A new investment thesis that should play out in the cannabis sector as the year progresses is a focus on particular market and segments. Companies focusing on specific market segments such as cultivation, supply chains or retail stores are likely to prosper while a company trying to serve all of the market segments is likely to struggle trying to serve so many different markets.
A prime example of the latter is the newly created Tilt Holdings (TSE:TILT) that is a hodgepodge of several different businesses focused on the cannabis sector. The company needs to prove that these unrelated companies will actually create a leader in the B2B services for the cannabis sector.
Not So Complementary
Almost overnight, Tilt Holdings was created via the merger of Sea Hunter Therapeutics LLC, Briteside Holdings, LLC, Baker Technologies, Inc. and Santé Veritas Holdings. In combination with this merger on November 21, the company raised $119 million via a private placement with Western Capital and listed on the CSE on December 6.
The company tries to sell the merger as complementary businesses, but the same companies in a normal retail sector wouldn’t own these businesses.
- Sea Hunter operates cannabis dispensaries and manufacturers its own products in Massachusetts.
- Briteside Holdings provides products from prefabricated modular cultivation units to home delivery and subscription based services.
- Baker Tech is a CRM software company focused on cannabis dispensaries with over 1,000 dispensaries and a 30%+ market share.
- Santé Veritas operates a cultivation facility in Canada.
Tilt didn’t just stop here. The company plowed into further acquisitions via Blackbird, Standard Farms and Jupiter Research. These companies focus on distribution, cultivation in Pennsylvania and the manufacturer of vaporizer equipment.
The headline number that will grab the attention of investors is that pro-forma revenues were $32.8 million in the December quarter. The Q4 reported revenues were only $5.7 million, as the four way merger didn’t close until the end of November.
In the quarter, Tilt generated an adjusted EBITDA loss of $3.3 million. The pro-forma adjusted EBITDA loss was $5.5 million.
In 2019, Tilt should generate substantial revenue growth on top of the pro-forma $98.0 million for 2018. The key will be in the details of the costs and the adjusted EBITDA figures.
The company has small cultivation facilities in the U.S. and Canada that don’t fit with the stated goal of being a leading software company all while working on distribution, manufacturer and delivery services. The ability to manage all of these diverse companies will show up in the bottom line figures where substantial operating expenses will lack a lot of the efficiencies of scale that a company would normally gain via the integration of seven different companies.
The key investor takeaway is that Tilt Holdings falls into the under the radar cannabis stocks category that is an appealing investment thesis this year. The problem is that the company is a hodgepodge of businesses that now has a new interim CEO.
Tilt needs to hire a full-time CEO and prove the concept that all these diverse businesses can be formed into a leading provider of B2B services for the cannabis industry. The best way to play this stock is watch it from the sidelines to see what progress is made during the year for the company that lacks focus.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no positions in Tilt Holdings stock.