TILT Holdings Inc. (TILT.NE) Q3 2019 Earnings Call Transcript
Published at 2019-11-20 23:04:06
Greetings and welcome to TILT Holdings Inc. Third Quarter 2019 Conference Call. At this time, all participants are in listen-only mode and this conference is being recorded. Following the initial formal remarks, we will conduct a question-and-answer session. Webcast participants can submit a question directly through the webcast. Further instructions be provided for the Q&A begins. Hosting today's conference will be Joe Milton, TILT's Senior Vice President of Business Development. And now I’d like to turn the call over to Mr. Milton. Please go ahead.
Thank you, operator and good afternoon, everyone. Thank you for joining the TILT Holdings Q3 conference call. On the call with me today with prepared remarks are Mark Scatterday, Interim CEO, Tim Conder COO and Dave Caloia, CFO. We will discuss results for the third quarter of fiscal year 2019. Our third quarter earnings release was issued after the market closed today and a copy of that press release can be found on the Investor Relations section on the TILT's website as well as on SEDAR. I would like to remind you that during this call, management’s prepared remarks may contain forward-looking statements which are subject to risk and uncertainties and management may make additional forward-looking statements during the Q&A section. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer you to all the risk factors contained in the third quarter press release and in filings with the Canadian Securities Administrators for a more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances except as may be required under applicable securities laws. Finally, please note, on the call today management will refer to non-IFRS financial measures such as adjusted EBITDA in which TILT Holdings excludes certain expenses from its IFRS financial results. Please refer to TILT Holdings earnings release and Q3 filings for a full reconciliation of non-IFRS performance measures to the most comparable IFRS financial measures. At this time it is my pleasure to introduce TILT Holdings Interim Chief Executive Officer, Mark Scatterday.
Thank you, Joe. Welcome everyone to the TILT Holdings third quarter 2019 earnings webcast. It is my pleasure to be a part of this call for the third time as Interim CEO of TILT. Joining me on the call today is our Chief Operating Officer, Tim Conder; and our Chief Financial Officer, David Caloia. The third quarter of 2019 was a very exciting and transformative quarter for TILT. It was the first full quarter in which we operated under our strategic, revitalization plan that was implemented in mid June. As discussed last quarter the plan focused on achieving operational efficiency within our core assets, while driving our organization towards profitability. I'm very proud to report that we have succeeded in achieving this important goal. The success of this plan is also illustrated in some of the major milestones we hit in the third quarter including: strategic growth in our core operating assets; the closing of a new financing facility; key additions to our management team; and adhering to a refocused corporate strategy. On today's call, I will discuss a few key points. After that, I'll turn over to our COO Tim, who will provide updates on each of our businesses before handing it off to our CFO, Dave, who will go through our third quarter financial results. We will close the call by taking questions both from the equity analysts community and them from shareholders and prospective investors. I will be addressing the following key points. First, I will discuss some of the financial highlights from the quarter, culminating and posting our first ever adjusted EBITDA profitable quarter. We believe profitability to be with -- of the highest level of importance to scale our business and we're proud to announce this accomplishment in our latest quarter results. Second, I will talk about the ongoing efforts to realign our focus on innovative technology and services, streamline operations and prepare for continued growth within each of our core assets and drive shareholder value through disciplined financial management. Third, I will address our recently closed financing and how it positions TILT for near and long-term success. This accomplishment is especially impressive, given today's market conditions and was only possible due to our focus on profitability over the last three months. Last, I will touch on achievements to date, especially as they relate to the goals we set upon my appointment last quarter and share the new goals that we have set for our team for the fourth quarter of 2019 and into 2020. First, I would like to talk about the steps we took over the past few months that have resulted in posting our first profitable adjusted EBITDA quarter to date and the importance of that milestone. Since accepting the role of interim CEO, I’ve made it clear and I believe wholeheartedly in disciplined financial management and fiscal accountability. On our last call we shared unaudited guidance and we had achieved a positive adjusted EBITDA for the month of July, which we continued throughout the quarter. This is especially important in today's challenging cannabis market and will be essential to TILT's ability to scale. As many of you on the call are aware myself and my executive team were not leading this company prior to and at the time of our launch as a public company. Since taken on this challenge, we’ve made sweeping and fundamental changes to our organization. We eradicated a majority of upper management and optimized our workforce. We slashed unnecessary spending and properly allocated our precious capital, the hard earned dollars of our valued investors. We focused our energy on stabilizing the key assets, which generated tremendous revenue, therefore laying the foundation for long-term success. The value of these efforts is reflected in our Q3 results. I'm very proud to share our profitability trend continued through the rest of the quarter and even outpaced our July results. There are only a handful of publicly traded companies in our industry that are profitable and only few generate the level of revenue that we do at TILT. We're very happy to report today adjusted EBITDA profitability of $2.7 million for Q3 on $46 million in revenue. This increase is monumental and something we believe shareholders will be excited about and proud of, we definitely are. We also finalized the forfeiture of legacy stock options, which have had historical impacts on our P&L. As you can see from our financials, this had a measurable one-time effect on this quarter's earnings, resulting in a positive $37 million adjustment to net income. Thankfully now these are forfeited, TILT will no longer experience net losses or inflated net earnings due to these non-cash legacy stock options that don't reflect our true performance. Our adjusted EBITDA growth has been consistent all year and we look to that to be our driving measure moving forward. Our core operating assets continue experience growth because our strategy is sound. We are stabilizing the company financially so that we can be well positioned to take advantage of opportunities that exist outside of the TILT organization. The cannabis industry has suffered some setbacks over the preceding months that may present enormous opportunities for the companies that are well positioned to act on them. We plan to be one of those companies. Second, I would like to discuss our ongoing efforts to reaffirm our focus as an organization. We are a leading technology and service provider for the cannabis industry through our primary operating assets, Blackbird, Baker and Jupiter Research. I would like to take a moment to explain why our assets are valuable and how each business unit complements each other providing a unique opportunity to leverage individual operating assets to the benefit of the large organization, something we view as a market competitive advantage. As reflected on our new website that was launched last quarter, TILT is a foundational technology cannabis platform comprised of assets that support businesses worldwide. We provide an infrastructure upon which the cannabis industry operates. This is our unique value proposition where many companies lead in one specific segment. TILT is positioned as a category leader across three major segments: vaporization hardware, transportation delivery and software. TILT segment diversification positions the business to have a global presence and access markets more rapidly in classic multistate operators. Our software and services asset Blackbird now contains the entire Baker toolset and is in the process of transitioning all the software clients to Blackbird. This will make the platform one of the most prolific in cannabis servicing over 1,800 brands and retailers, and over 1 million consumers in 43 states throughout the U.S. On the hardware side, Jupiter Research continues to grow its customer base reaching new clients throughout the U.S. and Canada as well as reaching new international markets in Europe and South America. Quarter-over-quarter, Jupiter grew its international presence 70%. This fact shows that TILT is becoming a leading service and solutions provider in the cannabis space on a global scale, servicing over 2,000 businesses around the world. As we evolve from the original amalgamation of companies to focus on being experts in technology and service solutions, we will continue to identify additional changes that maybe made within the organization to drive this effort. We will constantly evaluate each asset based on two criteria: one, does this align with our core focus; and two, does this asset have long-term value proposition. These questions will lead to opportunities for divestiture or commitment of ongoing investment. We will make any necessary changes to our asset portfolio in order to refine our focus, accelerate the realization of our vision and drive long-term shareholder value. Third, I would like to discuss our private placement of up to $35 million of shareholder backed financing where we closed $25.6 million and can further close on $9.4 million, which would take place by December 15. As I mentioned on our last call, we have been working diligently to secure an attractive facility, a challenging task in this current environment. This financing marks the beginning of the next chapter for TILT. It was done with care and attention to detail that embody your values and refine vision. We are a thoughtful and measured company and any decision to introduce debt in the TILT has been done with intention and purpose. With this $25.6 million as well as the option to close the remaining $9.4 million, we were able to extinguish an existing loan with a very high interest rate as well as eliminate outstanding encumbrances that were presenting our business from growing. First of all, this facility will serve as a springboard for future strategic calculated growth. Fund raising is not easy in this current climate. Luckily, our ability to drive revenue and reach profitability provided us the extended runway necessary to take advantage of what we felt will attract the financing for TILT and its shareholders. This financing is largely backed by existing shareholders, which we believe illustrates the confidence some of our largest investors have in our new management team and realign focus. I’m so confident in our vision and ability that I personally invested in the financing. Fundraising is very time-consuming. But it goes without saying that closing this financing was imperative to TILT's future. Now that we are beyond this milestone, my team and I are excited to focus all of our attention on the business and the opportunities in front of us. What gets measured, gets managed. Last, I would like to review the goals that we set for ourselves last quarter and set new goals for our organization to close out the remainder of 2019, and start the new year from a position of strength and preparedness. From the onset of my 10-year as Interim CEO, I made it clear that we would focus on profitability through the implementation of a disciplined fiscal strategy. As mentioned previously, it gives me great pride to share the successful result of a positive adjusted EBITDA of $2.7 million for Q3. We committed the closing financing at attractive terms for the company and its shareholders. While it took a little longer than expected, we accomplish this goal with a facility that met the company's needs and limited shareholder dilution. We also finalized the forfeiture of founders legacy stock options, which have had historical impacts on our P&L. As evidenced by our financials, this had a measurable one-time effect on this quarter's earnings, resulting in a positive $37 million adjustment to net income. Thankfully now that these forfeited TILT will no longer experience net losses or inflated net earnings due to these non-cash legacy stock options that don't reflect our true performance. The driving measure of value creation will be adjusted EBITDA, which demonstrate consistent improvement through 2019. Every day we strive to be transparent with existing and potential shareholders, customers and our hundreds of employees. There were times over the past few months when we want to share more than we were permitted to as a public company. Our sincere hope is that our actions speak louder now than words could have at the time. We're looking forward to maintaining a level of openness so that we can communicate our overwhelming excitement about the future with all of you as often as possible. On our last call, I hammered on the idea of creating and maintaining operational efficiencies throughout our organization. And while there are still work to do, I’m pleased by all that the organization has achieved in such a short period of time. We set KPIs and measured our business against them. We set goals and we surpass them. As such, I’ve the following goals for myself and our team. One, create and adhere to a path for profitability with our newly integrated software and service businesses. Two, drive revenue growth, while maintaining profitability. Three, reward the talent and commitment of our employees. Our business is only strong of the people behind it. Four, become a beacon corporate governance by recruiting strong and experienced Board members and solidifying high-performing management team. Five, look for new and exciting opportunities to grow our global support of the cannabis industry. Things have not been perfect, but we're driving continuous improvement every day. We are getting better together and growing as a team to improve the service and offerings to our valued customers. Next I'll turn over the call to Tim, who will provide individual updates for each of our core operating assets where we’ve been very focused in establishing a strong foundation that sets the stage for long-term and potentially rapid growth.
Thank you, Mark, and good afternoon, everyone. I was appointed as TILT's Chief Operating Officer back in July. Upon that appointment and until now, my primary focus has been evaluating and accelerating efficiencies and revenue within each operating asset and realigning our focus around a common strategy ambition. And while that work is not yet done, I'm very excited about what our team has been able to accomplish in a short amount of time. I know the reason for this is that our team believes in the company just like I do. Our core operating asset, Jupiter Research, has continued to forge ahead despite industry headwinds late in the third quarter. As always, Jupiter's focus has been on innovation and strong financial accomplishments. Jupiter has maintained a leading position in the vaporization technology space even as public speculation raised questions about the safety of vaping. The recent crisis came at a hard time for the cannabis industry as public markets [indiscernible] the news of vape related illnesses in many parts of the country put a huge amount of pressure on our customers and competitors alike. Research is starting to show what we had expected all along. The CDC released its preliminary findings showing that the root cause of these vape related lung injury -- injuries is likely to be certain additives found predominantly in black market leafs [ph]. Safety is the single most important thing when selling products for consumer consumption. The current environment has strengthened our result to continue to develop new products and technologies, ones that may even disrupt vaping itself, just as vaping disrupted combustion. We're hopeful that these events unite the vaping industry in an effort to educate consumers and self-regulate producers. At Jupiter, we commit to partnering with industry leaders in maintaining the highest level of manufacturing standards. Despite a negative nationwide narrative around vaping, Jupiter Research had an extremely strong quarter. And while we did see some effects to our revenue growth, we are still very profitable. Jupiter had many other important and positive developments this quarter, including the expansion of our product, research and science team led by Dr. San Li, who is tasked with developing proprietary vaporization technology. We also launch several new products and have continued to focus on international expansion as well as the ever-growing CBD category. In Canada, we’ve been working closely with many of the nation's largest license producers, while they prepare to launch new products into the market. In Europe, we have continued to lay the groundwork for a large-scale expansion effort, building strategic relationships and developing a robust logistics strategy. We have been closely following the legalization efforts in Mexico as we develop our presence in Central and South America where we have already been shipping products. Jupiter is a business that we are very proud of and excited about. Market opportunities at Jupiter has as the global leader is extraordinary. Pair that with product innovation and new technologies and the potential is immense. In September, we're excited to announce the full integration of our technology assets Baker and Blackbird into a single technology and service offering, creating one of the most prolific and comprehensive software platforms. Integrated technology unlocks opportunity for TILT by providing the businesses with new revenue opportunities. Simply put, software integration creates new connections between retailers and consumers, on which TILT can capitalize. We're the first company to integrate technology assets at the scale. This foundation prepares us for future expansion of organically as well as through potential acquisitions. This is an especially interesting opportunity given today's market conditions in some of the complementary and distressed assets that are now available. Blackbird is a technology and services company. We were the first to deliver legal cannabis in Nevada and expanded our services offerings into California last year where we are now one of the state's largest independent distributors. Last quarter, we were proud to announce 100% market penetration in both Nevada and California, two of the largest legalized cannabis markets in the world. Blackbird transports tens of millions of dollars worth of wholesale product and facilitates millions of dollars in retail transactions on a monthly basis. With the addition of Baker and Bright side, Blackbird now have software clients in all legal cannabis markets in the United States. The complete integration of these companies will extend the support we provide to brands and retailers by connecting them to consumers in a more substantial and comprehensive way, while simultaneously restructuring our revenue model to focus on fees per transaction in addition to charging recurring monthly fees. This will have a significant impact on revenue that we generate from existing and future clients and grow our business leading margins. Also by integrating these assets, we have been able to reduce our overhead and find internal efficiencies in areas where there was initial overlap. Blackbird offers one of the most comprehensive supply chain management tools in the industry and supports this technology with some of the best-in-class transportation and last mile delivery services for over 1,800 brands and retailers. Blackbird's value proposition will continue to be its ability not only support the downstream movement of product through the supply chain, but also to provide retailers and brands meaningful access to consumers through an e-commerce offering that has been strengthened with the addition of loyalty, rewards and digital messaging. Blackbird is looking forward to the new year, which will see several product announcements and service expansions, both in existing and new markets. At Commonwealth Alternative Care, our vertically integrated retail cultivation and production facility in Massachusetts, the team focused on creating efficiencies that led to an immediate and significant increase in revenue generation. We increased revenue by 218% over last quarter by focusing on growing high-yield strains and increasing our capacity for manufacturing and packaging value-added products to grow our wholesale distribution footprint throughout the state. We currently sell products to over 50% of our medical and adult use dispensaries throughout the state and are finally capitalizing on our early mover advantage in a market that is severely supply constrained. We sell every product we manufacture immediately, either in our own store or wholesale, and in many cases presale products weeks in advance. Most importantly, the significant growth in Massachusetts provided the company with meaningful revenue and free cash flow, helping sustain the business as we negotiated the terms for our recent fund-raising. Through hard work and ingenuity, we have been able to turn Massachusetts from a money-losing business into a profitable one, all without receiving adult use licenses or adding additional cultivation capacity. As those two things come online, we can look -- we can look to see even more significant growth in revenue and profit out of the state. Standard farms, our cultivation and production assets in Pennsylvania is positioning the company to capitalize on the additional greenhouse footprint that came online late last quarter. Our current products continue to be well-received throughout the market where we continue to distribute into approximately 90% of all Pennsylvania dispensaries. In Canada, we are prepared to submit all requested documentation to Health Canada as part of a standard request for information that was made last quarter as part of our ongoing licensing process. We plan to bring this facility online as soon as possible. As with all of our assets, we are evaluating the best uses for this asset that align with TILT's refined core focus. We continue to integrate our software, hardware and services with our plant touching asset -- sorry, our plant touching businesses. We are our own best client. This unique structure provides reliable and state-of-the-art technology and cost saving services to our vertically integrated operations as well as provides valuable insight that we derive from our own plant touching asset. These insights reduce the need for pilot programs and beta testing and further allow us to better understand the needs of our customers. TILT is only if strong as the teams that make up each of our core operating assets. Their ability to execute, their willingness to adapt, and their excitement to change the course of history. As the person who gets to interact with them on a daily basis, I can tell you without hesitation that I am extremely confident in TILT's future because of the strong team we have in place. It's been a challenging few quarters as we’ve integrated the various business units and dealt with industry headwinds. But the results speak for themselves and I'm pleased with the work we've done both to grow revenue and post positive adjusted EBITDA for the quarter. This is a marathon not a sprint, and I firmly believe that our ability to drive toward profitability uniquely positioned TILT -- position TILT's future outlook. With that, I would like to turn it over to our CFO, Dave Caloia, to discuss the company's Q3 financial results.
Thank you, Tim. I'm excited to share with you our financial results from Q3 2019. We generated our first ever profitable adjusted EBITDA quarter, sequential revenue growth and improved gross profit before fair value impacts of biological assets. As Mark and Tim both shared, profitability has been the laser focus of our strategic operations plan, and it's been rewarding to watch the successful implementation of that plan show so strongly in our third quarter financial results. For the third quarter of 2019, revenue increased to $46.1 million compared with $39 million that we reported in the second quarter of 2019, an increase of 18.2%. This was mostly due to revenue growth in the company's licensed cultivation facilities in Massachusetts. As Mark previously mentioned, we are also proud to announce that TILT posted its first ever profitable adjusted EBITDA quarter to date, achieving a major goal of new management for operational efficiency and profitability. I’m extremely enthusiastic about this new area of profitability and very proud to share with our new shareholders. Our adjusted EBITDA percent increased 1,600 basis points over the last quarter from a loss of $4 million to $2.7 million in adjusted EBITDA. The improvement of adjusted EBITDA loss compared to the second quarter of 2019 reflects higher volume, continued margin improvement and mix from the maturity of Massachusetts operations as well as a reduction in our operating expenses. As a percent of sales, adjusted EBITDA improved 600 basis points to 5.8% compared to the second quarter of 2019. As I've mentioned in our previous quarterly earnings calls, traditional comparisons are very difficult. For that reason, we use another financial analysis tool known as non-GAAP adjusted EBITDA that we feel gives shareholders a better idea of the overall financial health of the organization. A reconciliation of these statements and other non-IFRS measures is hosted in our detailed financial presentation on the Investor Page of the TITL website and in our earnings release. As Mark mentioned, we finalized the forfeiture of legacy non-cash stock options, which have had material impacts in our P&L. This forfeiture had a measurable one-time effect in this quarter's earnings resulting in a positive $37 million adjustment to net income. We anticipate this issue has been resolved once and for all and that TILT will not experience swings on net losses or inflated net earnings due to non-cash stock option expenses moving forward. We will continue to focus on adjusted EBITDA as a driving measure for company's performance. Jupiter Research, the company's Consumer Devices & Packaged Goods business unit impressively continues to operate as a profitable independent entity, despite the headwinds. This stability was rooted in further customer awareness and loyalty to the Jupiter product line, increase market leadership through our North America and extended product improvements in developments that continue to attract B2B sales. Additionally, with a focus on further international expansion, Jupiter is now represented in 15 countries with revenues generated from international sales up 70%. Finally, we have made significant strides in our cultivation and production business assets, led by Massachusetts license holder Commonwealth Alternative Care as well as recently funded Pennsylvania license holder Standard Farms. Revenue generated from Massachusetts grew over 218% quarter-over-quarter. I would now like to turn it back to Mark for final comments. Mark?
Thank you, Dave. Before we turn over to questions, I would like to recap some of the highlights from this Q3 earnings call. I took on the challenge of leadership of this company in order to enhance shareholder value during a very difficult period of time. I felt then as I do now, that my basic business principles and ethical standards were required for TILT. My team and I are focused on delivering quantifiable positive results in creating long-term shareholder value. With the successful execution of our strategic plan, one that puts an emphasis on profitability, my team and I are pleased to celebrate our first ever positive adjusted EBITDA quarter. This is a major milestone. We are results oriented business and Q3 demonstrates strong results. In terms of both revenue and footprint, TILT is and continues to be one of the largest cannabis companies in the U.S. Our unique portfolio of businesses are strategically aligned to be the technology and innovation backbone for one of the fastest growing industries in the world. We're blazing new trails for retailers and brands by providing the highest standard possible hardware, software and service solutions in the cannabis industry. We couldn't be more thrilled with the opportunities that lay ahead and we are more confident than ever before about our ability to capitalize on them. I would like to sincerely thank my team, that persevere during the time that presented many obstacles and challenges. Their dedication and optimism are reflected in our achievements over the last quarter and filled with a tremendous amount of pride for what we've accomplished together thus far and I'm excited about what we will accomplish together in the future. It is an honor to lead this company through an admittingly difficult turnaround period. We have been propped up by the investors, allies and customers that continue to believe in the TILT story. Your support not go unnoticed, but we are driven by a strong desire to reward your confidence in us. Today I can say without pause that TILT is positioned to be a global leader in providing innovative technology and services to the industry worldwide. Thank you.
Thank you, Mark. We will now be happy to answer your questions about TILT and our third quarter results. First, the operator will open the line for any equity analyst questions before we turn to the questions that we have been receiving and will receive from shareholders via the open webcast question submission system. Operator, are there any questions from our equity analysts?
[Operator Instructions] Our first question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead with your question.
Hi, guys. Thanks for the question and congrats on the quarter.
Just first question I would like to ask is kind of high level one. As you look at the business today, what would you say is kind of being underappreciated by the market in terms of how all the underlying business kind of work together synergistically and really the overlap that can really kind of build as you go into 2020? Thank you.
Yes. Thanks, Aaron. So I think as we touched on a little earlier, the refined focus of TILT is going to be around innovation and technology. And while plant touching assets are important assets to us today, they’re important because they provide revenue to drive discovery in those areas. So really, really excited about the future as it relates to that new and refined core focus and hoping that the industry takes notice of our sort of differentiation.
All right. Great. Thanks for that. And then just more specifically on the EBITDA margins. Just over the next kind of 6 to 12 months, how about to think about -- where you kind of target in terms of EBITDA margins and specifically for gross margin as well how you expect that to trend? Thank you.
Yes. We can't speak specifically about guidance going forward. But I think one of the positive highlights that we have spoken about in Q3 was our Massachusetts assets coming online and the Plant Touching assets in cannabis, particularly provide some very healthy margins. So we anticipate, as Massachusetts get ramped up and Tim mentioned this on the call, we still haven't received adult use license yet and we're awaiting to get our additional part of our cultivation facility opened shortly. We are able to provide very healthy margins now. So as we expand in 2020 in Massachusetts as well as Standard Farms, the hope is that the mix provided by this cannabis asset should provide a boost to our overall business. And as Tim mentioned, that’s going to really help as we invest in our other ancillary businesses that support the cannabis -- or cannabis businesses and partners worldwide.
Okay, great. Thanks. And then just one last one, and sorry if I missed it early in your prepared remarks. Specifically on Jupiter just any color you can talk about in terms of the impact from vaping in terms of your customer base and kind of how it impacted their frequency of ordering both during the quarter? And then what you see in your post quarter and then how you expect that to trend kind of going forward? Thank you.
Yes. I mean, we felt the impact from the vaping crisis like most if not all other cannabis operators did, but as quickly as it set on, it has began to dissipate. And while we didn’t sort of see the frequency of order slow down, there was some impact on volume already starting and recovering in a strong way.
Okay. Thank you and best of luck.
There are no further questions over the phone lines at this time. I would like to turn the floor back over to Mr. Milton.
Great. Thank you. I will go through the questions we’ve been receiving through the webcast. First question is, talked about Jupiter and the vape crisis, but also mentioned sort of international in the press release. Can you speak to how big of an opportunity that is, or what that looks like?
Yes. So, Jupiter has experienced 70% quarter-over-quarter international growth and that's without much impact from Mexico and Canada as of yet. So, obviously, the international potential is huge and we’re very, very excited about the opportunities that exist outside of the U.S as well as those that exist here at home.
Next question, what about the CBD market? Is that something that’s impacting sales already and what are the expectations?
Yes. Jupiter is taking on new CBD clients all the time. I think CBD market is a $1 billion market in 2019, so obviously looking forward to huge expansion efforts as it relates to selling CBD products worldwide.
Next one is probably for Dave. What changed in gross profit? One measurement looks like it went up quarter-over-quarter, the other looks like it went down. Can you help us understand what’s going on there?
Sure. From Q2 to Q3, we look at it two ways, gross profit before fair value and in Q2 we had significant improvement in the cost of our product as well expansion. So if you think about the crops in Massachusetts going from start up operations to expansion in Q2, we saw a sort of nice bump there. And Standard Farms, Pennsylvania, we're expanding from 16,000 square feet to 32000 square feet. So the impact of biological asset growth in that quarter was quite substantial. So the way I describe it is in Q2, we saw a nice bump due to the growth of kind of our crops as well as productivity improvements in terms of the cost, that gave us a big bump in Q2. Not an operational measure, just really more of a progress that we’re seeing within our crops and the ability to get the cost under control. In Q3, we saw some similar improvement not as much as Q2. From an operational standpoint, what we really look at is gross profit less the fair value adjustments of biological assets, and I think that's a really, really strong story. We went from 9.6 million in Q2 up to close to 14 million in Q3, showing a really, really nice expansion and gross profit expansion that really reflects our true operational performance and not the impact of expansion of crops in our cultivation facilities as well as our cost productivity efforts. So we are really excited with the progress here.
Thanks. Couple of questions on licenses. Tim, maybe can we start with an update on Massachusetts. What’s going on there? Adult use etcetera and then also update on Canada.
Yes, definitely. So as I think Dave touched on, we have some additional square footage in our Taunton cultivation and production facility that we're looking forward to bringing online in short order, essentially doubles our capacity in that space. So we’re really excited about that as we’ve been able to prove that we can recognize real revenue from the existing and sort of limited footprint. And also looking forward to activating additional retail licenses not just from medical but for recreational sales in that state. So look forward to hearing more from us about that in short order.
And any update you can share in terms of timing on Massachusetts, or what might prevent if anything there?
No, I can't really provide any timing update on this call. But we’re looking forward to the opportunity to open those stores and expects to as soon as possible.
And what about Canada in terms of the process there and what’s going on with the Santé Veritas asset?
Yes. As I mentioned earlier on the call, we're submitting answers to a standard request for information from Health Canada and on the heels of that submission looking forward to sort of discussing what our core focus will be with that asset there in British Columbia and how we will best utilize it, especially as we talked about refining the core focus here at TILT.
Great. Next question for Dave, in terms of the non-cash stock options and sort of the impact that had for net revenue and what does that look like and that can be one-time and can we just explain that again for everyone?
Sure. During Q3, we finalized the forfeiture of legacy stock options, which have had a historical impact on our P&L. As you know, we had a $60 million charge in Q1 and a $50 million charge in Q2. As you can see from our current financials in Q3, we had a positive measurable one-time impact of this quarter’s earnings resulting in a positive $37 million adjustment due to the forfeiture. Thankfully now that these are forfeited, we don’t expect TILT will experience net losses or inflated net earnings due to these non-cash legacy stock options that don’t reflect their true operational performance. Our adjusted EBITDA growth has been consistent all year. We did negative 7 in Q1, negative 4 in Q2 and we’re happy about 2.7 in Q3. So some really, really good momentum. And we look forward to using adjusted EBITDA as the measure going forward.
And then we have another question. This question about the financing that we announced and the number of warrants that were issued in conjunction with that. Can you clarify whether that was sort of full financing, or just the tranche that closed?
Sure. The warrants that have been issued thus far were for the first tranche of the 25 -- approximately 25 million at this point in time.
Okay. Back to Tim, question about again on Massachusetts. Any color on the affiliate program there and sort of what the status is on that?
Yes. We’ve been working diligently in line with the regulations in Massachusetts to restructure the few affiliate relationships that we’ve with operators in that state. To be more in line with sort of the nature of our effort -- of sort of our efforts as we launch that program, supporting operators to get up and running but not really controlling those assets. So we are still working through that process and have to report that -- explain well.
Thanks. Question on Jupiter is, this Jupiter drop ship and is there any sort of direct-to-consumer approach going on?
Yes. So Jupiter doesn’t currently drop ship. It's been focused primarily on B2B customers that order and high millions worth of volume, but always an opportunity to look in to.
After Massachusetts can investors expect any more significant capital outlay there as things progress?
No, I don’t think so. The capital outlay that we've invested thus far has gotten us to a great point -- a point where we can start recognizing real revenue on the heels of that investment. So, no, we do not expect to.
Great. Any comments you can make about Michigan, which just went recreational, or any other plants to move into new states and sort of in conjunction with that, are there plants to continue to cultivate cannabis in new markets or open up more retail stores?
So great news about Michigan, super excited for the people and potential operators in that state. At this time, we don't have any plans to expand our plant touching operations, but we’re always as we touched on I think a lot in this call, looking to expand all of our technology services and hardware operations both here in the U.S and globally.
What are your thoughts on today's news regarding the MORE Act and sort of what that means both the industry as well as for TILT?
I think anytime we're talking about the decriminalization of cannabis federally here in the U.S., we get excited about that especially if it's in conjunction with taking responsibility for the damages that were done by the war on drugs and supporting operators in their ability to get up and running. So always an exciting time.
Another one probably for Dave. We talked about some of the changes to net income and then non-cash stock option expense. What would you describe as quote real income for the company and how should investors think about the business?
Yes, we really think about true operational performance as we look at adjusted EBITDA. And as we mentioned prior, we've had really, really good progress momentum within the 2019 year. In Q1, we did negative 7 of adjusted EBITDA. In Q2, we did negative 4 of adjusted EBITDA and happy in Q3 to have our first positive adjusted EBITDA of 2.7. So we are always going to look to be a growth business, but we’re not going to do it at the price of profitability. And I think that's a discipline that marks on a fantastic job of providing with this leadership. So we're excited to continued growing and we have great growth within the quarter, 18%. But to get to profitable EBITDA, which is how we really measure success, is a great achievement for the business and our employees.
Okay. Thanks. Couple of questions sort of around, looks like investor relations, whether its analyst coverage or strategy to go out and share the fantastic earnings. Thank you for that question. So what are the plans to [indiscernible]?
I think we’ve been focusing on stabilizing and building the business and now we get the brag about it. So excited to embark on this next chapter at TILT.
Great. Operationally, you’ve mentioned a little bit of sort of evaluating the core focus. Are there plans to sell any assets?
Not currently. I think we are evaluating each of our assets and how it relates to our core focus. So there's always sort of opportunities for further investment or divestiture. And like we said, we will continue to make those evaluations.
And on the other side, any plans for M&A in terms of the acquisition side?
No, not at this time. But like -- as we also mentioned, the landscape is right for the stressed opportunities and there are a lot of really, really great companies out there and excited to see what people are doing in the future.
Great. Thanks. Wrapping up here, two or three more, it looks like. What would you say is the opportunity in California? Is that still a largest market in the U.S and what can we expect from TILT in that market?
Yes. The opportunity is huge in California. I think operators are used to sort of the slowness to come online, mostly around sort of local and regionalized sort of municipality regulations. But it's been a great market for Blackbird and now it's a great market for Jupiter, and it's an exciting market for us. And definitely expected some municipal market potential.
On that note, two more questions quickly on Blackbird. One is, sort of is there a plan. It looks like is there a plan to get that business unit to profitability? And sort of what is the future look like for the Blackbird business model and sort of what are the synergies between Baker and Blackbird?
Yes, definitely. Blackbird is a large infrastructure business with its warehouses and distribution network. It's also a business that we've invested too heavily to build out the software that supports the downstream movement of product. And those two things, sort of the building of that infrastructure and development of that technology are nearing sort of the first phase of completion. So now it's really time to turn on revenue and we’ve a exciting plan for and path to profitability for next year. So really excited to continue to execute our vision.
And then what is the future for TILT look like? What can we expect big picture for 2020 and sort of what’s on the horizon?
I mean the future for TILT is bright. I think everybody in this room is really excited about the potential that we have, especially as we refine and align our focus under our core operating assets and become what we hope is a premier technology and innovation company that support cannabis operators worldwide. So really, really exciting times ahead.
Great. I think last question which was asked several times is for Mark, which is can you give any update on how you're thinking about the business and plans on sort of the interim title. Is that [indiscernible]?
Yes, thanks. You know what, I think that my participation in this recent financing shows my enthusiasm and confidence in this company. And be honest with you, it's hard it's been over the last six months essentially starting to get a lot of fun. So I'm working with great people. I have the ability really [indiscernible] myself with amazing talent and just great people and I’m really, really enjoying it. So [indiscernible] about the -- something we can announce then.
All right. That’s it. Thank you everyone for your questions.
This does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.