TILT Holdings Inc (TLLTF)

[FUNMAN]

Earnings Call Transcript - TILT Holdings Inc. (TLLTF) CEO Mark Scatterday on Q2 2020 Results - Earnings Call Transcript
Aug. 25, 2020 10:05 PM ET

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TILT Holdings Inc. (OTCQB:TLLTF) Q2 2020 Earnings Conference Call August 25, 2020 5:00 PM ET

Company Participants

Gary Santo - Senior Vice President of Capital Markets and Investor Relations

Mark Scatterday - Chief Executive Officer

Tim Conder - President and Chief Operating Officer

Brad Hoch - Interim Chief Financial Officer

Conference Call Participants

Aaron Grey - Alliance Global Partners

Bobby Burleson - Canaccord

Operator

Good afternoon, everyone, and welcome to TILT Holdings’ Second Quarter 2020 Earnings Webcast. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. Participants can submit a question directly through the webcast. Further instructions will be provided as the Q&A begins. This webcast is being recorded for replay purposes. A replay of the audio webcast will be available in our investors section of the company's Web site approximately two hours after the completion of the webcast and will be achieved for 30-days.

I would now like to turn the conference over to your host today, Gary Santo, TILT’s Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

Gary Santo

Thank you, Devin, and good afternoon, everyone. Thank you for joining TILT Holdings second quarter 2020 earnings webcast.

With me today are Mark Scatterday, Chief Executive Officer; Tim Conder, President and Chief Operating Officer; and Brad Hoch, Interim Chief Financial Officer.

Earlier this afternoon, we issued a press release announcing our results for the fiscal quarter ended June 30, 2020. A copy of that which is available in the Investor section of our corporate Web site 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 make today regarding future expectations plan 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 three and six months ended June 30, 2020 filed with the applicable Canadian Securities Regulatory Authorities and you found on 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 statements in the future, we specifically disclaim any obligation to do so except as 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 their nearest comparable IFRS measure is included in our press release issued earlier today.

Mark will begin with a high level review of our second quarter, followed by Brad who will provide an overview of our financials during the quarter. Tim will then discuss recent developments and operational highlights, after which the team will take questions.

With that, I will now turn the webcast over to Mark.

Mark Scatterday

Good afternoon, everyone, and thank you for joining us today. I'd like to welcome Gary who joined us a little over a month ago as our new Head of Capital Markets and Investor Relations. We are delighted to have him on board.

TILT's second quarter results reinforce our belief that our balanced portfolio of businesses continue to offer multiple trajectories for ongoing shareholder value creation. Despite significant headwinds related to COVID during the second quarter, the company continued to improve gross margin before adjustments for their fair value of biological assets and inventory and for consecutive quarter generated positive adjusted EBITDA.

We also saw positive cash flow from operations increase, with second quarter results improving 40% compared to our first quarter. This contributed to 25% increase in our cash position, as TILT ended the quarter with $10.5 million in cash and equivalents on its balance sheet. During the quarter, TILT's largest subsidiary, Jupiter Research, continued to consolidate its position as the market leader of innovative vape and inhalation products. As we discussed on our last earnings call, the early days of COVID resulted in pantry stocking by our customers and we're able to capitalize on that because of our deep experience managing our cross continental supply chains and state side inventory.

Our strong first quarter performance carried into April, however, we saw drop-off in May as a result of COVID-related changes to customer behavior regarding inventory carry. Specifically, a number of operators chose to maintain lower inventory levels as a means to conserve capital. June and July have seen more normalized levels of buying, and it's too soon to tell whether it will persist with predictions of second COVID wave in the fall.

As we look to expand Jupiter's reach beyond the U.S., the activation of our Canadian fulfillment center is already paying dividends. Revenue from our Canadian customers was up 100% during the quarter, contributing over $2.4 million to TILT's top-line revenues. Our fulfillment center allows licensed Canadian processors to efficiently access our Canadian side supply, saving time and money by avoiding the need to ship products from the U.S.

On the plant touching side of the business, we are fortunate to operate in two of the strongest and fastest growing cannabis markets in the U.S., Massachusetts and Pennsylvania. That's not to say these markets were immune to the effects of COVID. We did experienced a decrease in wholesale demand at our Massachusetts facility, Commonwealth Alternative Care, as a result of the state's temporary suspension of adult use sales for all of April and most of May.

Additionally, our Pennsylvania facility, Standard Farms, experienced non-COVID related disruptions in part, as a result of the civil unrest in the region during the quarter. This required that we temporarily suspend deliveries to affected customers. This aside, the strength of our operations in these markets can be found in the fact that despite these significant headwinds, total revenue from our cannabis operations was down only 6% from the first quarter with volumes rebounding in June to pre-COVID levels.

June revenue at our Massachusetts facility surpassed April and May volume combined and exceeded 50% of CAC's total volume produced in the entire first quarter. As wholesale volumes continue to improve, TILT will push to support its customers to improve harvest yields, as well as product quality and dependable supply. Later in the call, Tim will discuss in more detail our efforts to expand our plant-touching businesses.

During the quarter, our software and services platform, Blackbird, continue to rapidly realign its business model and resources in response to COVID-related marketplace disruptions. In Nevada, where Blackbird is a market leader, adult use cannabis sales were restricted to delivering only sales between March 20th and May 9th. Blackbird's retail delivery logistics business rapidly scaled to meet the mission-critical needs of its clients, resulting in the highest quarter of revenue in its history.

The expiration of delivery-only limitations in the state has caused revenue to return to pre-COVID levels. While these changes to Blackbird's delivery and distribution model persists so do the resulting decreases in expenses and updates to its services pricing model. Overall, the resiliency of TILT's business model is easily identifiable in the combination of its operating assets.

Jupiter's highly efficient operating model continues to provide a foundation of consistent profitability and broad client reach. This is supplemented by the strong cash flow of our plant touching businesses in two of the strongest limited license markets. Blackbird provides further upside with its highly versatile integrated suite of enterprise software and logistics solutions.

With that, I will now turn the call over to Brad who will break down our quarterly financial performance in more detail. Brad?

Brad Hoch

Thanks, Mark, and good afternoon, everyone. TILT enjoyed solid performance in the second quarter, which reflects our ongoing focus on building operating leverage in the business. We continue to drive towards optimizing unit economics and focused revenue growth by building solid customer relationships, while continually managing expenses.

Revenue for the second quarter was $38.6 million, down $3.8 million sequentially, driven primarily by an 11% drop in Jupiter's quarter-over-quarter revenue. As we previously described during our first quarter earnings call, after initial rush of pantry stocking in mid March, we began to see our customers take a more conservative stance for its reorders in reaction to the COVID driven changes in the macro economic climate. This headwind contributed to a material decline in Jupiter's revenue, following the record breaking first quarter for the business.

The shift in customer inventory positioning during the second quarter included customized orders, which tend to be placed by Jupiter's larger clients. As was the case in Q1 and full year 2019, these larger better capitalized clients represented the majority of Jupiter revenue during the quarter. Overall, we do not view our customers’ inventory position as a persistent long-term trend, and have seen early indications of this.

Additionally, as Mark mentioned, second quarter revenue was pressured by the temporary suspension of adult use sales in CAC’s Massachusetts market, as well as disruptions to customers in Pennsylvania related to civil unrest in the region, which resulted in 6% sequential decrease in plant touching revenue. These reductions were partially offset by an increase in retail delivery revenue at Blackbird, resulting from temporary retail dispensary closures in Nevada related COVID.

Before adjusting for changes in fair value of biological assets and inventory, the Company's gross profit was $10.9 million, down approximately $800,000 from the first quarter, reflecting decreased volume at Jupiter and the Company's cannabis segment. This was partially offset by onetime credits, renegotiation of key vendor contracts and operational efficiencies at Blackbird. This helped the gross margin percentage grow to 28.3% for the second quarter, up 63 basis points over the first quarter.

After adjusting for changes in fair value of biological assets and inventory, the Company's gross profit for the second quarter was $7.1 million, down from $21.7 million in the first quarter, reflecting a quarter-over-quarter decrease of $14.5 million. This decrease is mainly attributable to the mechanical issues with certain environmental control systems, which affected our harvest. Those issues have been resolved and the company has put in place additional redundancy in order to prevent future occurrences.

Total operating expense for the second quarter was sequentially flat at $17.2 million, driven primarily by increases in administrative expenses and offset by reduction in wages and benefits. Excluding non-cash expenses associated with stock compensation and SG&A related depreciation and amortization, OpEx was $10.8 million, down approximately 5% from the first quarter. This is reflective of the previously announced cost reduction program undertaken at Blackbird.

The Company expects that this will yield $3.5 million in annualized run-rate savings, as management continues to drive efficiencies throughout its business model. The Company recorded a net loss of $9 million during the second quarter versus net income of $50,000 in the prior quarter. This was driven primarily by a $13.7 million decrease in net adjustments to fair value of biological assets during the period. This decrease was partially offset by an income tax recovery during the quarter of $3.3 million compared to a provision for income taxes in the first quarter of $2.3 million, reflecting a net quarter over quarter recovery of $5.6 million.

Cash flow from operations continues to be strong at $6 million in the second quarter, an increase of 40% from the prior quarter, marking our second consecutive quarter of positive cash flow. Combined with gross margin expansion and improving operations across our portfolio, the company saw its cash position increase 25% during the quarter to $10.5 million at quarter end. As we emerge from the initial impact of COVID, TILT is well positioned financially to take advantage of growth opportunities as we navigate this ever changing landscape.

With that, I will now turn the webcast over to Tim for more in depth operational overview. Tim?

Tim Conder

Thank you, Brad, and good afternoon, everyone. Following up on Mark's high level comments, I want to spend a few minutes providing additional detail on our segment operations.

First, Jupiter. Jupiter continues to be the leading distributor of CCELL inhalation technology, while continuously innovating new products and solutions designed to meet the needs of its customers. Despite the lower sales volume during the second quarter similar to its performance in the fourth quarter of last year, Jupiter continue to demonstrate the positive earnings power of its lean centralized operating footprint, which has proven to be both durable and accretive to overall TILT results on an operating basis through a variety of market conditions.

On the product side, our proprietary Liquid Que and Infinity product lines previously announced are now going into mass production. Last Friday, we announced the launch of our Dose-CTI line of products, designed to offer cannabis consumers more control over their inhalation experience with three time based dosage levels. This unique microdose customization feature for power supplies and all in one vaporizer products was previously limited to a small number of custom hardware orders. However, based on increasing demand, we have expanded the offering to a broader product set.

On the solutions side, Jupiter is now offering customized premium child resistant packaging solutions, custom fit for Jupiter and vaporizer cartridges and power supplies. By reducing the need for customers to purchase packaging separately from third parties, we continue to streamline the supply chain, helping them get to market faster, while also adding a new revenue stream for the Jupiter business. As we look to market expansion beyond the U.S., we have previously discussed establishing a framework through our on the ground sales teams in multiple emerging markets, including Canada and Europe. This is clearly having an impact as Jupiter continued to make inroads in the Canadian market, during the second quarter, with revenue up 100% sequentially as a result of cannabis 2.0 products, including vape becoming legalized at the beginning of the year.

Canada's multi-billion dollar legal market is growing at 50% annual rate and vape as a product category in the 2.0 environment has quickly established itself as a significant part of the market, representing approximately 20% in key provinces. TILT's second quarter Canadian revenue of $2.4 million was driven by growth at Jupiter, which provides a sense for our trajectory there. To me increasing demand Jupiter continues to work with its third party logistics provider to appropriately scale its inventory in Canada.

Lastly on Jupiter, we want to congratulate our business partner, Smoore International Holdings, on their successful IPO on the Hong Kong Stock Exchange. Over the years, our relationship with Smoore has evolved from a personal one between Mark and the founders to an institutional relationship between two best-in-class operators. Jupiter's Shenzhen operations team continues to manage both the direct and sub-tier supply chains in China to ensure that each piece of hardware is of the highest quality and delivered on time across the world. Jupiter remains one of Smoore's top five customers, alongside Japan Tobacco and British American Tobacco and Smoore’s largest customer within its healthcare unit. We look forward to expanding our partnership through stateside opportunities for research and development.

Moving onto Blackbird. After resizing Blackbird's operations during the first quarter, Blackbird delivery saw record-setting second quarter retail revenue, driven primarily by Nevada’s stay-at-home order related to COVID. While the revenue increase was temporary, it demonstrated that Blackbird's delivery model is profitable at scale. As discussed on prior calls, our revamped delivery model is based on scheduled delivery windows, allowing orders to aggregate and be batched, effectively turning our retail partners into micro fulfillment centers.

As Blackbird continues to sell its software products to retailers and iterate on its retail feature set, we have identified an additional opportunity to deploy similar tools for brands, including our e-commerce and CRM products. Blackbird's key differentiator from its cannabis technology peers is our deep understanding of the cannabis supply chain, as well as the team's logistics operations expertise. Blackbird is leaning into its existing relationships with brands to provide expanded value by not only helping brands get onto retail shelves but by getting branded cannabis products into the hands of consumers. We are still in the early days of this expanded strategy, however, we remained excited about its potential.

Moving on to our cannabis operations. Commonwealth Alternative Care in Massachusetts and Standard Farms in Pennsylvania. While we did experienced 6% decline in revenue quarter-over-quarter, over the first six months of 2020, our cannabis segment revenue is up approximately 103% compared to the first six months of 2019. Most of the sequential quarter decline can be attributed to softness in our Massachusetts wholesale business, which was firstly adversely affected by the temporary closure of adult use dispensaries in the state as part of their COVID stay at home borders.

Since the reopening of adult use dispensaries in late May, we have seen CAC’s wholesale sales recover to pre-COVID levels with edibles and vape products as some of our top sellers. Thanks to the strength of our balance sheet, we are proud to be able to offer trusted partners with a proven track record of on time payments, limited terms, as the adult use market continues to recover in Massachusetts. And we'll continue to monitor the market to identify other ways we can support our wholesale customers.

While the temporary adult use shutdown may have affected wholesale operations, CAC’s medical dispensary in Taunton saw a sharp increase in revenue, which has persisted even with the reopening of adult use dispensaries throughout the state. Year-to-date sales are up approximately 68% as average patient visits per week during that time has increased 46%.

The percentage of new patients peaked at 9.2% during the height of adult use closure but has remained strong since.

Finally, average basket size at CAC increased 43% during the second quarter and on a year-to-date basis is $149. We attribute the success of our medical dispensary to the combination of streamlined COVID compliant processes, the overall increase of medical patient cards in the state and our robust catalog of top shelf flower products.

While we continue to work with the regulators in Massachusetts to activate our adult use in remaining medical dispensary licenses, I am happy to report that we recently underwent a physical inspection of the first phase of the cultivation and manufacturing expansion at our Taunton facility. The inspectors had a limited number of comments, all of which have been addressed by our operations team and we await final walkthrough inspection before officially activating the additional space.

In Pennsylvania, at our Standard Farms cultivation and manufacturing facility, we experienced some pricing sensitivity following civil unrest, particularly in Philadelphia, which required a competitive reassessment of our strategy in order to meet the demands of the market, while maintaining our status as a top tier provider. We are also introducing new product lines to the market, including terpene applicators, which sell out as quickly as we put them on the shelves. The results have been an increase in revenue that continues to trend towards pre-COVID levels.

We look forward to increasing premium packaged flower availability in the fall as the Pennsylvania market remains supply constrained when it comes to flower. It is truly an exciting time at TILT, as we transition from stabilizing the core to growing the business. And as we continue to leverage our strong portfolio of assets, I want to thank our employees for their ongoing efforts across all of our core business lines.

And with that, I'll turn it back over to Mark.

Mark Scatterday

Thank you, Brad and Tim. Tim raised a great point. Over the past 12 months, management has been focusing on stabilizing TILT's core, refining and rightsizing its business model. This has been a key focal point of our narrative to the market since late 2019. And with each passing quarter, the results of those efforts become even more evident. However, companies in high growth industries, such as ours, do not generate shareholder value solely by having a stable platform, unless that platform serves as a foundation from which to drive growth.

Accordingly, our management team's focus have pivoted from stabilization to identifying, unlocking and accelerating growth drivers across TILT's portfolio of businesses. We have a number of attributes that have alluded so many operators in the cannabis marketplace, including; one, improving gross margin and operating leverage; two, consecutive quarters of positive adjusted EBITDA; three, consecutive quarters of positive cash flow from operation; four, an improving cash position; and five, existing assets capable of providing significant growth opportunities with limited need for additional capital expenditures.

We continue to attract top-line talent. Most recently adding Dia Simms as an independent director to our board. Dia brings a wealth of experience, building a brands in the cannabis, spirits and retail industries. This benefits TILT in our mission to support cannabis businesses as they build brands in this highly dynamic industry. Dia replaces founding board member, Gary Smith, who we thank for his many contributions to the Board.

Of course, our greatest asset continues to be our people, whose dedication and commitment over the challenges of the past year have been astounding. We have worked hard to get where we are today, and I'm excited for future. We'd like to thank our investors for their support and together with the rest of the management team, look forward to delivering long-term shareholder value.

With that, we conclude our prepared remarks. Gary?

Gary Santo

Thank you, Mark, Tim and Brad. We’ll now be happy to answer your questions about TILT and our second quarter results. While we'll take live questions from our equity analysts, all other webcast listeners will need to submit their questions via our open webcast question submission system. Time permitting management will do its best to answer as many questions as possible. Devin, can you please open the line for any equity analyst questions?

Question-and-Answer Session

Operator

Absolutely. At this time, we'll be conducting a question and answer session [Operator Instructions]. Our first question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.

Aaron Grey

Hi, good evening. And congrats on the quarter considering all that’s going on with COVID and otherwise. So first question I have is on the cannabis division. So it’s down modestly came in better than my model. So would love if you could just kind of parse out more between Massachusetts and PA? It sounds like you had disruptions in both. Obviously, MA was down in terms of adult use sales for about a month and a half, and then you also had the increase on the medical side. But first thing I want to know, was PA actually also down Q-over-Q, if you could just answer that, because I know you mentioned some disruption there? And then on the other side with Massachusetts. Was it more of the increase in June that you saw, which was more than I think you said April, May combined or just the overall increase on the medical side that helped to kind of buoy the cannabis division quarter-over-quarter, considering the quarantine measures you had going against you? Thanks.

Mark Scatterday

I'll start on Massachusetts. So, yes, I mean, as everybody knows, Massachusetts was one of the markets, so it was heavily impacted by state stay-at-home orders with the sort of temporary shutdown of adult use dispensaries. So we definitely saw sharp decline in our wholesale sales efforts. As we alluded to on the call, we did see that rebound as those stay-at-home orders and dispensary closures were lifted. So I think it's both Aaron, like the decline was sort of buoyed by both an increase in our retail operation, as well as a recovery in June for wholesale sales. Hopefully, that sheds a little bit more light on it.

But we're extremely proud of the team for; one, keeping their people safe during those COVID-19 stay-at-home measures as we continued to operate and sort of back-stock both flower and cannabis products. So yes, so that's really hopefully that answers your Massachusetts question. As for Standard Farms. Yes, I mean, we've seen some additional pricing sensitivity in the market. Standard Farms products are really seen as a top shelf sort of premium product. And while we really like that positioning, because the product really is best-in-class and targeted specifically for medical users, it sort of behooved us and became necessary to sort of address those pricing sensitivity, especially on the heels of civil unrest and some of the effects it had on our customers, like we said specifically in Philadelphia.

And so, we did just that. And by reducing sort of our price set, we were able to sort of reinvigorate our wholesale sales effort in that state, but still really maintain our position as a brand leader in a premium product. So some slight adjustments here and there as markets evolve and because we really are experts in all things cannabis, we see those things coming and are able to kind of make those incremental adjustments as necessary. Brad can probably talk about whether or not the June revenue surpassed April and May altogether. Brad, do you have that off the top of your head?

Brad Hoch

On the CAC, absolutely. And then and Aaron, I believe your other question was Standard Farms. The Standard Farms revenue was actually flat to Q1.

Aaron Grey

And then just shuffling over to the Jupiter business, down quarter-over-quarter and inline with expectations. But I know you guys mentioned in terms of getting into more of the packaging, so let's kind of unpack that a little bit. Is that more just going to be on the base side? Are you guys expanding beyond that? And then because you kind of just talk about the overall kind of strategy behind that, were you just seeing competitors coming to you for the vape side and say hey want to add this as a complimentary bolt-on offering, because I know you have a couple other initiatives in place after you pair it with Infinity line, also the Dose-CTI. Would just love to hear in terms of like why choosing now to kind of go into more of the packaging and what all that's going to encompass? Thanks.

Brad Hoch

Mark, you want that one?

Mark Scatterday

And Tim, you can expand on as well to. The opportunity, Aaron, has always been where, again, selling. I've always said if we could sell additional or more products to additional customers and packaging is a natural fit. Where we do draw the line though I want to point out is to where we're just not selling cannabis packaging. We're selling packaging and being the best at the packaging as it relates to Jupiter's products. So anything that touches Jupiter's products, we're going to specialize in and especially when it comes to child safety.

So it's always been an initiative we've always wanted to launch, but now we're really getting, putting the resources in and getting our hands around that and working with some of the best partners in the industry. We're really excited about what that's going to contribute.

Tim Conder

And Aaron, I think Mark said it well, right is like they're not trying to boil the ocean. They're trying to make their existing products more attractive to the customers that they have and reducing pain points in the supply chain as it relates to vaporizers and power supplies. And I think this is like huge value add to Jupiter's B2B customers. And I think it's a interesting and sort of low risk way to dip their toe in the packing water to understand the market opportunity, if it exists sort of beyond Jupiter products specifically.

Mark Scatterday

And in addition -- and what's also what Jupiter specializes in is innovation. So we will be really paying a lot of attention and really doing a lot of research behind so we cannot just deliver packaging but truly innovative and disruptive packaging in the future.

Aaron Grey

And then just last one from me and I’ll jump back into the queue. Just on Blackbird, nice to see the uptick Q-over-Q from the delivery side. So first off, I’d lover to hear more in terms of where you're seeing that quarter-to-date in terms of the delivery revenues and how that’s trended? And then second of all, I'd love to hear kind of some more updates in terms of the CRM kind of initiative you've had, and kind of rolling that out, where you see that and how best to expect, the revenue ramp for that, because I think there's a lot of opportunity not only on the sales but also on the margin side too, because of what you just see from SaaS side in terms of higher margins, so just kind of your outlook for that business would be great? Thanks.

Mark Scatterday

Yes, on the on the retail delivery side, as we talked about in our prepared remarks, we saw a very large uptick to the retail delivery volume during stay at home orders for COVID here in Nevada. And while we have seen revenue return to sort of pre-COVID levels, that's actually with less customers than we had going into COVID. The reality of scaling-up that business overnight to meet the market demands in Nevada meant that we really had to align our interests with really the best -- what we viewed as the best in class operators in the state that we knew we're going to do significant volumes and that we wanted to support. And so we’ve continued to really lean into those relationships.

And so we're doing a similar revenue but with less customers. And really like I said, pushing hard on those customers to help them ramp up their sort of omnichannel efforts, specifically around delivery and ecommerce. And we're excited to continue to really partner with the largest operators in the state and the largest operators nationally. So more to come on that. We expect some expansion with those partners for additional retail footprint throughout the state and expect that to increase retail delivery revenue sort of in line with those efforts.

As it relates to the brand, sort of the -- what we're calling brand marketing tools. Like Blackbird has a lot of different mouse traps. One of the great benefits to our ecosystem is we have hundreds of brands already in that ecosystem, which we do distribution for, both in Nevada and California. And this seem like a natural evolution of our toolset, sorry of our CRM and ecommerce toolsets to provide those tools to brands, which today have really a limited number of touchpoints with the end consumer. They’re heavily reliant on their retail partners to reach their consumer subset. And so we want to put sort of the power back into the hands of brands to be able to drive revenue for their business and have control over how they're -- over the discourse with their customer base.

And so we saw great opportunity to expand that toolset. As you touched on software, great margin. Through the operational efficiencies that we've implemented on our services side, we've been able to better those margins significantly. But they'll never get to where software margins will. So it's a really exciting toolset to be able to expand. We have the partners already to expand that toolset too. And the power in Blackbird is in its ecosystem, not just its software ecosystem but its software and services ecosystem. The more tools that brands and retailers use, the more of a network effect they get and the more power in each of the individual tools. So this sort of rounds that out by offering that toolset to brands, which we're really excited about and leaning into the highest margin segment of the Blackbird business.

Aaron Grey

And if I could just squeeze in one more to add on to what you just said. Just on the brand CRM versus where historically we’ve seen on the retail side. Are there any like incremental hurdles we should think about, because usually tied into the retail and then you kind of get some points into the it, it's like a loyalty program? Or just you can provide kind of more details and sort of how it'll be different than what the CRM capabilities you provide to the retailer for this new brand initiative that you have?

Mark Scatterday

Yes, absolutely. I mean, our system is an all in one system. Cannabis operators can use it to manage really the entirety of their business. They can also bolt on or integrate other tools. We have 10 plus integrations with other leading software operators in cannabis. And so our loyalty program works with Blackbird the way that it works with Flowhub, the way that it works with BioTrack and we anticipate our brand toolset not being really being no different. Like we want to decrease the rub for cannabis operators so that they can grow revenue. And so, while that creates sort of initial hurdles for us to overcome from a software development perspective, this has actually been on our roadmap for some time. So the software was engineered and architected with all of these tools in mind. You know, we're just building out a lot of tools, because cannabis operators have a lot of needs and we want to be able to meet them as it relates to the supply chain.

Operator

Our next question comes from the line of Bobby Burleson with Canaccord. Please proceed your question.

Bobby Burleson

So just curious on the packaging opportunity. Have you guys done an analysis on where you think the attach rates could be? Is it 20% of your hardware sales where you guys could offer the packaging or supply the packaging? Is it higher than that? What’s the kind of theoretical or as a practical tooling effect you guys can hit?

Mark Scatterday

It's really hard to estimate, and it's one of those things to where most, I think all of our products are sold through packaging. So I'd like to say, the addressable market is a hundred percent of the unit for unit. However, the value of packaging relative to the cost, if you kind of pair that back with the different levels of packaging. Our target would be minimum 25% but it's still early stages and again, the more innovative our packaging and the more perceived value that would have would help us increase that number.

Bobby Burleson

Is that a substantially higher gross margin potentially for you?

Mark Scatterday

Yes, most definitely.

Bobby Burleson

And then just more on the vape business, I guess cannabis 2.0. Curious to hear your thoughts on the trends in that market in terms of the share that you think vape might capture, or consumer products? I think it's gotten pretty darn high in California and some other markets here in the U.S. at times, it's pulled back a little bit, but it's still very high. Where is it now and where do you think it could go in Canada?

Tim Conder

I mean, I think unfortunately, Bobby, I don't have the Canadian market size in front of me, but it's large, right? I mean, it's inline with the size of the population related to the U.S. And while it's sort of been slow to come to fruition with the introduction of cannabis 2.0, it started to accelerate. And so, the market opportunity obviously has evolved over the past year and that's a really exciting prospect for us as sort of underpinned by our quarter-over-quarter results directly related to Canadian revenue.

Bobby Burleson

Is there anything structurally different about that market for you guys in terms of -- or for that vape hardware? Is there anything structurally different about the Canadian market versus say California or robust U.S. rec state in terms of where the penetration could go? And curious whether or not the margins for you in Canada would be similar to where they are in the U.S.?

Tim Conder

Well, just quickly and I'll let Brad touch on, Brad and Mark touch on the margin profile. But similar to the U.S., I mean it's province-to-province. I think the most important thing that we've done to prepare for rapid growth in that market is to expand our 3PL relationship and footprint outside of the U.S. into Canada. So that the supply chain can be more immediate for orders placed by our cannabis -- by our Canadian partners. And so I think that's been a sort of important infrastructure step for us and really preparation for that for the market as it scales. Brad or Mark, do you want to touch on any gross margin opportunities in that market that might exist?

Brad Hoch

So margins in Canada are very similar to the United States. If anything, they're a little bit better in Canada. It really is customer-by-customer that we do deal with some very large MSOs in Canada who you get good pricing. So our margins aren't quite as good. But as we build out the 3PL, we will be able to attain a bigger market share there and be able to drive that gross margin expansion. And that's one of the things we don't have in Canada is the large tariffs that we see in the United States.

Bobby Burleson

And then just switching gears to Massachusetts. So just curious, it sounds like you guys are closer to expanding that plant and cultivation footprint. What are you seeing in terms of general wholesale competition in Massachusetts? You see other guys bringing up additional capacity? Or is there just a general growing backlog of folks that are applying for licenses, trying to get inspections, et cetera. Is that still an issue in terms of bringing up more wholesale capacity, are you guys kind of ahead of the curve there?

Tim Conder

Yes. I mean, I think, I don't think it's any secret that the Massachusetts market has been slower to license and activate than than other markets. So we continue to see supply constraints, specifically related to flower. And definitely know operators that are also trying to bring additional capacity or new capacity online in that state. Again, we work with most of, or many of the top brands in the country, many of the top MSOs in the country. So of course we sort of know that there is additional capacity coming online. It’d be a guess if I were to try to assert when. But like all markets, pricing will sort of continue to evolve there, market saturation will continue to evolve. But I think we see more slowness in Massachusetts than really any market that I've ever been a part of. So I think we'll see sort of price points and pound price points maintaining at least for the next year or so.

Bobby Burleson

Just one last one for me. We look at the potential for growth, especially for Jupiter.

What's the kind of CapEx requirement there? Are you guys sufficiently funded at this point to deal with any capital needs, any CapEx [loss] for that basis?

Tim Conder

Yes, I'll start that one and Mark and Brad feel free to jump in. But one of the really beautiful thing that we continue to highlight about Jupiter is its highly efficient operations model. It can scale to very, very large degree without a lot of CapEx. It leverage as a 3PL provider as part its its supply chain, so that it doesn't have to also undertake logistics. They have a highly efficient sort of engineering and research and development team in Phoenix, Arizona that supports obviously product development efforts for Jupiter and also CCELL. And yes, there are some CapEx projects on the horizon specifically related to R&D efforts in Arizona but there it's minimal but the upside is large.

Mark Scatterday

I would like to add to that also. Jupiter from our first commercialized product and our first revenue in 2016. I just want to reiterate we were able to scale to revenues of last year of about $125 million. So in about three or in four years, we are able to scale with very limited amount of capital. And it just goes to the team and our culture of just being really, really efficient and dedicated to the bottom line, so the capital is there to support that growth.

Operator

Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Santo for any web questions.

Gary Santo

Thank you, Devin. We've had a number of web questions. Of course, we won't be able to get to all of them. And for those of you who we do not get to, we will do our best to reply in the next 24 hours. So we'll make sure you get answers. We do have a few questions around the similar theme for the management team, which is given the positive tone, a number of other operators have struck regarding COVID in second quarter. How should they think about how TILT's performance compares to those?

Mark Scatterday

So first, I just want to start by congratulating the operators, mostly MSOs that kind of have come before us in this earnings season and the big numbers that they've put up. Remember, many of them are our customers. And so, seeing their growth was really exciting for us and I just want to congratulate them on that. Our growth will not be the exact same as our sort of MSO partners. They have more SKUs, they have more products and more touchpoints to sell those products. But that ability comes with also in my opinion a lot of inherent risk. They're operating, they're selling cannabis products when sort of maybe on the eve of federal decriminalization or legalization, there's a lot of tax -- there's a lot of tax issues related to selling those products.

So we really remain bullish on the ancillary side of the industry. And we continue to talk about are we -- we've talked about our stabilization efforts over the last year and have evolved that conversation from stabilization to really creating a foundation for growth. So the next phase of TILT's business and the business of each of our subsidiaries is to implement and execute a strategic plan for rapid growth in line with the growth of the cannabis industry. And we're really excited to sort of enter into that chapter.

I would also say that we unfortunately operate our plant-touching assets in Massachusetts, which was a market that obviously was very much impacted negatively by COVID-19 stay-at-home orders. And so we're sort of contending with that part of our portfolio but as we mentioned, having a strong rebound related to that asset.

Gary Santo

And as a follow-up, there’s a question about whether or not inventory carry at Jupiter had any impact on some of the quarter's performance and how folks should think about Jupiter's inventory going forward?

Brad Hoch

So Jupiter’s inventory did increased during the quarter. And really that was kind of a timeline of coming out of the Chinese New Year holiday than the delayed return of manufacturing due to COVID. Our inventory levels of Jupiter reached unrealistically low or I should say unsustainably low levels. And once manufacturing returned to normal, our air travel restrictions resulted in extremely high air freight rates. And since we already pass increased tariffs to our customers, we didn't want to pass yet another increase onto our customers.

So we decided to ship products from China by ocean at a fraction of the cost and by shipping, obviously shipping ocean versus air, this adds roughly three weeks of inventory to our balance sheet. So good catch on whoever found that in our MD&A. But yes, we did -- Jupiter inventory is a little higher than it was in Q1 but we expect it to hover right around that same inventory level as it was in Q2.

Gary Santo

Great. Thanks, Brad. Looks like we have a strategy question, and I think part of this might have been touched on with the analyst, but sort of taking it a little further. With the business now stabilized, where can we expect to see growth come from across the business as a whole?

Tim Conder

We expect growth to come from every subsidiary within the TILT portfolio. And as part of our management team's strategic plan for growth, we'll really be pushing as hard as we can on each of the subsidiaries’ abilities to drive revenue and drop cash to the bottom-line. Obviously, Jupiter being the market, really global market leader in vaporization hardware. We continue for them to have that to lean into that title and continue to grow in evolving markets like we discussed in Canada, and still obviously in the U.S. With our plant-touching assets, we have yet to recognize the benefits of our additional capacity in Taunton, Massachusetts as we’ve talked about at our 30B facility and also our additional sort of retail licenses. So really looking for revenue growth as those come to fruition.

And at Blackbird, there's a lot of blue water. It's a platform that has taken some time to establish, both from the services and software perspective. And as we're sort of like getting to a place where we feel like the offering is well-rounded, we can really push the accelerator to onboard new clients in the markets where our offering is available from a software perspective across North America and from a services perspective right now in Nevada and California. But as we prove that model and grow revenue, excited to expand that into other markets as well. So really I think that's going to be the theme that you're going to hear from us a lot going forward is growth, growth, growth, whereas up to this point for the past several quarters, it's been stabilization. So look to hear more from us on that front soon.

Gary Santo

Thanks, Tim. I think we have time for one more. Has the relationship between Jupiter and Smoore changed since the IPO, and that's a pretty common one we hear a lot about?

Mark Scatterday

I think with Smoore's IPO, there's probably more eyes on them than ever before. And Jupiter definitely continues to have a strong institutional relationship, primarily because we're the founding and the largest customer of their healthcare unit. The healthcare is what’s really driving their high viscosity or high viscosity oils and extracts. And we believe our relationship is more important to them than it ever has been. We're one of Smoore’s top five customers along the likes of British American Tobacco and JPI. I'd also like to point out that that's more really has a limited involvement and investment in cannabis.

So therefore, they continue to be relying on us, very relying on us for -- as their main U.S. R&D partner. None of their R&D effort can ever touch cannabis. So they rely pretty heavily on our science and technology and R&D department. In addition, we're also their only CCELL distributor that handles all their warranty claims. So we're partnered up with them to process and handle all their warranty items.

Gary Santo

Great. Thanks, Mark. That puts us up against the clock. So again, for those of you who submitted questions that we were not able to read out loud, we will do our best to reply in the next 24-hours. So stay tuned on that front. Devin, thank you and on behalf of the management team here at TILT, I thank all of you who are listening today's webcast, be sure to check our investor section of our Web site, tiltholdings.com, for the latest information on upcoming news and events. Thank you again, and have a good night.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.