Cannabis CEO blames company’s auditor for half-billion-dollar writedown

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The departing chief executive officer of Tilt Holdings Inc., a Canadian-listed cannabis company hoping to expand in the United States, is blaming his accounting firm for a writedown worth a half-billion U.S. dollars.

“The statement about Canada and the medicinal market that was in our [financial statements] was inaccurate,” Alex Coleman said in an interview on Friday, after Tilt announced he was stepping down as CEO but would stay on as chairman.

Cambridge, Mass.-based Tilt reported its 2018 earnings on May 1 and announced a US$496-million writedown. The non-cash charge relates to goodwill impairments tied to the company’s reverse takeover of Canada’s Sante Veritas Holdings Inc. in November.

As part of the reverse takeover, Tilt acquired three other U.S. businesses – Baker Technologies LLC, Briteside Holdings LLC and Sea Hunter Therapeutics LLC – and merged them to create a vertically-integrated company that offers cannabis production, retail software for dispensaries and consulting services. The combined company started trading as Tilt on the Canadian Securities Exchange (CSE) in December.

In its financial statements for the year ended Dec. 31, Tilt recorded impairment charges on three of these businesses: US$132-million for Sante Veritas Holdings Inc., US$158-million for Baker Technologies, and US$206-million for Briteside Holdings.

All three companies operate in Canada, and according to the statements, the combined writedown reflects the “outlook on the medical cannabis industry in Canada as a result of the legalized recreational market." Tilt is hoping to obtain a licence from Health Canada to cultivate cannabis for the recreational market, but there is no assurance it will succeed. (For now it is constrained to the medicinal market.)

In the interview, Mr. Coleman took issue with this assessment, which he said came from Tilt’s auditor, MNP LLP. “I would say that MNP is underresourced and that kind of language was not attributed to our company," he said. MNP did not respond to a request for comment.

The auditor’s assessment appears to conflict with Tilt’s view of the deal’s potential when it proposed the four-way business combination in May, 2018. In a statement at the time, Tilt touted the merged company’s “competencies across the entire spectrum of the industry, from vertically-integrated operations to cutting-edge genetics and customer relationship management systems, all supported by robust data-driven insights.”

The writedown is also at odds with the assumptions used to market a US$119-million private placement that Tilt completed in November. The financing, underwritten by Canadian investment banks and led by Canaccord Genuity, was priced at $5.25 a share on the CSE. Tilt’s shares last traded at $2.14 on Friday, giving the company a market value worth $284-million, according to Refinitiv. Canaccord did not respond to a request for comment.

When the writedown was first announced, Mr. Coleman blamed it on “two conflicting accounting policies." During a television interview with the U.S. financial news network Cheddar on May 3, he suggested his auditors had adopted new accounting methods, and added that their new system “is not based on intrinsic value, it’s based on cash flows."

The implication was that Tilt’s valuation suffered under the new system because it is still in start-up mode, so it does not produce much cash flow. However, auditors predict future cash flows when valuing businesses.

On Friday, Mr. Coleman revised his original explanation, acknowledging in the interview that “it’s not an accounting change.”

Instead, the difference appears to lie between his expectations of Tilt’s potential, and those of his independent auditor, which are subject to discounted cash flow (DCF) assumptions. “How do you justify a DCF analysis on an asset that has strategic value?” he wondered.

As for his departure as CEO, when asked if it is in any way related to the writedown, Mr. Coleman said it was not, and added that the timing “was just coincidence.” Tilt said in a statement that the company is looking for a chief executive with operational experience.

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