I’m sitting in Central Park right now having a beer and working on a mild sunburn.

The Business of Cannabis: New York event on Sept 29th – sees me onstage 3 times. The first is with the COO of Ayr Wellness, Jennifer Drake, the second with Merida Capital’s Managing Partner Mitch Baruchowitz.

The third is a discussion with Gary Santo, CEO of TILT Holdings ($TILT).

Our last Structure on $TILT saw the company expanding their weed segment (kinda sorta), with a nod to flower being predominant in their new markets in PENN.

I imputed a 3% margin on the bulk of their sales – within a subsidiary called Jupiter LLP – who holds an exclusive licence to sell the product in the US. It’s a Chinese based manufacturing powerhouse, and $TILT holds that licence near and dear. 

Despite some brisk sales numbers, the relationship isn’t terribly profitable for $TILT, but I am looking for more data points on deriving the margin under the deal. $TILT’s segmented disclosure is bog-standard-cannabis-sector-awful, and the licensor (Jimmy Jang) is both financing $TILT…… and owns a swath of optionality on their balance sheet. 

I’ve got nothing against $TILT per se, but as an investment, I’ve always given it a hard pass. They cleaned up an absolute fiasco in Blackbird/Seahunter/Sante Veritas/Briteside et al. I just went back over a previous article to look up those names…and that whole basket of ‘companies’ was simply a blast furnace to equity value. It cost shareholders dearly. They claim much ‘R&D’ potential around the Jupiter relationship, but it looks like nothing more than a line from IR. I don’t see spending anywhere, and the Jupiter sub most likely exists simply as an inlet for data.

I’m interested to see if their weed sales are expanding, among other things. They’ve announced a new credit facility, notably at prime + 350bp. Which, is pretty cheap money (and cheap because it’s tied directly to the Jupiter subsidiary’s inventory/receivables). They’ve also been granted a couple of provisional licenses in MASS – but it’s not clear as to when they’ll actualize. Another feature of the sector. We’ll get to see what kind of ramp they’ll bring when it happens.
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Since I get to speak directly with $TILT’s CEO Gary Santo, I thought I’d put this out to subscribers:

If you have any specific question(s) you’d think would be useful and appropriate.…..send them to me at andrew@thecannalysts.ca. If I don’t get a chance to ask him onstage, I’ll bend his ear at the after-party and put it to him. 

Same with Baruchowitz (Merida) and Drake ($AYR.A). You got questions? I’ll get answers. Heck, it can apply to any of the speakers there. I’ll be working the room, so I’ll have face time with them all.

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$TILT’s share price mimics the sector, and these financials didn’t really set their world on fire. Let’s have a look, and see if they’re moving in the right direction. Last quarter was showing some firmness in their cannabis segment, and continued growth in Jupiter by adding new markets.

It’s nice outside, I’m hungry (heading out for Sichuan!), and going to take a leisurely Sunday stroll through midtown. So, this one’s gonna be abbreviated.

To the financials!

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• Cash at $9MM. Most current assets flat QoQ. Inventory though is up by $18MM. We’ve seen this lumpiness before in ‘cartridges and power supplies’ – but last 2 Q’s have been stable. Will look for sell through next time.
• They’ve re-classed $1.6MM of ‘Construction in Progress’ to ‘Assets held for sale”. A look at the last 2 quarters as well as the MDA yields absolutely nothing but numbers. No narrative. Irritating. We’ll probably see more about how much they’re going to write off when it’s finally sold.
• Sales relatively flat, but up $1.7MM ($48.5MM v $46.8MM). Margin reported at 27%….same as last quarter. Cash OPEX at $10MM, ‘Finance Expense’ (way cute phrasing) at $2.4MM. Operationally, they’re now into positive in adjusted EBITDA.
• All said, they report a $3MM loss on the quarter.
• Which, is the problem. A company with a $200MM/yr run rate is a break even proposition. The thinness of ‘Salaries & Wages’ and ‘G&A’ (which total $6.2MM) repeats that their business model remains that of a drop shipper.
• More on optionality below. Despite the existence of some 16MM ‘compressed’ shares in the capital structure – and 27 references to ‘compressed’ in the financials – there’s no listing of them in the notes.

Ok. I said this will be abbreviated – I’ll stop here. I could segment, but will look at it again next time. Given sales are flat, a working assumption of ‘nothing to see here’ is probably not out of line.

Nothing has really happed in terms of share count, Jimmy Jang is either optimistic, or distracted.

A good picture of their optionality is contained in their Basic v Diluted, which lays out how many warrants still lay on the books.

There’s a bucketload of in the money stuff laying around. Inelegant. This would prevent my interest in the outfit as a matter of course:

The debt ‘restructuring’ $TILT performed at year end added this cost to shareholders, as creditors got repriced. There’s a ton of fuel for that equity incinerator.

Of course, there’s options, no breakdown is provided as to tenors/strikes aside from ranges:

So. Sales have improved marginally, margin remains marginal, and optionality will ensure that any price accretion will be consumed by the birthing of new (and cheap) equity. Where this equity growth/expansion stops and the business creates organic cashflow is anyone’s guess. I can’t see incremental licenses blowing this thing out.

To be fair, I don’t have a strong operational handle on them, yet, flat sales kinda speaks to it for me.

I’m looking forward to talking with Santo. I think my first question to him will be: ‘what’s the plan?” That will probably tell us all we’ll need to know about go forward prospects. Absent a hard catalyst, this dog don’t hunt.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $TILT.