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Re: greenwillow post# 514

Sunday, 02/28/2021 5:01:48 AM

Sunday, February 28, 2021 5:01:48 AM

Post# of 931

TILT Holdings: A Vape Leader Returns To Growth

Dec. 15, 2020
Seeking Alpha
By D. H. Taylor

Sold a holding that contributed 4% to top-line, but needed additional funding every quarter.

Continues to maintain consistent operating efficiencies, enabling profitability in the future.

Book value of $1.17 but stock trading at $0.27.


Some companies in the cannabis industry are all about premium products and growing a business base of customers. TILT Holdings (OTCQX:TLLTF) is not one of those companies. These guys have a big focus on manufacturing or growing and packaging products for other companies via white label manufacturing. This is beneficial for many in the industry. You, as in you the reader, could start a cannabis company right now and have TILT package, label, and ship this product to a dispensary.

Your future cannabis company would have minimal start-up costs and as long as TILT maintained its own costs and provided a solid product, your business would be free to grow. All you would have to do is make sure everyone did their job and you marketed the product properly.

The most obvious barrier-to-entry is regulation. Before you went out peddling cannabis, you have a few hoops to climb through. Outside of that, however, there are not a lot of barriers to entry, and just about anyone could start a premium white label product and TILT could be your supplier.

Granted, it is not that simple. But then again, it is.

This whole process is called white label manufacturing and is common in almost all industries. While I have found some cannabis companies that have some business coming in from white label manufacturing, the bigger margins are in having a premium brand that those companies marketed themselves. The fact that TILT Holdings places most of its focus on manufacturing products for other companies was interesting and it could work; I like the idea of economies-of-scale.

At the same time, this is not even TILT Holdings' biggest business. That distinction goes to Jupiter Research that manufactures vape pens and cartridges. The vape business has had a couple of issues materialize over the past few months.

So, the question then becomes: How is TILT Holdings faring with this kind of business strategy, and if it is faring well in the current environment, is the company a buy?

Cannabis Industry In the United States

TILT Holdings sells vape products through its Jupiter Research arm. There were problems in the vape world and that devastated revenues. But Jupiter has rebuilt itself with rebounding revenues. Outside of Jupiter, TILT had a software company that acted more like a drain on resources than anything else. The company sold that and is now free to focus on its core business and Jupiter. TILT also sells some cannabis products to other companies, but the real meat-and-potatoes of the business is Jupiter Research.

I have found no concrete numbers as to total vape sales in the United States for cannabis products. But if you look at the Jupiter Research link I provided here, Jupiter sells quite a lot of products on a rapid basis: It sells in 33 states, supporting 800+ brands, and sells about 4,251 vape pens per hour. Not bad.

According to Mark Scatterday, CEO of TILT Holdings, the belief is that since the decline in vape sales, from this point forward he believes that sales will continue to progress forward. That being said, there was a lull in sales due to COVID recently, as well as the aforementioned vape issues.

Nonetheless, TILT returned increased earnings this quarter.

This is where I kind of went mehhh… on the numbers. Cannabis is increasing in sales around the country, Canada, and Europe. We need only look at the continuous increases in MoM in Canadian cannabis retail sales or cannabis sales in various states that show how rapid growth is. However, this revenue, albeit quite consistent, is just that: consistent. But as a potential investor, I want to see growth. Period.

Revenue growth has basically stagnated here. And, while the software division of the company is now out of the picture and it can focus on Jupiter, its biggest business arm, I want to know that during a period in the industry where there are continual increases in cannabis retail sales, why are there not continual increases in revenues.

And then the lightbulb turns on and I realize this is one of those types of companies that is my least favorite solely for this one reason.

Every time the company makes a sale it is to a new customer; I know this all too well. It has no returning customers for products. For example, I have a coffee and chocolate business that keeps me incredibly busy. I sell various products on my website where there are three categories: Coffee, chocolate, and brewing supplies. The brewing supplies are one-time sales. Once you buy a pour-over setup, a grinder, or a French Press, your brewing needs are satisfied. But you will always need coffee and that is my primary focus. I honestly put very little emphasis on the coffee brewing apparatuses. What I hope is to sell bags and bags of coffee to you over and over again.

A vape pen is exactly like this. Once TILT Holdings sells that initial pen, then the other companies are free to sell their oils to fill into the vape pen over and over again while TILT is looking around for its next sale. This is a simplistic look at these products, but it is an essential boil-down that I view this company from.

The companies that are selling the vape oils to place inside the pens are the ones getting the repeat business and TILT needs to somehow figure out how to get this to be their primary focus.

TILT Holdings Operating Efficiencies

Given the challenges that it takes to sell a product over and over to a customer when all you really have is a one-time product, TILT Holdings runs this operation quite efficiently:

TILT Holdings Operating Efficiencies

Operating efficiencies are running at consistent levels and are well below the necessary level of 100% to be potentially profitable. I just had a discussion with a good friend about metrics with management and how to tell if they actually are "good" managers. This is the first metric I look at to see where the priorities are for management and to me, these cost structures say the owners come first.

TILT Holdings EPS
EPS is almost there to become a profitable company:

Close is exactly that. Looking above to the cost metrics, again I think this company is definitely on track given it maintains excellent prudence. I think it is an eventuality that it becomes a profitable business.

To me, this demonstrates that there is not much need for an investor to address the issue of how the company will get to profitability. It is operating quite efficiently and is close to that level. The only real variable is the level that it needs to achieve to reach economies of scale to achieve profitability. The company's newfound focus on just its bigger business of Jupiter, instead of the software company, should fit in well now.

TILT Holdings Cash On Hand

All of that being said, the company lost about $4M last quarter. It has just reported that it only has $4.3M remaining:

So far, management has not made any press releases addressing its need for additional capital and I am sure it will be addressed quickly. But for now, this is something that I wanted to bring up just here after mentioning being so close to profitability.

If the company plans on raising capital via selling stock, this will dilute shares and as an investor, this is never something you want to happen while holding shares of a company. I will continue watching this to see how its cash position plays out over the course of the next few quarters.

TILT Holdings Total Equity & Book Value

I usually don't show the total equity charts for a couple of reasons. But in this case, I wanted to address this chart along with TILT book value because of the problems I see this company may have.

As I mentioned earlier, you want a company to have increasing revenues via an increasing customer base buying more and more products. You want a level of customer retention and you want that to be very high for obvious reasons.

Along with that you also want increasing assets as the company grows more and more. This alone would push the value of the stock up higher if all other variables remained the same. So, if you do not have an increasing revenue level and also do not have increasing assets, how does the company grow or its stock move higher?

These are the structural factors that I wanted to point out with TILT Holdings. Management is not doing anything to increase value with assets in this regard. In fact, it is decreasing; albeit, assets are down only 5% from their peak.

TLLTF Stock
The stock has done about the same as revenues and assets, and that is not much but move sideways:

I believe the company may have a couple of challenges to address in the future in order to get the stock moving upwards. The company needs to focus on a product line that retains customers, that brings them back buying their products over and over again while at the same time assets need to be increasing.

TILT is close to profitability but if it does not get its assets moving higher and its revenues above the all-too-crucial economies-of-scale levels, this stock may be stuck here for some time.

From a book value perspective, however, the stock is undervalued relatively. Book value has the company's share at $1.17 versus the current $0.27 per share valuation of the stock.

I think it might be that not many would get too motivated to buy this stock for the reasons I've mentioned: there is no upwards momentum. Still, there is relative and intrinsic value in the stock itself.

The Takeaway: Is TILT Holdings A Buy?

There are a couple of variables that I like with TILT Holdings, but ultimately, this is not my kind of stock to own. As I mentioned, my coffee and chocolate business demonstrates these ideals to me over and over again. You buy a brewing device and you can consume that brewing device ad infinitum which is absolutely no different than a vape pen. However, the coffee that goes into the brewing device is no different than vape oil that goes into a vape cartridge: Once they are consumed they need to be refilled.

TILT Holdings has a solid business with its vape pens selling to many different companies. It has built itself a strong reputation. But as it turns out, it looks as if the company's reputation is with the businesses it sells to, not the consumers at the end of the line.

I do not see any momentum moving upwards that would propel the company's stock upwards. That being said, it is near profitability and has a strong book value. But what it needs is momentum moving upwards.

I am bullish on the cannabis industry and I should think that TILT will continue to sell great products. I think that will continue to support this business. With the book value so much higher than the stock, the stock should move upwards. But I think I will pass on putting this into my portfolio and just rate this a buy.

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