TILT Holdings ($TILT) caught our attention in the summer in 2019 and it’s kept our attention ever since.

The company itself is somewhat unique, with revenue lines originating from being a: vaporizer hardware supplier (licensed under Jupiter) that has a large grow-op in Canada (Sante Veritas), who sells software that does everything (Blackbird/Baker/Briteside), and even has a cultivation site and retail dispensary in MASS (Commonwealth) and a grow op in PENN (Standard Farms).

Our last Structure on $TILT mused that they need improvement around margins in their core business, and, that they’ll need to address a persistently (and consistently) high G&A.

Let’s see where they’re heading.

To the financials!

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• Sales are up to $40.4MM (from $38.6MM previous). Inventory up $8MM to $54MM. We’ll look at this and sales levels more below.
• 30% margin reported in aggregate. There was $7MM of positive margin generated this quarter from that $40.4MM ($3MM from Jupiter sales of $30MM, and $4MM from cannabis sales of $9.4MM). Eep.
• Corporate overhead down slightly QoQ, total level still outside of the solar system. Currently running at $45MM/yr.
• Finance cost to $3.2MM this quarter, up from $2.7MM. Total for last year: $14MM.
• It’s impressive to see how little cash these guys need to operate. Although they burned through $9MM this quarter – working capital has gone pretty much entirely into inventory. They likely maintain favourable terms with Jupiter, which’ll help a lot with the payables.
• Allowance for doubtful accounts $1.9MM this Q, $1.5MM prior. Understand, that on a 10% margin, $2MM in sales represents $1.8MM in cost. Given they made $2.9MM in gross margin this Q, a potential $1.9MM hit to receivables isn’t elegant.
• Jimmy Jang still holds 44MM units that convert into subordinates. He’s struck 11MM of them this year (none in the last quarter).
• During formation, they’d been lending money to dispensaries and cultivators. These arrangements create relationships, which could presumeably develop. MSO’s have been doing this since the land grab began back in early 2018. As it is, the ‘loan’ portfolio under these is now at $27MM across 11 counter-parties.
• SBC of $1.4MM, $3.3MM on the year. An improvement.
• Other warrants and options remain in big numbers. The strikes are big numbers as well. 16.3MM options at $0.60, with expiry in 2030(!), and 76MM warrants (63MM of them in the money at any share price higher than $0.39). Hella.
• Moved their head office from Cambridge, Mass. to Phoenix, Arizona.
• Hey, their dispensary in MASS won an award for “Best Edible at The New England Cannabis Convention’ for chocolate flavoured coffee beans. They now an ‘award winning’ brand.

Ok. There’s more, but nothing is more important to $TILT right now than margin.

Their inventory grew by some $8MM over the quarter……and $20MM in vape inventory must be quite the sight in a warehouse. Almost all the increase in inventory was attributable to oil (now at $27MM, or 50% of the total). At their December 31st year end, oil inventory was $14MM. We’ll be looking for movement in this go-forward:

$TILT splits out operating segments:

You’ll find Jupiter sales under ‘Accessories’. $TILT was pretty happy on the conference call about the ‘top-line’ growth it showed. Well, it did generate a positive margin of 9% (last quarter it lost $470k on $28.7MM in sales). Break-even is about all the Jupiter has ever really done. 2019 reported a loss in the segment of $4MM on $117MM in sales. Given $TILT touts the division as ‘lean, centralized’ & ‘productive’ – it doesn’t look like they see much more they can improve around margin. They cite large orders as driving the increase in sales. They also mention that it was a record for the number of cartridges shipped, which reflects lower margin from bulk.

We also see that their Blackbird (Tech/Dist.) side – which has done nothing – do more of the same.

The landscape in Canada for software related to cannabis is limited. There’s a couple of repurposed agriculture platforms for grow-ops, some seed-to-sale tracking systems, a few retail POS systems, as well as some home-grown builds. Blackbird technology looks confined to the order/pickup/delivery/inventory channel, and offers no functionality around POS or cultivation. Sales dropped by a million QoQ.

Apparently that was enough for $TILT. In the press release announcing earnings, they announced that Blackbird has been sold to a company called ‘Slam Dunk’, which is controlled by $TILT’s COO, Tim Condor. An explanation is given for the sale, and it’s more blunt than most formal business communications typically are. It says that the cannabis technology market in the US is a complete shit-show:

A cynic could easily describe Blackbird’s own offered functionality as ‘fragmented’^{^1}. The net assets of it went out the door for $10MM USD, and $TILT retains an option through the note they issued (yes, they financed the deal as well) to be able to convert the note into ‘Slam Dunk’ equity. “Hey Tim, if this thing ever turns out to be something, give us a call, we’re interested”.

Back in November of last year we noted (with some sarcasm) that should $TILT be forced to sell their technology division or factor Jupiter’s receivables, they’d be in trouble. Well, they are selling the Blackbird assets that came in at $54MM USD back in early 2019. 24 months later, they’re selling it back to the guy who sold it to them in the first place…..for $35MM less.

Despite my semi-serious prediction, $TILT isn’t in trouble per se……at least in terms of continuance. Cashflow is rocking due to Jupiter, and $TILT dumping a mutt that sounds like it’ll never play fetch……isn’t a bad idea on the face of it. Besides, should an Act of God happen – where Blackbird actually get an order – $TILT can option their note and get (back) in on the ground floor (again) of Blackbird. I shouldn’t be facetious, but seriously, Blackbird was sold to $TILT by the CEO & COO to begin with. The current CEO (Mark Scatterday) came in with Jupiter, it’s alluded that he was too busy with all that bother cleaning up for the last guy to stay on top:

Where I suggest $TILT has ‘trouble’ is in the lack of paths for margin growth. The ‘tech’ segment – and the massive investment in it – has thus far borne out to be folly. No word if the CRM side in Baker is faring any better or worse. There a similar lack of visibility into their delivery service (Briteside). We’ll see next quarter, although tech segment sales have been pretty anemic all along.. As it is, the best $TILT can do in talking to the Blackbird sale is by saying: if they’d sold it at the beginning of the year, it’s absence would have brought in $7MM more in EBITDA during 2020, which, could have been put towards their grow ops which have actually been making money.

Yes, they said that on their conference call. No, I’m not joking.

In looking for margin growth, that leaves one with their US based cannabis operations. Which, was responsible for generating $3.2MM in gross margin (34%) this quarter. They’ve got expansion plans underway in MASS (additional cultivation sites and another storefront, both stuck in regulatory unwinding prior affiliations); Standard (in PENN) is a cultivator that wholesales in-state.

Pretty tidy looking there, as much as I can see of it anyway, even if margin looks a little low for a vertical standalone. The ‘trouble’ is the operations are the equivalent of having an 8′ dinghy for a 2 dozen passengers. This outfit can’t be supported by such a small commercial footprint, even if it’s doing well. The addition of another dispensary will help. Heck, they could use 10 more of anything that makes money.

And that brings us back to the future. In our look at their 2019 Year-End, we noted that their existence anchors on Jupiter, and that expanding revenues across their operating segments was is critical for the company. A chunk of one of the promises in those segments is gone, the other 2 tech pieces showing little sign of life. Even if Jupiter’s sales doubled right now, net margin contribution from that would likely remain in single digits.

I summed up my view last time by saying something needs to change here. To myself, the disposition of a shitty asset doesn’t count. The elephant in the room is the cost of the licensing with Jupiter, and as mentioned, should $TILT make too much hay around this, Jupiter probably has recourse to walk across the street, and give their business to someone else who won’t complain. If Jupiter margin is an un-moveable object, then that puts their future commercial success in the hands of 2 dispensaries; 70k ft² of total cultivation space across 2 states;, a delivery service in California; and a CRM platform being sold within a fragmented & hyper-competitive cannabis software market.

Something needs to change here. Apparently, their future won’t be as a retailer. From the conference call, they see themselves as a wholesaler of product into other MSO’s. Given their cultivation footprint, I think the word ‘creative’ might be what they’ll need to become a more active wholesaler. CEO Scatterday on the conference call:

Jupiter’s entry into Europe is touted as margin replacement. Canada is mentioned too, as it makes up 7% of total reported vape sales. Mexico’s mentioned. Perhaps Jupiter’s vape tech is good, but unless margin can get above single digits consistently, that dog won’t hunt. The intensity around Jupiter’s operations and logistics and working capital consumption……I have a hard time seeing where a 9% margin supports that with sales at such a relatively low dollar value.

Look for an announcement soon of a restructuring/re-focus/re-something. It might be called a strategic review or similar. Given corporate overhead and that they tapped out of the tech promised as a growth area for the company – $TILT’s going to need to be more creative than they’ve demonstrated so far.

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.

1 – I’d characterize Blackbird functionality as ‘specialized’, unable to stand alone within a vertical outfit. In a word: piecemeal. In an environment where multiple software systems exist: API’s bloom; integration issues are persistent; and you’ll see software companies consolidating/aligning/partnering with each other to expand functional offerings. Over time, we’ll likely see 2-3 companies emerge that claim to offer software that claims front-to-back functionality. That Blackbird wasn’t able (or willing, or sought) to look at strategic alliances…indicates it’s got nothing special to offer. Doesn’t matter now though, it’s gone.