation, has resolved previously reported harvest-related issues and recorded their second largest revenue month for the year in September. Both look to finish the year strong, and the best part is that these facilities have room to grow, no pun intended, before nearing full capacity. We continue to see high demand for our premium flower and consumer packaged goods as we work closely with the leading dispensaries and MSOs, many of whom are also clients of Jupiter. Our new product offerings sell out as fast as we develop and launch them. According to our recent patient survey, our Standard Farms brand remains a top-3 brand in the state of Pennsylvania, which when you consider the fact that we do not have a retail presence there, is a remarkable achievement. Meanwhile, earlier this year, CAC recently won best edible at the New England Cannabis Convention for their chocolate-covered coffee beans. With this kind of success and additional resources now available, we look forward to scaling our plant-touching operations in order to meet market demand in these 2 dynamic markets. Near-term examples include investing in additional equipment at Standard Farms that will allow us to increase extraction capacity by over 50% as well as improve production yields by 15% to 20%. Similarly, expanding our tiered cultivation capacity at CAC should allow us to offer a greater diversity of strains and significantly improve production capacity there as well. A few words about our Massachusetts operation. CAC operates a state-of-the-art 46,000 square foot facility in Taunton that includes 18,000 square feet of flower rooms as well as manufacturing and processing operations and a medical dispensary. We are in the process of doubling our canopy and recently received approval to begin operations in the first phase of that expansion, adding 10,000 square feet of flower rooms as well as 7,500 square feet of packaging and manufacturing space. We are happy to report that plants are in the ground in 3 of the 6 new flower rooms, with the remaining 3 expected to come online by year-end. We are also in the late stages of completing our second phased expansion, which will provide for an additional 6 grow rooms, pending regulatory approval. To that end, I'd like to take a moment to comment on the regulatory status at both the state and local level in Massachusetts. Taunton has been a fantastic host to Commonwealth Alternative Care. And in return, we have done our best to respond in kind, supporting the surrounding community by providing jobs, tax revenue and cost offsets. We are committed to using local vendors whenever possible and have worked to support the sealing of CORI records for people with past misdemeanor drug possession convictions. With facilities fully constructed and ready to go, we look forward to bringing that same commitment and level of engagement to the communities of Brockton and Cambridge once we receive approval to open our doors there. To be clear, our plans in Massachusetts have not changed. We continue to progress in the planned expansion of our existing Taunton dispensary to include adult-use sales as well as our efforts to open medical and adult-use dispensaries in Brockton and Cambridge, where we maintain provisional licenses to operate medically pending final approval from the Massachusetts Cannabis Control Commission. Our applications for provisional licenses for adult-use retail facilities in Brockton and Taunton were deemed complete by the commission in March of 2019. We've updated those applications in September to reflect the changes that TILT has undergone and have continued to work diligently with the commission to complete its review of our applications during the past year. We have every confidence that the commission is working to review our applications in a manner that is both expedient and within the confines of the commonwealth's regulations. Understandably, concerns regarding our municipal-level regulation and licensure stem from the unanticipated length of time it has taken to receive our provisional state licenses. However, we continue to have a productive dialogue with the commission, providing prompt responses to any and all requests received and are confident that we are taking all possible steps to ensure that our plans for Commonwealth Alternative Care come to fruition. So what does all this mean to our shareholders? Simply, as taken together, Jupiter and our plant-touching businesses offer a highly differentiated business solution platform designed to provide our customers with answers to their strategic needs in inhalation product development as well as provisioning in major supply-constrained markets. Across CAC and Standard Farms, major MSOs make up 5 of our top 10 clients and 1/3 of our overall plant-touching revenue. This represents a powerful untapped potential in terms of achieving synergies and cross-selling opportunities between our plant-touching and non-plant-touching businesses. With such strong core assets and diversified revenue streams, we're not looking to compete with our customers. We're looking to help our customers be competitive. It's time to go to work. With that, we conclude our prepared remarks, and we'll now open the call to questions. Taylor? -------------------------------------------------------------------------------- Taylor Allison, [6] -------------------------------------------------------------------------------- Thank you Mark, Brad and Gary. We will now be happy to answer your questions about TILT and our third quarter results. (Operator Instructions) Operator, can you please open the line for any equity analyst questions? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Aaron Grey with Alliance. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [2] -------------------------------------------------------------------------------- So appreciate all the prepared remarks kind of on the updated strategy as well. So I guess I'll kind of start with that now you guys have announced the divestiture of Blackbird, so looking at Jupiter and the plant-touching assets and how you look to kind of go forward with that new strategy. You guys mentioned how the plant-touching, you're looking to actually kind of help some of the MSOs and kind of be partners with them. Can you just kind of elaborate kind of on that particularly given you do have the branded products within your plant-touching, so how you're looking to partner with them? And then as those markets look to kind of grow, particularly in Pennsylvania, kind of the capital that might be required to kind of increase cultivation, so how you're thinking about capital allocation beyond some of the increased yields you mentioned kind of longer term. And just kind of bringing it all together, I ask that with the lens of what just happened the other week with the election and increased speculation of how there might be changes at the federal level regarding cannabis depending on what might happen in January with the Senate. So I don't know if that was kind of in line within that, but your commentary there would be helpful. -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [3] -------------------------------------------------------------------------------- Aaron, thanks for joining us today. A few things packed in there, so I'll try to hit them. If I forget any, please jump in. I think regarding the strategy as it pertains to plant-touching, the thing to remember about a lot of the MSOs, in other -- in certain states, it's possible that you're not allowed to carry wholesale, such as Florida. So you're obligated to carry all of your own product and be vertically integrated. But in most of the other states, I would say that, typically, the MSOs do tend to carry each other's products. So having some of our own brand architecture is really not a competitive disadvantage. In fact, it gives more variety and allows the MSOs to create sort of that curated experience. So not only do they have their own brands, but they know that if they're customers like a few other brands, they can carry them as well. And in particular, in Pennsylvania, where ours is a top-3 brand, we think that that's helpful to the MSOs who purchase from us because, again, it's a reason for their customers to come back time and time again. But that's not the limit to what we're looking to do. Besides our own branded products, similar to what we do with Jupiter, we also can offer white label products and contract manufacturing. So if we have brands that are looking to get into the space but maybe they don't have a retail presence, if we have any smaller retail outlets that might be looking for a house brand and they're not affiliated with an MSO, we provide any of those levels of services, whether it's a house-branded product, a contract manufacturer product and so on. So for us, our ability is to try to take a look at what the market has, where is the market going in terms of product and development and make sure that we're always out in front with good, quality products, whether under our name or whether under our partners' names, and to make sure that they're cutting edge to the extent possible. And we can do that in Massachusetts. We can do that in Pennsylvania. And I think that's really where we can add the most value, especially going forward as this market expands. I think there's a number of retail licenses that were awarded in Pennsylvania. Massachusetts, I believe, is expanding their number of retail outlets, and not all of these shops are partnered with MSOs. So we're there to support not only the big folks but roughly about the 75% of dispensaries out there that are not affiliated with an MSO as well. Let me pause there and see what other questions I can hit there. I think I covered a little bit about expansion, a little bit about products. What else? -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [4] -------------------------------------------------------------------------------- Yes. Just quickly adding on, just would you look about -- think about replicating that strategy in other states and as you now kind of focus more on plant-touching? Or are you kind of just focused with just those 2 states kind of in the near to medium term? -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [5] -------------------------------------------------------------------------------- Obviously, we've got some significant assets to work through in the 2 states we're already in. That said, as we look at what's available out there, there are some interesting assets. And I want to be clear: we're not looking to go to the retail side of this. I know we have retail in Massachusetts. And hopefully, we'll have expanded retail in Massachusetts with our licenses. That's really our test bed. We can test our Jupiter products there. We can test our other product developments. But as we look to other markets, that ability to do manufacturing and cultivation and provide that sort of wholesale supply, that is interesting to us. So I think as with all things, you'll take a look at what comes down the pipe, you evaluate it, see if it makes sense. And if the numbers line up, you certainly rule nothing out. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [6] -------------------------------------------------------------------------------- Okay. Great. That's helpful. So then regarding the Jupiter business, I mean I see that kind of return to growth during the quarter. I think you said Canada was up 20%. So it looks like that was a good portion of incremental growth. So just regarding the U.S. business for Jupiter, you talked about September being very good. Mark, I would love to get your commentary in terms of what you're seeing more near-term. And kind of a higher-level question that I've got, and I'm sure you guys have as well, in terms of growth being more in line with what we might have seen from MSOs last quarter and then this quarter, some of the bigger players, which I know some of which are your customer base. So how best to think about that growth and when it might start to get a little bit more in line with MSOs. Obviously, this is just one segment, just being vape within that, but I'm just starting to see more sequential growth there. -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [7] -------------------------------------------------------------------------------- Yes. Thanks, Aaron. We're really excited where Jupiter is today. And what we've always been able to deliver is scale and grow profitably and with a solid foundation. And that's what we're going to build upon. With Gary expanding his responsibility and role with in TILT, it really frees up my time to where I can focus on what really is my passion, and that's product and innovation. So I'm working really close with Smoore and our newly developed R&D laboratory to develop foundational technologies that then we can build suites of products around it. Combine that with our geographical footprint. One of Jupiter's strengths is its diversity and its customer base and working really close with both smaller customers, the midsize and the large MSOs and our expansion to international. What really catapulted Jupiter in the beginning with the growth of cannabis was our timing in the marketplace. We were able to get in early with some disruptive technology and really grew with the category and put some distance between ourselves and the nearest competitors. We're taking that same success formula and strategy internationally. And we're getting a head start on that with medical -- really with medically approved products and technologies. So again, I'm working really close with Smoore, our manufacturing partners. They've obviously got a lot of resources that are really working to our advantage. Gary, do you want to add anything to that? -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [8] -------------------------------------------------------------------------------- Sure. I think an interesting piece to the Jupiter story that maybe didn't exist or hadn't been contemplated is the plant-touching connection. I think when you take a look at what a lot of the customers out there look for, they like that one-stop shop, whether it's getting their packaging or the various pieces that you need or the equipment. Now that we have especially in those supply-constrained markets, we can then also offer Jupiter customers access to some of our plant-touching assets. So if they're in a supply-constrained market and in need wholesale flower or things like that, it also creates tremendous cross-sell opportunities. We are dealing with the large MSOs out there. And what we found is our supply chain management has been very well received. This quarter again, we experienced a moment where some of the competitors ran out of product, and we were able to step in and fill those needs, except this time, instead of supplying the suppliers, we sold directly to those customers. So that's fertile ground for us to really start to expand and get more aggressive. I think your comments about the tracking like an MSO, I would [add one thing away] from Jupiter. If you actually look at the growth in our plant-touching business, it's actually tracking pretty favorably along with where MSOs are. I think we said, between the 2, we're up almost 24%, 25% or so, give or take. So that's sort of in line with what you're seeing. And I think what's interesting is, remember, we don't have that retail presence. We're not opening up new stores right now. That's just coming out of our wholesale business and also from our one medical dispensary in Taunton. So as we think about the future going forward and actually bringing those facilities closer to near capacity, we think there's a lot of runway there to keep pace. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [9] -------------------------------------------------------------------------------- Yes. No, absolutely. And last one for me, then I'll jump back into the queue. Mark, you've often talked about and you highlighted before innovation being so key to our own process and that of Jupiter. So can you talk about how key you think it is now for Jupiter in driving innovation, separating itself and working with CCELL to create defensibility against some of the other products that are on the market? And then if you could comment kind of how you've seen that trend in terms of potential impact on pricing. And then just also to add on, just how that packaging part category for vape products, how that's been evolving for you guys. And I know it's been a new initiative. And then I'll pass it on. -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [10] -------------------------------------------------------------------------------- Yes, sure. Thanks, Aaron. Again, innovation has always been kind of the foundation and cornerstone of Jupiter. And although we have -- we build on that foundational. In fact, we have really just been in our phase -- our first phase as we talk about the pillars of our innovation. We've only focused on vaporization. And yes, as the market expands and vaping -- the vaping category has been relatively flat, if not declining as a percentage. There's exciting new ground in heat-not-burn and as well as vaporization for concentrates. And we're really focused on these other areas. So those 3 pillars would be -- Jupiter Liquid is our vapor line. Jupiter [Essence] would be more if you think of it as concentrates. And Jupiter [Bloom] is the other division of heat-not-burn. There's actually some really interesting space that we're exploring that's kind of more that open space in between heat-not-burn and vaporization. So I can't really share a whole lot right now with that, but it's something that I'm very excited about that we've got our supply and our -- and this is all, by the way, that we could really rely heavily on IP. That's going to be really important to us. As far as the second part of your question, Aaron, on packaging, we're making tremendous ground -- tremendous progress with packaging. And we're -- as we're leaning into packaging and providing solutions for our customers, we're now focused on now the unique side of that. And we're just entering into that space of working with our suppliers and being innovative and coming up with some really fresh new ideas. That's where we're going to win on innovation in our future and consistently providing that level of service that we always have. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- (Operator Instructions) There seems to be no further questions over the phone lines at this time. -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [12] -------------------------------------------------------------------------------- Great. Taylor, do we have any from the web? -------------------------------------------------------------------------------- Taylor Allison, [13] -------------------------------------------------------------------------------- Yes, we do. So we'll start with some -- a question on Blackbird. We're getting a lot of these: "Regarding the Blackbird news, it's great that TILT saved money, but where can we expect future growth to come from?" -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [14] -------------------------------------------------------------------------------- Want me to start? -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [15] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [16] -------------------------------------------------------------------------------- That is a great question and a common one. We have talked about Blackbird as being that future growth engine for us. And like any start-up, it does have that chance to be a home run down the road. I think for us, we have some near-term growth prospects right here in our own backyard. Jupiter is just getting started. And as you've seen, the plant-touching assets, while they're up only -- while they're up 24% quarter-over-quarter, they have a lot of room to run. They're not even near capacity. And if we were to get our retail licenses in Massachusetts, we'd have to step up production that much more. So we want to sweat our existing assets. And then also, as we start to look around in the M&A world out there as we now have these additional resources, we have an opportunity to be inquisitive. And it's not to say we'd go on a spending spree, but we could start to look at interesting tuck-ins and acquisitions that support not just plant-touching or the inhalation business but any of the ancillary pieces that our customers might need. Again, we're trying to fill the entire spectrum for them, not just be a 1- or 2-product sort of organization. So there are some interesting assets out there. Again, we would not be investing in what we would consider to be faraway growth. I think we have to limit ourselves somewhat to things that are cash flowing and are going to be accretive more immediately. I think that's the case with a lot of folks in this industry right now. But I think we will continue to keep an eye out for additional growth, but we have a fair amount of room to run right now just with our existing. -------------------------------------------------------------------------------- Taylor Allison, [17] -------------------------------------------------------------------------------- Thank you. And as a follow-up to that, you mentioned -- this is another question: "You mentioned not buying a start-up. Is there other M&A that you would do? What kind of companies would you buy?" -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [18] -------------------------------------------------------------------------------- Sure. I think kind of building off the prior question, I think we -- there's nothing that we won't take a look at per se. I think it's important to look at everything that comes across the desk. But it's also important to have a discipline, and we have an internal scorecard that we keep that makes sure that the top 5 or 6 things that we're looking for get checked off before we even start to deploy resources to evaluate that. And as I mentioned, having cash flow and being accretive, that's important. Taking a look if it allows us to expand our footprint, that will be another thing that will be important. Does it tuck in and allow us to go deeper in our existing markets? So certainly nothing revolutionary, but I think it's also remembering what we're good at, staying true to what our core mission is and not getting blinded by just the sheer volume of opportunities out there. So again, there's a lot of interesting things. Our banking friends have done a good job of keeping us apprised of them. So I'd say stay tuned. -------------------------------------------------------------------------------- Taylor Allison, [19] -------------------------------------------------------------------------------- Thanks. "In regard to global expansion, what can we expect from the recent news about Kanabo?" -------------------------------------------------------------------------------- Gary F. Santo, TILT Holdings Inc. - President & Head of IR [20] -------------------------------------------------------------------------------- I guess I'll start, and Mark, if you want to jump in there, too. So I think the Kanabo thing is interesting to us, right? So we already have a medical device over in Israel. This is an opportunity to now expand to medical devices here in the EU, and I think that's really important because that's the next logical step. I think if you take a look at Europe, I think you've heard others say that Europe is probably 3 to 5 years behind where the U.S. is right now. So it makes sense that their next phase would be to go right into the medical side. And we think vaping is just getting started on that front. So having a partner there that can help us distribute, it's important that it's a very cost-effective relationship for us. We can't boil the ocean and build out teams all over the world. So if we can leverage other people's distribution and also their R&D capacity to work alongside us, I think you'll see us look to expand into markets with a similar formula. -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [21] -------------------------------------------------------------------------------- Gary, I couldn't have said it better myself. That's -- no, we are really excited about the -- we've worked with Kanabo now for just over about 2 years. And they have just proven, although things have been slow to start over in both Israel and Europe, Kanabo has proven to be a really terrific partner on the R&D side and the regulatory side. So really excited about what the future holds there. -------------------------------------------------------------------------------- Taylor Allison, [22] -------------------------------------------------------------------------------- Great. And this one's for Mark: "So I heard Gary say something about Mark spending more time focusing on Jupiter. I know you touched on that a little bit in the analyst questions, but what does that mean?" -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [23] -------------------------------------------------------------------------------- Yes. I think it's -- we couldn't be -- or I personally couldn't be any more proud of the team. And since I've taken on the role of interim CEO in May of 2019, we couldn't be any more proud with the turnaround, and it has taken a tremendous amount of effort and work and time, which has really displaced my energies and efforts out of Jupiter. I came -- Jupiter was extremely successful in the beginning. It took 100% of my focus and work and really working closely with the team. But since May of 2019, I have spent 80%, 90% of my time on the corporate level of TILT with the turnaround. I'm very pleased and proud of where we are today. And again, with Brad and Gary going into their respective roles and taking on more responsibilities, it is freeing up my time to where now I can spend more time in Jupiter. And again, that's where my passion lies, is on new product. And I know a new disruptive platform or technology will be really that second-stage boost that we've been looking for. We've got some exciting stuff in the works. -------------------------------------------------------------------------------- Taylor Allison, [24] -------------------------------------------------------------------------------- Thank you. That is it for questions today. Operator? -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- And with that, we've reached the end of our question-and-answer session. And now I would like to turn the call back over to Mr. Mark Scatterday for any closing remarks. -------------------------------------------------------------------------------- Mark Scatterday, TILT Holdings Inc. - Chairman & CEO [26] -------------------------------------------------------------------------------- I really appreciate everyone's attendance today and participation, and we really look forward to our year-end -- or next meeting year-end, probably April of 2021. I hope everyone has a great holiday and a safe time with your families. Thank you. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.