On TILT Part 1: A player has to to know the score

Fundamental Hype is using CSE-listed TILT Holdings to illustrate the mechanics of the venture equities market that is carrying these pot stocks in a two-part series, and would like to preemptively tell anyone who accuses us of being biased against TILT: MISS ME WITH THAT BULLSHIT, because FH is the only venture equities blog bringing you the straight goods, and if you’re cheering for these companies like they’re ball teams, then YOU AIN’T WILD, YOU’RE A TOURIST.

The LOUDEST story of last week’s Earnings Monday, when seemingly every single US multi-state operator and many of the Canadian LPs filed their year end financials all at once, on the very last day they could do it without defaulting, was a nearly $500 million write down that had to come off of the balance sheet of popular, widely traded and touted cannabis company TILT holdings (CSE:TILT).

$132 million worth of that charge is directly related to Sante Veritas Holdings – Canadian assets that were once a developing cultivation license in Powell River, BC, and are now a half-finished construction project surrounded by a mob of pissed off locals. The other $363.9 million appear to be tangentially related, which all begs the question: “how did all that get to be worth half a billion dollars in the first place?” and shows without a doubt that – when it comes to pot stocks – it’s long beyond time for an agonizing re-appraisal of the situation.

The write down isn’t a monetary loss of value…

This past Thursday, MarketWatch’s Max Cherney had TILT CEO Alex Coleman explaining that this is just an accounting entry, and that the company isn’t too worried about how it will effect them going forward:

“The goodwill attributable to the merger was more of an intrinsic-value allocation,” Coleman said over the phone. “That’s really the gist of it. The company didn’t proactively write up our assets and we didn’t write them down.”

Coleman’s description differed from the company’s financial statements, which said that the impairment charge was the result of the company’s “outlook on the medical cannabis industry in Canada as a result of the legalized recreational market. The impairment was determined by comparing the [subsidiary’s] value-in-use to its carrying value.”

How a freshly grown cannabis company managed to lose $500 million in less than a month – Marketwatch May 2, 2019

Coleman has a point here, but so does Cherney. The on-paper value of these assets is a notional construct that appeared at the time the assets were pulled together in a four-way plan of arrangement combination in December. The aggressive on-paper growth strategy for those on-paper assets at the time was to use the modular garden products of Oregon’s Briteside Technologies, to get Sante Veritas a licence in Powell River, and make it a producer of high quality cannabis, then use Baker Technologies’ software-as-a-service business to help move the stuff through dispensaries, gluing it all together through the consulting expertise of SeaHunter Holdings.

Since then, the company appears to have decided that it would rather focus its energy on doing that sort of thing in the United States, and the auditors appear to be of the opinion that such a shift eliminates the value that ended up on TILT’s books in relation to those assets.

Plan of TILT component Sante Veritas’ planned facility from the SV website. The literature has the company “…[anticipating] concluding construction of Phase One mid-2018, with Health Canada licensing to follow.”

…Just the end of the goodwill they developed in Powell River, BC

Before TILT Holdings came along with this broad and exciting strategy, Sante Veritas was a company that was developing the Powell River property meant to become the heart of a new Canadian LP. They had (and still have) a 10 year lease with the City of Powell River on an old building that is being refurbished into something that Health Canada is meant to license, then expanded.

Sante Veritas even granted options to the City of Powell River in the process of securing the former Catalyst Paper facility. The City’s right to buy 1M shares of Sante Veritas for $0.12 become valid if and when the facility gets its production license from Health Canada, and the city issues an occupancy permit.

SVH’s subsidiary Santé Veritas Therapeutics Inc. (“SVT”) is at the final stage of obtaining a cultivation licence under the Access to Cannabis for Medical Purposes Regulations (the “ACMPR”). Health Canada recently issued SVT a “confirmation of readiness” for a licence under the ACMPR, confirming its initial annual cultivation request of 2,835,000 grams of cannabis flower. SVT is currently completing the buildout of Phase I of its cannabis products cultivation platform, comprising more than 40,000 square feet of combined indoor cultivation and administrative facilities in Powell River, British Columbia, on a waterfront site that was formerly part of Catalyst Paper’s operations. SVT anticipates receipt of Licensed Producer status later in 2018.
Sante Veritas Holdings’ listing release, May 9, 2018

Before May of last year, Sante Veritas wasn’t a project being financed by or traded in public markets. It was rolled into broken-down, halted TSX.V shell co Marchwell Ventures in the spring of 2018, and listed on the CSE with 23 million shares outstanding and total assets of $886.

Sante Veritas’ assets showed respectable on-paper growth pre-TILT merger.

For a time, there was growth…

The company proceeded to raise $16 million with the help of Canaccord Capital and Sante Veritas Executive Chair Michael Orr to develop the property, and started gaining a public profile. By the time the company was presenting at Canaccord Genuity’s Cannabis Conference in New York City, May 17, 2018, there were 245 million shares out, 32 million of them belonging to Orr, along with warrants to purchase another 10 million shares at $0.10/share. It’s not clear what Orr paid for that stock.

Sante Veritas carried the cultivation assets at a value of $8.1 million on January 31st, 2018, at $10.9 million on April 30th, 2018, then at $12 million in July, 2018. All reasonable book values and a reasonable carried-value rate of growth for an under-development asset.

The kinky four-way that merged Sante Veritas with Brightside Technologies, Baker Technologies, and SeaHunter Holdings saw all three of those companies being amalgamated into a newly created, clean-as-a-whistle subsidiary of TILT Nevada which, in the filing for the quarter prior to this year end (period ending Sept 30, 2018) listed 100 shares outstanding, and total assets of $1.

“ONE DOLLAR, BOB!”

In the fourth quarter of 2018, TILT got busy. It printed enough stock to raise $120 million dollars, buy all four of those companies, plus a numbered BC company for a US$721M on-paper premium over their book value, then write down nearly $500 million between them.

TILT’s press releases over the four months since the end of Q4 focused on the future. They acquired a vape company, projected 2019 revenues of US$97.3 million, effected a US OTC listing, and acquired a California distribution partner. The company made appearances in many of the known promo sites including Grizzle, Capital 10x and The Midas Letter (but especially The Midas Letter), cast as a US operator working their tentacles into key parts of the US marijuana landscape ahead of the yet-to-come legalization that’s going to make us all rich. We’re going to have a closer look at all that in On TILT Pt. 2, but it’s of note that the developing Powell River AMCPR licenses made few appearances in the company’s ongoing promotion.

Then, trouble in paradise

By the fall of 2018, Sante Veritas wasn’t showing as much interest in the developing AMCPR license in Powell River. Construction had stopped at the former Catalyst Paper site, and a local mayoral candidate was wondering out loud what the city was supposed to be getting out of this, anyway. Local news outlet the Powell River Peak has mayoral candidate Ron Woznow being told by Executive Chair Michael Orr in October that SV weren’t all that interested in the PR assets at the time, focusing their attention on the merger that would soon form TILT holdings.

“He explained to me, as Dave said, there’s a merger going on,” said Woznow. “But, I talked to Michael Orr, who is the major shareholder of Santé Veritas. His exact words to me is what happens in Powell River is of minor interest to us right now. So you’ve got three American companies. You’ve got Michael Orr, major shareholder of Santé Veritas, and he’s saying it’s minor interest. I’m as optimistic as everybody. I hope that they decide to push ahead and create the jobs that everybody was promised.”
Sante Veritas CEO updates company status in Powell River – Powell River Peak, October 18th, 2018

The Peak goes on to quote Sante Veritas CEO John Walker effectively corroborating Orr in fact and in sentiment, providing no timeline for a re-start of construction at the Powell River facility.

$132 million of the $208.9 million in Goodwill that the Powell River assets took on in their business combination with TILT holdings has been written down.

And why would they? In the world of venture-stage marijuana companies, Canadian LPs are SO 2017… Trying to wrestle a license out of Health Canada, then trying to scale up to an over-promised capacity would put a company on schedule to be in mid cycle right around the time the larger and more mature plays are disappointing everyone by not living up to their advertised capacities. The US is where the action is at. It’s a $19 trillion economy with all sorts of ways to get first-mover advantage.

Keep your bearings.

Licenses to legally grow marijuana are valuable because of their scarcity. To date, the Canadian Federal Government has issued 177 of them in total, and they aren’t all fully licensed to grow and sell dope. Not one of them is known to have delivered a bottom line profit to the business that owns it, because that isn’t how capitalism works. In an environment where liquid capital markets will happily ascribe value to even the notion that Health Canada might let them grow a test crop, then let them grow weed and attempt to sell it, investors are more inclined to bag THAT up and sell it first, and they did. Today, the public LPs we track are worth more than $52 billion in total, and that isn’t even all of them. When we started in 2017, the total was under $10 billion.

Crystallizing potential and selling it is what venture stage investing is all about, and as soon as there’s more potential somewhere else, the capital loses interest. Accordingly, the trade in early stage development assets is off north of the border. The kabuki theater of it all is that the company is de-risking the assets and turning them into a business – turning business potential into business kinetics – but that hardly ever happens in a practical sense. More often, the exciting growth phase is started, the money raised, the tough work of becoming profitable starts, and the capital moves on to something better with more potential. TILT is a rare instance of it happening out loud in an active vehicle that’s seeking and gaining profile.

“The money is made in the buying,” and the product of this business isn’t cannabis, it’s stock.

The 32 million shares and ten million warrants of Sante Veritas that Micheal Orr had when he took Sante Veritas on the New York road show this time last year are now 3.4 million shares and 1.4 million warrants of TILT. When he resigned as a TILT director on April 5th of this year, the stock position was worth $9.96 million. Public filings don’t tell us what he paid for the stock, because he was a Sante Veritas shareholder when it was merged into the first public vehicle. Assuming a proportional rate of strike-price conversion, the warrants that Orr had to match the position in Sante Veritas that he showed up with gave him the right to purchase just under 1.4 million shares of TILT for $1.16/share.

By contrast, nobody who bought TILT out of the public market since its listing in December has so far has managed a cost below $1.84, and a rough volume weighted average price of the stock traded since then comes out at $2.74. The $120 million TILT raised concurrent with the deal was done at $5.25/share, with no warrant.

May 6th chart of TILT Holdings courtesy Stockwatch.

Most of the money made in cannabis equities is made by the entities who have locked in a risk adjusted cost that’s so low they can’t lose. It’s the money that acquires and finances the early licenses, the money that cleans up and re-sells the trading vehicles, and the money that writes the check for the working capital that is to be used for these aggressive build-outs. That money knows how to keep its costs low. Bankers and hustlers don’t have a crystal ball that tells them how long the public is going to be interested or how greedy it’s going to ultimately get. They don’t worry about the same timing variables or sentiment indicators that retail shareholders who buy it out of the market do; it’s better and easier to just keep the cost down.

Stay tuned

The stock bought to fund the businesses that are now trading as TILT holdings are presently an in-the-money trade, and the company is in the process of representing themselves as an aggressive developer of crucial pieces of the US marijuana economy of the future. We’re going to have a closer look at that promotion in On TILT part 2.

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5 Comments

  1. I enjoyed your unbiased article on tilt holdings. I suspect you were in equity research at one point in your career. Not only that you must have spent able time dedicated to reading their filing documents. I would also like to highlight that even if TILT was a legitimate business an investor should never buy a stock in which management, at best, spins the story to it’s dedicated shareholders in a manner that is questionable (whether purposeful or not, i’m trying not get sued so i’m being very generous here) to it’s shareholders.

    1) Original guidance of $200 million in revenue for 2019 when marketing the financing they did for $120 million with Canaccord four months ago not even remotely close to achieving
    2) CEO explanation of conflicting accounting policies as the cause of $500 million write down disingenuous. Accounting policy states goodwill must be market to market every quarter. CEO comment of “silver lining” being future earnings will be higher because less good will to amortize is a ridiculous false positive comment. We impair not amortize in this day in age anyways.
    3) No company explanation why the CFO resigned in January.
    4) Private placement to Weston Capital for $6.8 million a few weeks after $120 million raise at an effectively much lower issuance price uncalled for and the rationale given makes no sense. Weston Capital appears to have no credentials for the stated reason of the financing. Likely a concept of making one investor “whole” because the financing was a bust on the first day of trading and they thought the investor was important.
    5) Blackbird transaction announced with a purchase price of $5 million cash and $45 million in shares at $5.25 (there should have been a definitive agreement signed with a public announcement subject to some conditions to close). But closing press release stated the company issues shares at $2.78 which in effect massively increased the purchase price. Lacks a sense of fudiciary duty to existing shareholders on minimizing dilution.
    6) No investor call after $500 million write down. When you raise $120 million in the public markets and four months later you write down approximately half the value of the company you have an earnings call with shareholders. Instead the CEO goes on two media formats, one called “Cheddar” and another promotional website called “Midas Letter” and takes one preplanned twitter questions.
    7) Company is now borrowing at 18.75% with zero cash flow. And this loan is from officers in the company who were paid for their assets through the equity raise.
    8) oh and take and look at the cheddar interview. I’ve never seen a ceo not take responsibility for his own md@a. I question whether he even read it. Absolutely disgusting fiduciary duty for his salary and options.

  2. PS michael Orr must be a real winner going through the offering documents under regulatory violations you’ll find his name there.

  3. As a retired certified accountant I am really pissed and dismayed that the professional society society and the stock exchange entity would have such useless and meaningless standards that allows all the information to stay in the closet, until someone practical, investigates and reports. No wonder investing for a profit is so difficult.

    • A very sincere thanks for reading, Murray. They sure do make it a treasure hunt.
      It wouldn’t be right for me to comment on the role the professional boards of certification play in this sort of thing (so I’m glad that you did). In my experience, the accountants and lawyers are the only ones whose money is a sure thing in venture-stage equities.

  4. Murray,

    I agree with your comments. If you’re a dissatisfied shareholder in TILT, I’d might like to speak with you. I’ve identified a few others that invested in TILT and are quasi family offices. Still yet to be determined if there is additional recourse against Canaccord and TILT. Someone would have to take the lead on it. Not sure if I’m willing to at this point with other commitments. Let me know if you’re open to being reached, we can figure out a way if I hear from you.

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