TILT Holdings Inc (TLLTF)

[FUNMAN]

Tilt Holdings Might Tilt Further To The Downside
Oct. 29, 2019
12:05 PM ET

This is an ugly article, disclosing little hope for financial sanity. Sure does look like the insiders have been enriching themselves.

On a side note: Because of the vaping scare, the sales of edibles has increased.

To read this article with the charts and graphs, click on this link:

https://seekingalpha.com/article/4299928-tilt-holdings-might-tilt-downside?app=1

Summary

* 82% of Tilt's revenue is realized from a segment under increasing regulatory scrutiny.

* The company's balance sheet is in a precarious position.

* Financing options are limited against the backdrop of negative free cash flow and a collapsed stock price.

I will be honest, Tilt Holdings (OTCQB:TLLTF) was a company on my radar in the months prior to it going public. This was a period where my green rush portfolio had a strong bias toward ancillary cannabis plays. I took the statement 'during a gold rush, sell shovels' too literally. Indeed, my position in Kush Bottles was almost up 100% (I later sold this). So I had confidence in my strategy, this confirmation bias led me to search for and invest in other companies to match my KushCo position.

Tilt is an ancillary cannabis company based in Boston, Massachusetts, USA. It is a holding company for the six cannabis companies below. The corporate segment of all six companies occupy are also included in brackets.

(1) Blackbird (Distribution): A cannabis distribution company.

(2) Standard Farms (Cannabis): Pennsylvanian cannabis grower.

(3) Jupiter Research (Accessories): Designer, developer and manufacturer of vaporizers for the wholesale market.

(4) Sante Veritas (Cannabis): A licensed producer applicant under Health Canada's ACMPR.

(5) Baker (Technology): A CRM and customer engagement platform for the cannabis industry.

(6) Commonwealth Alternative Care (Cannabis): Massachusetts based medical cannabis retailer.

By combining what some have described as a 'ragtag' bunch of companies, Tilt hopes to have covered all bases within this new cannabis zeitgeist. But the company's time as a public company has only seen newer lows with no end seemingly in sight.

The War On Vaping
Jupiter Research, which was acquired by Tilt in January of this year, contributed 82% of revenue at Tilt's last reported quarter. This creates a risk as vaping has been subject to negative media coverage and scrutiny following the outbreak of over 1600 vaping-linked respiratory disease cases. This threatens to catalyse a negative shift in the current positive societal sentiment extended to vaping.

Further, according to the Centers for Disease Control and Prevention, which is leading the investigation into these deaths (and on data available from 860 of the 1,604 patients who have fallen ill), about 85 per cent reported using THC-containing products. That is damning and has raised the spectre of a regulatory clampdown against vaping products for the THC market. Indeed, there has already been a temporary 4-month vape ban in Massachusetts. This new reality for vapes poses future headwinds for a division that constituted 82% of Tilt's Q2, 2019 revenue.

The company is cognizant of this, releasing a statement on September 26, to address ongoing vaping issues and the temporary Massachusetts vape ban.

Further compounding the headwinds, the 'Accessories' segment is Tilt's only profitable segment, bar 'Cannabis' whose profitability was derived from non-cash changes in the fair value of biological assets.

Is the Darkest Hour Just Before Dawn?

This statement, albeit a cliché one, is always relevant to describe the future for entities that have experienced a sustained decline in their value, prospects and fundamentals. Tilt’s future will either be a continuation of its dark past, one characterized by significant capital destruction, or a resurgence to the upside. To say the stock has been beaten down would be a gross understatement.

The stock price has entirely capitulated. With material headwinds still remaining. The company's financial position is precarious and questions remain on how the company intends to fund itself. At its last reported quarter, Tilt reported a cash burn of $40 million. This was an aggregation of negative OCF of $15.3 million and CapEx of $24.7 million. The company also reported cash of $4.5 million remaining. Working capital was also negative with total current liabilities of $146.3 million versus total current assets of $95.6 million.

The addition of debt to a balance sheet under strain would be an exercise in lunacy, as would be the use of a dilutive equity raise. And while the announced forfeiture of $60 million in share options by its remaining founders would help address stock compensation expenses, it is fundamentally a non-cash item so will do little to stem the cash burn.

However, the forfeiture will mean lower stock compensation expenses in the coming quarters. During Tilt's Q2 2019, this line item formed close to 70% of total operating expenses.

If the company's stock price in unable to break out to the upside over the next few months (to allow for an equity raise) or the company's cash burn is reflective of its second quarter, then the darkest hour will become even longer. It is not impossible to imagine further downside even from this point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.