Phoenix, Arizona-based TILT Holdings Inc. (NEO: TILT) (OTCQX: TLLTF) began life in 2018 with plans to become a vertically integrated, multiple state operator and see where destiny took it. It took it in short order to Gary Santo, who joined the company in 2019 not long after TILT went public but before it ran out of money. Today, in what is referred to as “Gary’s Gamble,” TILT has engaged in a pivot of such magnitude that, as the CEO explained in a recent interview with Cannabis Business Executive, the company has essentially reinvented itself, in the process retiring its Blackbird and Baker tech brands, embracing a new “brand partner” business model, and doubling-down on Jupiter Research, the CCELL wholesaler that also does hardware design, research, development, and manufacturing in the vape space. With vertical integration still a part of its DNA, TILT also operates three dispensaries, and it just announced a partnership with the Shinnecock Indian Nation that will tap into New York’s potentially ginormous cannabis market.

Most of all, though, TILT is all about the company’s partner brands, and using its skill sets and assets to maximize their success. It is a model that has been embraced by cannabis operators that would previously have been competitors but are now collaborators. In December, Robert Beasley of Florida-based Fluent enthused, “I’ve talked to some companies in the northeast. A really good one is Gary Santo at TILT Holdings. They’re all about brands, they’re building their business rebuilding and adopting brands. They’re bringing West Coast brands to the East Coast. That’s their entire model, and if you’re in an environment where different brands can stand out on the shelf, that can be a successful model.”

Santo had been working in finance since the mid-1990’s. During all that time, he said, the jobs shared certain features. “Every company I’ve worked for has been in the startup phase or reinventing themselves,” he said. “Whether they’re doing a massive M&A that was going to completely change the course of the company or add some new capability they didn’t have before, maybe they were previously public, came off market, and came back again, but there were common threads all the way through from my youngest days working full-time.”

Working in the life sciences industry at the time, he watched the cannabis industry from the sidelines as it expanded during the 2017-19 years flush with money but lacking in fiscal discipline. “All these companies were raising crazy amounts of cash without going through any of the steps that every other company I worked with had gone through to justify that they should get that cash,” he said, “Like becoming an operator, or showing that you have IP or something innovative and market-changing.”

It took people close to him to suggest the inevitable. “A few friends of mine said this is a great career arc for you.” He recalled. “Why don’t you get into cannabis, and now you’re going to be the gray-haired guy that you basically always resented when you were coming up through the ranks, and you’re going to provide some guidance and structure, because it’s literally the Wild West.”

A Rare Second Act

Santo’s journey to TILT ran through a first stop. “I joined Columbia Care to help take them public, and then around 2020 in the height of COVID, TILT came onto my radar screen as a company that seemed to be reinventing itself,” he said. “I know how rare it is for startups that go public to get a second act, so to see what the Board did – where they took such definitive action with the leadership team that took TILT public and felt they had lost their way, their strategy really wasn’t going to play out, it was too wide, not deep enough, and they had basically spent all the money they raised – it struck me as a really interesting opportunity. And as I looked deeper into the company, the bones were really strong. They were different-looking than Columbia Care, they were different-looking than all the other MSOs out there. I viewed it as a challenge and saw it as an opportunity to leverage the skill set across all those different industries, and it’s been a lot of fun since then. A lot of work, but a lot of fun, too.”

His first task was a complete SWOT analysis of TILT’s business units. “That’s how we figured out there was no real pathway with the software and services business, and we spun that out,” said Santo. “But when we looked at Jupiter, we saw they were a business-to-business play. They were selling to the brands, they were selling to the MSOs, and the Canadian LPs. The issue with them and why they weren’t making more money was because they didn’t own the vertical. So, as we turned to look at the cannabis business, we said, ‘We’re a little late to the MSO game; what do we want to do here; we’ve been selling wholesale for a while, leaning into it out of necessity. In Pennsylvania, we have no retail, only wholesale, and in Massachusetts, we had one medical store open, and we were selling wholesale.”

Jupiter Research was a TILT acquisition that Santo found very interesting. “They focus on the power supplies and the empty carts that are basically powered by CCELL,” he said. “We also have nice R&D business there too, because Jupiter’s founder, Mark Scatterday helped the CCELL technology come into the vaping space. A good, profitable company, they had acquired the plant-touching operations we have in Pennsylvania, in Massachusetts, and we had a call option in Ohio at the time.”

Santo saw additional potential uses for Jupiter. “Is there an opportunity to take the Jupiter B2B play and make that our intended purpose with plant-touching as well,” he mused. “We took a look at wholesale, we saw the volatility that was coming, we saw all of the additional growth that’s going to be coming on board, and we felt the B2B play was the right one. But then what are you selling? On the hardware side, it’s CCELL or other technology specific to vaping, But what are you going to provide on the plant-touching side? We had to decide, do we promote our own brands?”

TILT was in a situation similar to other MSOs with more than one brand. “[We had] Standard Farms in Pennsylvania, Commonwealth Alternative Care in Massachusetts, not to mention our other branded products , ike CHROMA or one. There was no brand loyalty, and I know how expensive it can be to try to develop that, especially when you’re dealing with a limited footprint and you don’t have a platform on which to develop it. So, the question became, do we buy a brand? I took a look at Cresco and the house of brands and how that all worked for them. It’s expensive, and you don’t know who Coke and Pepsi are going to be, so how do you build a brand, how do you stay asset light, and how do you give yourself the flexibility that if you pick the wrong brand or the wrong demographic, you can shift gears?”

From Competitor to Collaborator

It took a change in perspective to see an opportunity sitting right in front of the company. “We started looking at the partnerships we had with brands and MSOs through Jupiter,” said Santo. “We had a bird’s eye view on how they were doing, how they were ramping up, how they were holding on to their prices and pieces, and we started looking at the California market, the Washington state market, the Colorado market. Hyper competition, but if you were able to be a brand out there and you carved out a niche and you were able to maintain pricing, and you weren’t doing ‘buy one, get one free’ specials all day long, it was intriguing to us.

“It became clear that what these brands needed was the ability to come east, but their options were limited,” he continued. “It was either sell yourself to an MSO, and then you lose your brand, or you could partner with an MSO, but a lot of times the MSOs wanted an exclusive. In Massachusetts, if you were to come and work with us exclusively and we limited it just to our retail, that’s only three stores in Massachusetts. Who gives a darn? So, to be able to partner and keep that independent became interesting, and we started to approach brands with this idea in early 2021. It wasn’t an easy sell; I would say that the world wasn’t thinking consumer packaged goods at that point. They weren’t thinking brands at that point. By the middle of 2021, everybody was talking about it, but I think we were the only ones out there in the beginning of 2021.”

What is left but quality and consistency? “Exactly,” said Santo. “We were looking for brands that had some depth, like an Old Pal. It’s a true lifestyle brand, and they’ve created a persona with their swag and with the product. You look at Her Highness. That’s high-end female cannabis couture. It’s a little different. It targets a certain use case and a certain demographic, which made it interesting. You look at 1906. They don’t have a very big portfolio, they do those experiential drops, but the portfolio they have when you go into a market, everybody loves it.

“So, you didn’t have to have a ton of SKUs to be interesting to us,” he added. “You had to have a depth and a purpose, and also an explanation about what you are going to do next. What you’re doing now is great, but what’s your next iteration? That’s how the conversation started, and since then, I would say that our brand partners have been our best marketers.”

I asked Santo about the logistics of getting brand partners on shelves, and who was responsible for tasks such as sales and marketing. “What we found is a lot of these brands liked to own their marketing piece,” said Santo. “They liked the look, the feel, the collateral, and they wanted to put their brand ambassadors on the ground, which was music to our ears, because that’s some of the most expensive dollars you will spend maintaining a brand that aren’t immediately correlated to revenue generation.

“What we did was we brought our expertise to bear, which is in cultivation, manufacturing, and production,” he added. “But we also have a sales staff and we’d already been selling to 40 or 50 percent of the stores in Massachusetts, and in Pennsylvania, we touch about 80 to 90 percent of the stores. So, we have a readymade network, a relationship that we’re selling to already, and the trick was to say, ‘Look, you own instore activations, you go do your thing, put your brand people out there, do all your social media stuff, and we’ll also backfill that with some of our own field marketers, and, more importantly, our sales staff, and our fulfillment and distribution staff, to get that product out there. We will also help with product design, because nine times out of 10, something had to change in terms of the packaging or the formulation, because what sells in Californian adult-use doesn’t necessarily translate to Massachusetts adult-use.”

TILT is sort of a one-stop-shop, then. “Being the subject-matter experts, and frankly, owning product development –our Massachusetts ops have full capabilities of kitchen, extraction, the whole nine yards, working with Old Pal to develop new products, working with Her Highness to reformulate a few things – we’re sort of their entire back office when you think about it that way. The tradeoff for us was, if we do this, we have to put all of our brands on the back shelf. If these brands do what we think they’re going to do, which is get quicker adoption, they’re going to hold their price point, they have a following, and we need to dedicate our people and everything else to support those brands as if they were our own.”

It was, noted Santo, a unique argument considering the source. “That, to me, was the biggest hook that they had never heard from another MSO before, because most of the MSOs will say that, but at the end of the month and the end of the quarter, when they’re trying to drive margin, they will always revert to their own products, because they believe they will get better margins selling their own products in their own stores.”

It sounded like an MSO win-win. “It really is,” said Santo. “If you think about some of the big MSOs out there, they really like access to some of the products that we bring. Now, we also may buy biomass from them, or they might buy biomass from us, but we don’t do a lot of bulk sales anymore. When I joined the firm, we were predominantly bulk sales, but in Massachusetts, we’ve gone from selling one-pound turkey bags to producing 150,000 to 180,000 units of packaged goods each month. So, it is a big pivot, but we do become sort of partners with those MSOs to get them those kinds of products on a regular basis. You can have your 1906, your Old Pal, or your Highsman, which is another big one.

“What do we get out of this,” he asked rhetorically. “If you look at Massachusetts, that’s a great example. You’ve seen compression in pricing on both the retail and wholesale sides. The curves were almost identical, and there’s some discussion that maybe wholesale has finally bottomed out, and maybe it has, but with our brand partner products we don’t discount. We already know what the price point should be because they’re coming out of ultra-competitive markets like California and Colorado. So, our thinking all along was, if I put my product out and every conversation where I start to sell that product begins with the discount I’m going to apply, I would rather take a brand partner product that I’m not discounting and get a smaller piece of a bigger pie than own the whole pie but start every conversation with a 20 percent discount.”

Currently, TILT has nine brand partners. “I believe all of them are activated at some level with the exception of one we signed right before the end of the year, Coda, which is a top chocolate manufacturer out of Colorado,” said Santo. “We’re excited to bring them into our markets, and I think we will be activating them later this quarter.”

It occurred to me their model creates an obvious opportunity to have discussions in states where they currently don’t have a footprint with licensees that might have an interest in carrying these brands, which then opens up the possibility for TILT to sort of back into a new state.

“I don’t remember seeing you at our strategy meetings,” joked Santo, “but that’s exactly right. We are very fortunate that the brands we have are loyal. When we were thinking about what footprint we want, I always said, let’s keep a northeast corridor. Let’s keep all our assets close to one another, because if we ever get legalization and I can do interstate commerce from that tight knit nexus, I can probably serve half the US, and I don’t have to go crazy with divestitures and all sorts of stupid stuff.

“But our brand partners,” he continued, “even some who are active in other states with other providers, have said to us, full stop, ‘If you can get into Illinois, we will switch horses and work with you there. Whatever state you’re in, I’m coming with you.’ That opened our eyes to why we don’t have to just limit it to this Northeast Corridor. There are reasons to start looking at some of these other markets and see ways to get in, because we’re going in with four or five brands, some of whom might already even be in market that suddenly accelerate the creative value of anything we would do in a new state.”

Subsequent to the interview, TILT extended the reach of its brand partnership with Black Buddha Cannabis, which had previously launched in Massachusetts. The company announced Feb. 1 that the “Black and woman-owned and led, environmentally conscious, social impact driven cannabis wellness brand…is now available across Pennsylvania from TILT’s subsidiary, Standard Farms LLC.”

The Shinnecock Indian Nation

Ironically, the Shinnecock Nation opportunity presented itself when the company was considering different markets to expand to. “One of our investors mentioned, ‘Did you know the Shinnecock were looking to get into cannabis,” recalled Santo. “I grew up on Long Island and used to go out to their Powwow every Labor Day when I was growing up. I met with them and an entity called Conor Green, a tribal advisory business they had been working with for a number of years trying to design a cannabis program. Their goal was to have some type of engine on sovereign land that could provide jobs and cash back to the tribe. They missed the casino wave, and this was their attempt to do something else.

When we sat down, I was struck by how thoughtful and pragmatic they were knowing that they’re on sovereign ground,” he added. “They can basically design the program any way they want, with any rules they want, and they intentionally decided to mimic New York State because they felt the broader play is not just selling on the side of Montauk highway out in the Hamptons, but to sell wholesale throughout the state. And the only way to do that was to mimic and build a program that looked and felt a lot like the New York State program. So that impressed me a lot, because unlike many other people I had met in the cannabis industry, pragmatism was not one of the virtues that I saw come to the forefront.”

The configuration of the arrangement still had to worked out. “We decided to do a partnership, and because it’s on sovereign land, there’s already going to be some differences,” explained Santo. “You’re not going to have a deal like you have in Ohio, where I’ll build it out and then two years from now, I’m going to have a call option and own it. That’s never going to happen, and that was fine by us. We knew this was going to be something that was going to be wholly owned by the Shinnecock Nation. There would be a partnership, and we would be able to step in and help build and provide the wherewithal, but what was exciting to me was the ability to not only do that, but to be able to engage members of the Shinnecock nation, train them, and teach them to run the facility.

“There is a true passion for the plant,” he added. “A lot of people down there grow, but when they came to our facility in Massachusetts and they saw what it meant to grow at a commercial level, it was eye-opening to them. And to be able to hire 100 or so members of the Nation and be able to employ them and fulfill that vision of creating an economic engine to me showed that cannabis can be a lot more than just some type of a lottery ticket to make money with, that you can actually develop something that can benefit neighborhood community. We started to focus a little more on the entire social equity side of the business, on how you can really help, because I think everybody does the usual donating of money here or helping expunge records there. But I also saw interesting things in the industry where companies help expunge people with nonviolent cannabis crimes, but never hire any of them, which I thought was really interesting.

“This was an opportunity to really take a big risk,” he said of this gamble. “How do you get into New York State and get into it cost-effectively? How do you address social equity? It all started coming together very quickly, and I was fortunate that the Board totally backed the play. It’s not easy to go to a Board and say, ‘Hey, can we spend $18 million on something we’re not going to own?’ There were a couple of interesting conversations, but I think we all saw it for what it was; a great opportunity to help on the social side, an inexpensive way for us to get into New York, and while we may never own that, if we’re doing our part, we have a pretty lengthy contract with them – it was nine years when we signed with two five-year extension – so I think we’re feeling good about that, and we continue to work together closely with them as we’re doing the buildup.”

A dispensary on Shinnecock land is slated to open towards the end of Q1, but there is “always a chance that could trickle into the beginning of Q2, supply chain being what it is,” said Santo. The Nation also announced that it will be full-service. “We’ve helped them design some of those programs, so it will be adult-use and medical,” said Santo. “It will be right there on the roadside, in-between the stores where people go to buy cigarettes. It will be a flagship store. It’s gorgeous, probably one of the most beautiful dispensaries I’ve ever seen, and it’s going to be a showpiece for them, which is great.”

Located on Montauk Highway in Southampton, the store will eventually sell products from TILT brand partners. “That’s part of it,” said Santo. “Not only are we going to be working with the Shinnecock and Little Beach Harvest, which is the name of the operation to create their brand, and which we’re going to make available in Massachusetts and other states, but we’re going to bring our brand partner products in as well. That’s exciting to the Shinnecock, because some of the brands, like Her Highness, was started and is basically run by two women based out of the Hamptons, so that’s perfect.”

The Coming Cannabis Commoditization

To Santo, cannabis is the worst integration story ever told. “And I think too many MSOs out there just ignored the integration because they felt that we can’t do it anyway,” he explained. “There are ways to get economies of scale, they’re not as big as they are in all the other industries I’ve worked in, but you can start to formulate the company and have these groups work together as one instead of as independent shops. I was speaking with a company just the other day, and they were talking about how they’re starting to centralize procurement. Just starting? That’s crazy.”

Where can those economies of scale be found? “Centralized procurement is the key,” replied Santo. “Curaleaf is one of our biggest customers. We provide the hardware for their Curaleaf Select, and it’s been a long-standing relationship with Jupiter. We also have a robust relationship with them on the plant-touching side, and we even just signed an agreement with them in Europe to help develop a medical device product – take one of our legacy products and get it medically certified for use in Europe.

“When you start to centralize procurement,” he added, “I can help them round out the things that they need with better overall pricing than if I’m trying to fight this on an item-by-item basis. I will probably hit a wall at some level on what I can do for them on hardware, but maybe I can help them on the plant-ware side, whether it’s preferential allocation of inventory or things along those lines. But that only happens when you’re at an enterprise level. You don’t have those conversations when you’re talking individually to every Curaleaf dispenser. I think that’s been the biggest thing, the power of consolidation of the purchasing and the operations, and then these MSOs can start allocating what they can. I mean, I get it, the product can’t cross state lines, but you can still manage your inventories as if you had all these different warehouses.”

A successful pitch can include offering a suite of solutions. “We’ve had brands that have wanted to come into one of our markets, and we ask them if they would like to use the Jupiter hardware, because if you use the hardware, we can get you a better overall deal on what our contract is going to look like. Boom, next thing you know, we’re doing branding with them, and we have the hardware with them, and maybe in Massachusetts we’re even selling them retail inside of our stores. So that’s the business model full-throttle, and it’s how we live in that moment and find those opportunities.

“It’s interesting,” he added. “Not everybody is ready for those conversations, so for us, we tend to gravitate towards folks like a Curaleaf and others out there that are trying to centralize things. I think planning for the future for us is trying to figure out what success really means. Is it about footprint? Is it about sales per square foot? Everyone said that the grow is going to become commoditized, that the Ag guys are going to come in and take over the grow. But it’s already happening, because all the operators out there have overbuilt their grows, and that’s why you’re hearing stories of people shutting down their grows and dialing them back.

“I’ve also felt that you would get retail commoditization,” he continued. “In Massachusetts, we have around 275 dispensaries, but there are only 400 CVSs. If you think about it, does the world really need that many dispensaries or will that also start to combine? Will you get online shopping? Well, you’re seeing non-storefront retail, which is basically online shopping. We want to own that space in the middle. So, when I think about future success, it’s making sure that we have strong manufacturing and distribution capabilities, that if we’re going to grow like we are in Massachusetts and Pennsylvania, and that we’re growing strains that are unique, and not just bulk strains, where two or three are super high-yielding and we’re pumping out stuff for the lab.

“I don’t want to become that,” added Santo. “I want to become specialty, owning that piece of it, continuing to partner, and looking at where our brand partners want to go and will the markets support us. For example, we love Florida, but you can’t sell wholesale there and you’re very limited, so it’s also about being tactical. I would like to expand and have a few more states that we can get into, and I think our brands would love it, but I want to be smart about it. It’s not going to be growth at any cost. We worked too hard to get here to become like every other MSO and just start spending like crazy.”