Following quickly on the heels of their recent year end, we now have $TILT’s first quarter. Let’s dive right in and catch up on what’s happened with them.

To the financials!

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• And just like that, sales back up to $42MM. Still, $4MM short of their Q3 F2019 level of $46MM.
• Cash up to $8MM. Not apparent where it came from, I’ll keep looking. Margin has rebounded to 27%, this time attributed to a change in customer mix. Unlike last time, bulk sales have now fallen off, and smaller orders at being made at full list price (according to $TILT). They’ve also claimed greater yields from the Standard Farms facility.
• Ah, the cash increase is attributed to conversion of Jupiter inventory (more below).
• Professional fees have gone from $120k last quarter to $2.4MM in this one. Previous CEO Alec Coleman is suing the shit out of them. $TILT is doing the same to him. That, and a couple of other legal issues, are also in progress. Might explain some of it, but that’s a big jump. The annual audit and a re-class of acquisition expenses is also cited.
• Overall expenses dropped by $2.3MM, which, is not easy to track. SBC got slashed (from $2.3MM to $600k)….seems they’ve discontinued stock options. Well then. Somehow they reduced Admin expenses by $1.5MM by focusing on ‘lean operations’. Hey, it’s that simple right? They’ve also initiated layoffs in Blackbird (a year after dropping some $250MM on it), and reduced benefits for employees across the board. These are cited for reducing expenses QoQ by another $1.3MM.
• Still, $17MM in operating expenses swamps a 27% margin. Excluding GoB voodoo, they lost $11MM.
• Technology sales are off 33% YoY. QoQ is harder to divine, thanks to an earnest effort by $TILT at avoiding QoQ comparisons, despite improving disclosure in general.
• R&D negligible, and looks like a single employee. For a company that does hardware….one would think they’d have more going on around product planning and development.
• Estimated credit losses are at $550k on $19MM of receivables. A little higher than standard for most CPGs, but nothing more.
• PP&E at $85MM, but $45MM of it is in leasehold improvements.

Ok, not much more to see incrementally..

Some accounting in their Statement of Changes got cleaned up this quarter. Seems $TILT didn’t have a handle on how much net cash was exchanged for acquisitions back in January 2019. Maybe the new auditor’s doing a full comb through…..but still….$43MM is a lot of change to find in the couch:

$TILT’s margin flux and business tweaking (they’ve dropped an undisclosed amount of headcount in Blackbird) is challenging to the analyst. Businesses in formation can be a tough go as it is, but layering in segment rationalization and an effective restructure while one builds really occludes measuring the quality of the underlying assets.

That bulking up of inventory last quarter pre-empted the need for more ordering apparently, with most of the increase in the cash account increase coming from inventory conversion. Given sales rates, inventory looks to be a bright spot in these statements (even if lean on the cannabis side). Despite this, they’re going to need to order up and get units to sell. This will place pressure on working capital:

I didn’t remark on it last time, but the loans receivable they have o/s is hefty at $28MM. It’s a loan portfolio that’s comprised of dispensaries and grow ops across several states. Presumably, these ties enhance the ability of TILT to sell into them. In looking some of them up, I came across a scenario familiar to many Canadian retailers trying to find a location for a store. It’s one where professional hand-wringers NIMBY their way across local municipal councils and political nobodies (There’s a store already in town! Why would we want another?). The story has the bonus of bringing a ‘historical building’ into it as well).

10 days before these financials were released, $TILT’s CFO took a powder…..a ‘one day’s notice’ kind of thing. But he will stick around under contract to help out the temp:

CEO Mark Scatterday…..whose been an ‘Interim’ CEO since Coleman’s departure…..became ‘Non-Interim’ back in February. Innocuous enough. But it’s noteworthy that $TILT’s CEO is also a significant creditor:

Regarding an opinion on $TILT…..I hold reservations about the viability of them ‘as-is’.

Blackbird is running at $2.5MM in revenue per year. Jupiter’s sales – aside from that drop last quarter over the illegal vape scare – are flat, and packing a margin that has all the meat of a drop shipping business. Cannabis sales are increasing, and hopefully they’ll avoid last fall’s stock-outs go forward.

Margins are not stable outside of cannabis either. They’ve trimmed staff at Blackbird, which signals to me that there wasn’t as strong a purpose there as initially envisioned. Indeed, both of their non-vape segments (tech and distribution) are seeing sales off this quarter by some 25% (down to $1.8MM), and they lost $4MM on them. Of the $33MM in vape sales, net income in the segment was $380k. Three hundred and eighty thousand dollars. They don’t report that segment’s margins, and that’s probably because they are razor thin. ‘See though’ kind of thin. They’re selling about $2MM/month in cannabis, which is higher than last year’s run rate. But those kind of numbers belong to a 4 store Mom & Pop business, not a listed outfit with $300MM (remaining) in Goodwill and Intangibles.

I don’t see anything here that would justify much enthusiasm. We predicted in our last structure that despite the sizeable revenues, Jupiter’s margin appears anemic. Incremental sales to new stores and emerging states would be a natural spot to look for growth, but this has me asking how many vapes and vape manufacturers will the market be able to support? Jupiter sales would need to triple at current margins to get some sort of useful rate of return. Perhaps there is more to come.

As it stands, they reported a $2MM loss this quarter, but this number had $9MM in GoB attributed to it, which is a function of planting their grow. If we see another quarter of the same thing, that remaining $300MM in Goodwill and Intangibles might not be around at their next year end.

There are positives, looking at Jupiter’s sales rates, and $TILT being able to access large orders commercially, as well as selling into smaller customers. Reorders, and total sales rates need to hold, or it’ll reflect negatively on throughput at the cash register.

Cash is becoming needed, look for a raise or credit facility to be struck shortly. I’m going to assume they’ve been talking with Jupiter over the distribution deal’s terms….that’s where I’d start if I was looking for money out of their assets. Given the past 5 quarters of $TILT’s performance – as is – it’s looking more and more like a pony who can’t do one trick. It’ll need to show it can over the next couple of quarters if we’re to see any kind of durability in share price.

As it stands, we’re far from being able to assert much confidence about this specific business: we neither have enough data points or granularity in margin to do so. But what we have seen so far is not encouraging.

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