Good afternoon, everyone, and welcome to TILT Holdings Second Quarter Conference Call and Webcast. Today's call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately two hours after the completion of the webcast and will be archived for 30 days. I would now like to turn the conference over to your call for your host today, TILT's Head of Investor Relations and Corporate Communications, Lynn Ricci. Please proceed.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today, we issued our second quarter 2023 earnings press release. The press release, along with our quarterly report on Form 10-Q, is available on the U.S. Securities and Exchange Commission's website at www.sec.gov, on SEDAR at www.sedar.com and on our website at www.tiltholdings.com. Please note that during this afternoon's webcast, remarks made regarding future expectations, plans and prospects for the company constitute forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, which we disclose in more detail in Amendment number 2 to the Form 10 registration statement filed by TILT with the SEC and on SEDAR. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by law. As of today's call, we are presenting our financial results in accordance with the United States generally accepted accounting principles, or GAAP. During the call, management will also discuss certain financial measures that are not calculated in accordance with GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for TILT's financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their nearest equivalent GAAP measure is available in our earnings press release that is an exhibit to our current report on Form 8-K that we filed with the SEC and on SEDAR today and can be found in our Investor Relations section of our website. On today's call are Interim CEO, Tim Conder; and Interim CFO, Brad Hoch. Following prepared remarks, we will open up the call for questions. During today's prepared remarks, we may offer metrics to provide greater insight into our business and/or our financial results. Please be advised that we may or may not continue to provide these additional metrics in the future. With that, I will now turn the call over to our interim CEO, Tim Conder.

Thank you, Lynn, and good afternoon, everyone. It has been just over three months since I stepped in as Interim CEO of TILT. Over that time, I have had the pleasure of meeting with our various teams across the country, along with key customers and partners. I am heartened by the energy and commitment from our teams as well as the strength of our market position and the depth of our partnerships. Last quarter, I outlined a few key areas of focus for our team over the near term. The first, and arguably most important, area of focus is to return TILT to profitability through a focus on operational excellence. Over the past few months, we have left no stone unturned to identify cost-savings opportunities and efficiency gains. The most visible area of improvement for the company was rightsizing across our plant-touching and corporate business units, which will net an annualized savings of over $8 million. Though these were difficult decisions to make given the impact on our team members, the reductions were necessary to get ourselves back on the path to sustained profitability. The majority of these reductions were completed throughout Q2, and we expect to realize the full P&L benefit as we progress through the year. Another area of efficiency involved rationalizing our vendors across our business. This required a deep dive into our suppliers and processes as we look to renegotiate contracts to improve pricing, establish consistent and repeatable SOPs for procurement and eliminate expenses that don't support our core business initiatives. We are also more actively managing our cannabis inventory in Massachusetts. This resulted in the destruction of expired and otherwise unusable biomass, creating a write-down that Brad will cover in just a few moments. To minimize future write-downs from product destruction, we identified new product pathways and implemented robust S&OP processes. We also improved cycle time from harvest to flower pack-outs to ensure that the products we sell are of the highest quality and freshness when they hit retail shelves. These adjustments are powerful drivers of operational efficiency and sales velocity. The ultimate result we are seeking from these optimization initiatives is to improve our cash generation in order to pay down debt and position us for long-term growth driven by the reinvestment of our own free cash flow. Strengthening our balance sheet is paramount, and we will continue to take action to improve our margins, achieve profitability and generate cash. In addition to exerting measures of control and accountability over our operation, we have also been evaluating our brand partner lineup and overall brand strategy with a goal of maximizing margin, increasing sales volume and velocity and ultimately developing a unique and differentiated portfolio of cannabis products. As I mentioned last quarter, we must ensure that we are selling the right products in the right markets to the right consumers at the right price. Through the course of this evaluation, one thing has become glaringly obvious. We are significantly under realizing the opportunity that exists through the brand partnerships and hardware innovation taking place in our Jupiter Research subsidiary. Jupiter is one of the largest developers and distributors of vaporization hardware in the world, working with many of the leading brands in the vaporization category. Going forward, we will deepen our moat with existing and prospective hardware customers by helping them expand their businesses into new markets through our cannabis operations. We will continue to have a presence across all categories but inhalation will be our primary focus. Currently, we work with two of the top 10 U.S. vape brands across the entirety of our platform. We sell them hardware, cultivate and manufacture their products in certain states and sell these products to licensed retailers. We are in late-stage negotiations with others to expand our partnership beyond just hardware and bring their products East to Massachusetts, Pennsylvania and Ohio. We look forward to sharing more as we further optimize our brand portfolio to better support our long-term strategy. Focusing in on our plant-touching business, I would like to discuss the market positioning of our retail stores. Today, we have three retail cannabis locations plus a kiosk within New Dia store at Fenway Park, all in Massachusetts. Going forward, our stores will serve a specific purpose to showcase our brand partners and increase the sell-through of their products as well as providing a controlled environment to R&D new hardware products and test their associated go-to-market strategies. Having our own retail footprint in certain markets provides other benefits as well, such as enabling us to sell through slow-moving or aging SKUs by utilizing in-house promotional and pricing programs. As we think about Pennsylvania and Ohio, where we only have wholesale cannabis operations currently, we may determine that verticalization is similarly important for the reasons I just outlined. We are excited about these markets as both inch toward adult use, and we will position ourselves accordingly to capture the upside of the eventual transition from medical to adult use sales. We are also evaluating other markets across the U.S. to expand our cannabis operations. With the right brand partner mix, we not only capture the revenue that is generated from cannabis sales but also the increased volume of hardware sales. As one part of our business expands, it triggers growth for the other. That is our flywheel. And lastly, New York. The regulated adult-use cannabis market in New York state has experienced a number of hurdles during its delayed rollout. Our partnership with the Shinnecock has been impacted by certain statewide challenges, including unlicensed operators selling cannabis on Shinnecock land and the inability to bring in or sell cannabis products across sovereign and New York state lines. Due to these challenges, we are undergoing a deep analysis on the economic viability of this partnership. During this analysis, construction has been put on hold. We are grateful to our partners for their cooperation and understanding through this evaluation period to ultimately bring the Shinnecock and Little Beach Harvest to the next phase of their journey. We will communicate more as we determine next steps for TILT in New York. Turning to our hardware business. Jupiter continues to support the leading inhalation brands in North America through innovation, consistency, reliability and industry-leading customer service. In addition to the cross-platform work we are doing in the U.S., Jupiter is also deepening its customer relations in Canada. We have partnered with many of the top brands and producers in the Canadian market. In certain cases, our customer relationships have evolved to include custom hardware product development and exclusivity periods for those products. This gives our customers a distinct advantage over their competitors and exemplifies our ability to deepen our customer relationships through innovation. We are proud of the brands that we have supported through their meteoric growth in such a competitive market. As we look to the second half of the year, we will continue to execute against our operational refinement plan by further optimizing our brand portfolio and product assortment, creating greater operating leverage and focusing on business fundamentals. We are committed to strengthening our financial foundation to prepare for growth driven by the reinvestment of cash from operations. And we are excited to better unify our hardware and plant-touching businesses as we return to both adjusted EBITDA profitability and positive operating cash flow. I'd now like to turn the call over to Brad to review our financial performance in more detail. Brad?

Thanks, Tim, and good afternoon, everyone. As a reminder, all results today are presented in U.S. dollars and on a year-over-year basis, unless stated otherwise. Now jumping into our results. Revenue in the second quarter of 2023 was $41.6 million compared to $47.1 million in the year-ago period. For our hardware business, we generated $28.7 million in revenue compared to $34.8 million in the year-ago period. And in our cannabis operations, revenue in the second quarter increased to $12.9 million compared to $12.2 million in the year-ago period. The decrease in revenue for the quarter was primarily driven by supply constraints in our Jupiter business. In fact, Q2 orders were higher on a year-over-year basis. However, the orders were back-end loaded, so we were not able to fulfill delivery within the quarter. Gross margin in Q2 was 9.7% compared to 23.3% in the year-ago period. The decrease in gross margin was mostly due to one-time write-down of inventory across our markets. Excluding the write-down, gross margin would have been 21.4% for the second quarter. Operating expenses, less non-cash adjustments for stock compensation, depreciation and amortization and impairment charges, in the second quarter decreased to $10.7 million compared to $12.5 million in the year-ago period. The decrease was driven mainly by lower legal fees associated with litigation activity and lower headcount as the company realigns resources to align with strategic goals. Net loss in the second quarter was $26.9 million compared to a net loss of $7.1 million in the year-ago period, with the increase primarily driven by $15.7 million of non-cash expenses related to inventory, investment and loans receivable write-downs. Adjusted EBITDA in Q2 increased to $1.5 million compared to $1.1 million in the year-ago quarter. The increase was mostly driven by early progress with our strategic refinement and optimization initiatives. This marks a return to positive adjusted EBITDA, and we expect to remain positive in the second half of this year. Cash used from operations in the second quarter of 2023 was negative $3.3 million compared to negative $0.4 million in the year-ago quarter. The consumption of cash was primarily related to pay down certain vendor payables. At June 30, 2023, we had $4.1 million of cash, cash equivalents and restricted cash compared to $3.5 million at December 31, 2022. Notes payable net of discount at June 30 was $57 million compared to $59.7 million at December 31, 2022. With that, I'll turn it back to Tim.

Thank you, Brad. The first 90 days as Interim CEO have been a great experience. While I am not underestimating the challenges for our industry or those that we face at this stage of stabilization, I am encouraged by the opportunity we see before us, and I believe we have the right people in place to execute on our strategy and return to profitable growth. With the refinements we are implementing to course-correct where we have stumbled, I believe we will enter 2024 as a new company with a strong financial foundation, a unique and differentiated strategy rooted in innovation and partnership and the battleground experience that comes from successfully navigating one of the most challenging macroeconomic environment our nascent industry has ever faced. I want to thank our stakeholders for giving us the time to evaluate the business and make difficult decisions. We are committed to long-term success, and we are doing what it takes to achieve it. With that, we will open up the call for questions. Operator?

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Aaron Grey with Alliance Global Partners. Please proceed.

Hi, good evening and thank you for the question. Tim, you laid out a couple of things that you're looking to make changes on since you came to the helm. Just curious, as you look towards the next six months, what do you think is some of the low-hanging fruit, how it's been going on, and things from the operations of what you think could be achieved either from a top line or a cost-savings side and what to expect from TILT in the next six months from some of the changes that you've laid out? Thanks.

Yes. Thanks for the question, Aaron. I really appreciate it. So like we discussed through the script, a lot of those changes were made in Q2, and we'll see the benefit of those flow through in subsequent quarters in the back half of the year. But we'll continue to sort of evaluate our operations holistically to see where we can reduce expenses and also where we can increase revenue. And I think it's an important differentiation for us that top line growth, in and of itself, is not our focus; profitable revenue growth absolutely is, so where can we invest to grow revenue profitably and where can we continue to cut to increase our margins by reducing expenses. I think we still have some room in certain markets on the plant-touching side of our business, mostly through sort of like operational refinement and just getting as efficient as possible in growing, harvesting, packing out and distributing products throughout our network.

Okay. Great, appreciate that. Second question, you talked about potentially getting into new states, could you talk about maybe what part of the supply chain you want to be? Would it be more – I imagine not cultivation, but would you want to be on the processing and manufacturing, also some retail? It does seem like you're more willing to get vertical. So can you talk about some of the initiatives you might have to get into new states? And how key is that to potentially drive growth, so that you can have your current brand partners and extend those into new states versus the limit you might have in terms of deepening those partnerships and the existing pay that you're in? Thank you.

Yes, absolutely. No, that's a great question, Aaron, and it's a hot topic of conversation internally. So we see our core competency as hardware, cultivation and manufacturing and distribution. And I would include retail in that sort of distribution arm, right, because not only are we distributing our in-house products and our third-party branded partner products throughout our retail network in the states that we serve, but also through the three retail locations that we run ourselves. So that's what we see as our core competency. I mean today, Jupiter sells product into essentially every legal cannabis market in the U.S. or actually every legal cannabis market in the U.S. And so we see a huge opportunity to support our brand partners in other markets like you indicated. And we'll be evaluating what are the best markets for us to enter. I can tell you that we believe that we can be top five for all of the products that we distribute. And it's important for us, as we grow market share, to grow into new states to sort of capitalize on the success that we've had historically in the markets that we currently serve. How we evaluate those states is really going to come down to market size, market maturity and the opportunity that we believe exists not just for us as a whole from a cultivation, manufacturing and distribution standpoint, but for our individual brand partners as well.

Okay, great. Thanks for the color and I will jump back in the queue.

Thanks, Aaron.

Thank you. Our next question comes from Pablo Zuanic with Zuanic & Associates. Please proceed.

Thank you. Tim, maybe along the same lines, focusing on Jupiter. First, a couple of housekeeping questions. So can you talk about what the decline in sales in Jupiter would have been sequentially or year-on-year if we x out these supply chain issues? And related to that, if you can remind us, in terms of the competitive environment in hardware, right, I suppose that the context, a lot of your customers are facing price inflation, so you're probably trying to push prices down and, at the same time, you may have new competitors in hardware that are also bringing prices down. So just a reminder of the competitive context there and the demand side of things for the business. Thank you.

Absolutely. Thanks for the question, Pablo. We appreciate it. And those things go hand in hand. I believe we've lost some market share year-over-year due to the increase in competition at the hardware level. But we still believe that today, our hardware is best-in-class from a reliability, sustainability and innovation standpoint. However, I think there are two areas of focus for our hardware business as we move forward through this year and into next year. And that's really going to be how do we get more price competitive and how do we increase our speed to innovation. We believe we can be the most innovative as it relates to hardware not only sort of iterating on existing products, but bringing new products to market that ultimately grow the pie for inhalation and vaporization. And we have some things in place that should come to fruition next year that will help us from a pricing standpoint as our competitors have really tried to sort of bottom out the market in pricing to gain market share. But we believe we can be competitive and remain best-in-class in all of those aspects.

And do you want to quantify the impacts from supply chain issues on sales in the quarter or not? You don't have to if you don't have the numbers in front of you.

No, I don't think I'll quantify that. Brad, unless you want to. But what I would say is our sales remain strong, revenue has seen some lumpiness due to supply chain issues, but we're looking for that to sort of normalize in the back half of this year.

Okay. And then – thank you. And then staying on Jupiter, I'm just trying to understand the opportunity, right? So in your current states, Massachusetts, Ohio, Pennsylvania, maybe remind us of how untapped is that opportunity or you're already working with partners. And then a separate question on the same topic, a lot of your – you're selling, I think, in 39 states hardware, right? So your partners are already there, I suppose, with other companies, right? So how do they switch into you? Or by the same token, if I'm a vape company that wants to enter Maryland, why would I want to partner with you if you're not present in Maryland? I'm just trying to understand the opportunity and the challenges as you try to do this – thank you – and pursue that strategy.

Yes, absolutely, Pablo. So I'll start with the second question. I might need you to sort of repeat the first one. But partners would want to work with us in new markets because we're performing in our existing markets, right? The less sort of operators that brands have to manage in order to not only bring their products to market, but accelerate their market presence and capture market share is – it's sort of less is more, right? Working with one partner that's successful in every market is easier than working with 10 or more partners that have varying degrees of success by market. So we believe that we have an opportunity with our brand partners not only to continue to serve them in the markets where we currently operate, but to expand our cultivation, manufacturing and distribution footprint into new markets to serve them in states that they want to go into. Yes, you're right, in certain cases, our third-party brand partners are already in those markets, but not in every case. I mean, we have conversations regularly with our brand partners who are looking to expand and asking us whether or not we see a near-term opportunity in a state that's sort of an expansion target for them. So we'll continue to work closely with them to identify market opportunities and maybe align our strategic growth, so that we can sort of capture market share together. But we believe, and we hear from our brand partners often, that we are an operator that they want to continue to work with in the markets that we currently serve and the ideal market, cultivation, manufacturing, distribution partner in markets that they may be anticipating entering. I mean what – could you repeat the first question?

Yes, I will. The first part was mostly in your existing markets, right, Massachusetts, Pennsylvania, Ohio, how untapped is the opportunity with your hardware partners? So it's already fully tapped because you're already working with them there. Thank you.

No, I think, there is a very large opportunity. I would say there is a number of powerful and sort of industry-defining brands from the West Coast that are still looking to make the move East; not everybody has and they're timing that to align with sort of their internal strategy. But we see an enormous opportunity with some of those partners that have yet to do so, and we see even more. And we see accretive opportunity for the brand partners that we already have in market. I think in Q2, we saw a brand like Old Pal go from 25th in the market for flower to number five. And so we see opportunities like that with other brand partners. And it's paramount for us to have them really in the top five of their category in each market, which not all of our brands are today, but that we're working sort of diligently in cooperation with them to achieve.

Thank you. I'll add one more and thank you again. In terms of your kiosks strategy, I think you mentioned the Fenway store there from another vendor, another company. Massachusetts, as you know, has a cap of three stores. But to my knowledge, there are no caps on kiosks. I mean, is that a big opportunity or we shouldn't exaggerate the opportunity in that sense? Thank you.

Yes. Absolutely, thanks for the question. Absolutely, I mean, we're seeing retailers get creative about how they meet the consumer at their point of purchase and how they bring new consumers in to grow the pie and convert those new consumers into sort of recognized sales. And New Dia at Fenway is doing exactly that, I think they're a great example of it. And we don't see this just in cannabis, right? We see it outside of cannabis. Companies like Sephora or MAC have turned to stores within a store, which is sort of similar to the sort of kiosk model to really allow brands to better connect with consumers and ultimately help them as a retailer drive sales. We're super excited to be a part of New Dia as they – as that launch and going forward. And I think that you'll start to see more of these types of sort of creative solutions around retail pop up not just in Massachusetts, but beyond. And it's something that we'll always explore because, like I said, distribution is one of our core competencies and channels for distribution. It will be obviously paramount as we look to sort of grow that part of our business.

Thank you.

Absolutely. Thank you, Pablo.

Thank you. At this time, there are no further questions in queue. I would like to thank you for joining today's conference call and webcast. You may now disconnect your lines, and have a great day.