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TILT Holdings Inc (CNSX:TILT) CEO Explains Goodwill Writedown

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

TILT Holdings Inc (CNSX:TILT) (OTCMKTS:SVVTF) (FRA:0T01) CEO Alex Coleman explains the company’s recent goodwill writedown and indicates it does not impact the enterprise’s value in the public markets. Coleman discusses the company’s strategy to put together assets in each of the 33 states in which the company is licensed to operate to secure its US footprint and to provide customers with products. Currently, most of TILT’s revenue comes from devices, software, and services because the company is established in primarily medical markets with more restrictive demand. TILT is forecasting that cannabis revenue will match device revenue in the near future, which excites Coleman as the company has an 85 to 90 percent gross margin on its cannabis products. Coleman provides his opinion on federal legalization and the problem of the illicit market in the United States. He suggests that consumers will naturally gravitate toward the legal market because that is where value-added products, such as vape pens, edibles, tinctures, and beverages, are and sees dried flower becoming less relevant.

Transcript:

Narrator: TILT Holdings, Inc. is a business-to-business cannabis company focused on the research, development, manufacture, distribution and sale of products and services. The company maintains two primary divisions: technology for software and services, and infrastructure for cannabis products and devices.

Revenue is generated from cannabis cultivation, the sale of flower, concentrates, oils, consumables and topicals, vaporizer and inhalation devices, delivery and inventory management services, and licensed software.

The company has operations in 40 US states, and Canada and Europe, and more than 1,000 dispensaries across the US, Canada, Puerto Rico and Jamaica.

TILT Holdings, Inc. trades on the CSE under the ticker symbol TILT.

James West:   I’m joined now by Alex Coleman, CEO of TILT Holdings, trading on the CSE under the symbol TILT. Alex, welcome back.

Alex Coleman: Thank you for having me.

James West:   Alex, you’ve just recently put out your consolidated financial statements, and I want to start with a quick conversation about your goodwill writedown, just because that was a remarkable occurrence. What is the explanation behind that?

Alex Coleman: Yeah, it’s essentially a result of two conflicting accounting policies. On one hand, they attributed value to each asset that we put together at the time of our IPO on December 6th, where you had four companies getting together simultaneously. And the attributed value took the balance sheets and attributed goodwill based on the percentage ownership.

A few weeks later, at year-end, based on IFRS accounting standards, specifically IAS 36, you have to actually discount back cash flows for each asset to then determine the value. Well, our company, as you know, is primarily an ecosystem company; you know, we’re a partner company, we think about market reach and market share, and so in those asset pools, we have things like modulated grow facilities or business-to-business, business-to-consumer distribution businesses. You know, we have over 1,000 customers in retail alone, and 500 OEs. And so the cash flows, if you do it by simple math, never represents the correct intrinsic value of each asset that we’ve put together here, and that’s the conflict.

And so you basically had, in a very short period of time, a writeup based on an IPO price, and a writedown based on discounted cash flows, which really don’t take into consideration the value of the enterprise.

James West:   Okay, so it really doesn’t impact the enterprise value in any way, shape or form?

Alex Coleman: It does not impact, there’s no correlation between the writedown or the adjustment to goodwill and the enterprise value in the public markets. You could also argue, and I would, you know, the silver lining in this is that our earnings will be substantially higher going forward because we will be amortizing that goodwill and, you know, it’s already taken off in one go.

James West:   Okay. One of our Twitter followers who goes by the handle The Curious Investor, wanted me to ask you about Standard Farms and their production/extraction plans. He says he hasn’t heard much about them, and feels that they’re keys to the business because of their higher margins.

Alex Coleman: I don’t know how to answer that. I think it’s easier to answer it in the addressing what our strategy is, which is on a state-by-state basis. In order to provide the cannabis products, the devices, the software and services, that predetermines that we need assets in every state that we can then cultivate, process, package the actual cannabis products. Standard Farms from Pennsylvania, and our processing license in Ohio, is just part of that puzzle of putting together all the assets across all 33 states so that we can provide our customers with the products.

There’s nothing unique or specific about Standard Farms; it was a world-class operation when we bought it. We’re currently expanding production capacity today, and like everything, we expect the max supply with the demand in the market as that unfolds. So I don’t know how to answer the question specifically, other than if you look at the other states where we’re doing the same thing, we always try to identify a very good foundation from which we can build.

James West:   Okay, sure. So, great, you’ve – you’re obviously amping up the revenue; adjusted EBITDA is improving, EBITDA is improving. Where is the best source of your quality revenue at this point?

Alex Coleman: So in the front end, it’s definitely devices – software and services, just because we’ve established ourselves in mostly medical markets, and as we’ve talked about before, demand is a little more restricted in medical markets than it is recreational. Our forecast expects that certainly at some point in the near future, measured in quarters, that cannabis revenue will be at least as big as devices, and it’s interesting, because we’re about a 30 percent gross margin on our devices, and we have about an 85 to 90 percent gross margin on cannabis products.

So you’ll only see an uplift in our performance going forward. Furthermore, we really don’t run a lot of retail, primarily because our customers are retailers; and so you’ll see a lot of that profit drop to the bottom line.

James West:   Okay. And then, so on a state-by-state basis, do you have any states that you’re liking better than others at this point?

Alex Coleman: You know, every state that converts to recreational you expect to be the best state in the near future. So a state like Massachusetts converting to recreational, Michigan converting to recreational, those are the ones that are going to lead our revenue and profit. Following that will be the others like Ohio and Pennsylvania, etcetera, where massive population bases, but the programs aren’t as developed yet.

James West:   Right. The issue of Federal de-prohibition in the United States – is anybody making that an election issue for the upcoming Federal election at this point, and do you think that’s really going to be a deciding factor among voters?

Alex Coleman: The deciding factor among voters…you know, it’s a very interesting election cycle given the economy and the usual outcome of the incumbent getting re-elected. It’s anybody’s best guess what our current President does. You know, he plays a little bit of three-dimensional chess. I know that we’re on his desk with a lot of Senators and a lot of Congressmen, and everybody’s approaching it from a different angle.

The real complexity here is, what does Federal legalization mean? If you look at the market data coming out of each state, you can easily project a million jobs and $15 billion a year in annual state tax revenue if the whole market were recreational across the country. Now, that also pre-supposes that we’re restricted to intra-state commerce, and the reason is, there’s still a very robust black market, and I personally don’t think that you can see those numbers if you open it up to federal legality and then you have a place like California which is a great state to operate in, but as everybody knows, they produce 13.5 million pounds and they only sell 3 million pounds in the state.

And that’s what worries me the most, is that a Federal legalization doesn’t take into account that existing market, which really hasn’t been addressed yet.

James West:   Right. So on that note, you know, 13 million pounds produced and only 3 million pounds sold – that seems to be emerging as a default characteristic of states that legalize recreational cannabis, but then fail to really enforce the compliance of statewide legislation on the part of market participants. And it seems like there’s really not much in the way of political willpower to shut down these illegal dispensaries and grow-ops. Is that something that you think represents a threat to the legitimate industry in its entirety?

Alex Coleman: Well, I think in the dried flower product, absolutely. I mean, if you look at Canada, and the reason, you know, some are attributing it to supply chain problems; the other thing is, the black market has a published price that’s 58 percent less than, you know, the legal market. I don’t know how you do that, and that country has let – it’s just as an example to your question – that country left an entire 12-month period during which legal participants can only compete with the black market on dried flower.

Really what happens, though, is the consumer gravitates towards – and our companies do best – is create value-added products: vape pens, edibles, tinctures, a full range of value-added skus. And that’s really what differentiates us from the black market. I think the more time that goes on, the dried flower market becomes much less relevant, and the legal market, by simply delivering better product to the consumer, ends up prevailing. But look – it’s an issue. I mean, Gavin Newsom obviously is asking the Federal government for help; they didn’t really look at it as a problem until they realized how much revenue they’re missing, and how prolific the black market is, and now they’re paying attention.

And there’ll be interesting case study to see what happens next.

James West:   Sure, sure. So you know, I guess from the States’ perspective, state governments, that one of their primary motivators in legalizing cannabis is this concept of increased taxation from, you know, consumers of cannabis. Do you think that the, you know, that that’s going to cause more states to accelerate towards legalization, or do you think the states that have dragged their feet so far, some of them are just more conservative in nature, some of them are more religious in nature…do you think those states are forever going to be anti-cannabis, or do you think that the momentum is going to sweep them up as well, at some point?

Alex Coleman: I think it’ll sweep them up as well. I mean, you should have a market that evolves, very similar to alcohol, where you have a blue state – in this case, let’s call it a green state – with restrictive laws; other states are going to be more liberal. It’s a natural outcome of allowing each state to define their own laws, which is what we are advocating for. You’ll still have FDA oversight and all the other agencies, but I think each state should be able to decide. But really, the punchline is there’s no question we’re seeing acceleration of every state focusing on recreational once they get a medical market approved, because that’s the biggest challenge, right? Once you get through that hurdle, and you create the acceptability among your voting constituents and you then you look at the missed jobs and the missed tax revenue by not making it recreational, it is an eventuality.

James West:   You bet. All right, Alex, well, that’s a great update. I really appreciate your time. Thank you very much for joining me today, and we’ll come back to you soon.

Alex Coleman: Yeah, I really appreciate it. Thanks for having me again.

James West:   You bet. Bye for now.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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