Initiating Coverage

April 3, 2020 Cannabis

Aaron Gre y, CFA, CPA

agrey@allianceg.com Sales & Trading 888-543-4448

(CSE: TILT)

P r i c e C $ 0 . 2 1 5 2 W e e k R a n g e ( C $ 0 . 1 3 - C $ 3 . 2 0 )

P r i c e T a r g e t C $ 0 . 7 5

M a r k e t C a p ( m i l ) C $ 8 8 . 0 0 E x c h a n g e r a t e 1 U S $ = 1 . 4 1 C $ S h a r e s o u t ( m i l ) 3 6 0 . 0 0 3 - M o A v g V o l 4 1 5 , 5 9 1

EPS $ Yr Dec 2019E 2020E 2021E

A c t u a l C u r r C u r r

Mar

(0.99)

A

(0.06)

E

–

Jun

(0.16)

A

(0.06)

E

–

Sep

0.11

A

(0.05)

E

–

Dec

(0.09)

E

(0.05)

E

–

YEAR

(0.52)

E

(0.22)

E

(0.06)

E

P / E N M N M N M

Revenues (thousands) $ Yr Dec 2019E 2020E 2021E

A c t u a l C u r r C u r r

Mar

34,378

A

42,848

E

–

Jun

39,007

A

45,181

E

–

Sep

46,123

A

53,222

E

–

Dec

38,422

E

57,326

E

–

YEAR

157,931

E

198,576

E

265,877

E

Adj. EBITDA (thousands) $ Yr Dec 2019E 2020E 2021E

A c t u a l C u r r C u r r

Mar

(8,704)

A

935

E

–

Jun

(4,573)

A

1,397

E

–

Sep

1,475

A

4,552

E

–

Dec

(2,077)

E

5,559

E

–

YEAR

(12,686)

E

12,443

E

39,468

E

TILT Holdings Inc.

Buy

Volatility: 5

TILTing in the Right Direction; Initiate Buy

We initiate coverage on TILT Holdings with a Buy rating and C$0.75 price target. We believe TILT's new management team has helped to transform the company into a more simplified organization of core & non-core assets, with a focus on its technology businesses long-term. We see Jupiter's vape business as one of the market leaders in the category and core to our t hesis, with notable upside from its Blackbird distribution/ technology brand. Meanwhile, the company's non-core cannabis assets are positioned to generate cash flow and may be divested over time.

New Management Brings a More Simplified Structure

T oday, TIL T is f ocused on building a long-term business model through its technology platform. When the company first went public over a year ago, we believe it quickly developed into a company with a number of subsidiaries, with various brands that made it difficult to see how everything aligned. New management has developed a more focused strategy of core assets with Jupiter and Blackbird, and non-core assets - which we believe sets the company up well for long-term success. We view Jupiter as the crown jewel within the portfolio, as one of the leaders in the vape segment and a history of operating on a profitable basis and innovation. Blackbird now encompasses all of the company's distribution & technology platforms, and the company looks to ramp up this business in 2020. TILT's cannabis assets in MA & PA represent non-core assets that generate cash and the company may look to sell off these assets over tim e.

Our Base Case Starts With its Crown Jewel Jupiter Business

TILT's Jupiter business is one of the leading distributors of CCELL vape hardware and has benefited from growing vape sales across the US. While the decline in vape sales has likely impacted the business in 4Q19, data indicates vape sales have been on the rebound - and we expect the vape category to continue to gain share long-term. As one of the leading suppliers of CCELL, we look for Jupiter to benefit from category growth as the company serves brands, Canadian LP & MSOs in legal cannabis markets. Importantly, with the company already generating low to mid-teens EBITDA margins, we look for Jupiter to become increasingly profitable via scale & innovation.

Blackbird Offers Notable Upside, But Could Take Time

The company has worked to consolidate its multiple technology brands under its Blackbird label and looks to build a technology/distribution ecosystem. Under this ecosystem, the company has developed the infrastructure to generate revenues from wholesale through the supply chain to the end consumer sale. This is accomplished through its SaaS platform, distribution system, CRM technology, loyalty program, and last mile delivery capabilities (see Figure 22). While still in its early days of bringing all these platforms together, we see Blackbird as offering notable opportunity to TILT's top & bottom line trends. We see this business as offering the most upside to our model.

Cannabis Assets Are Cash Cows Until Potential Divestiture

Management does not view its cannabis assets as core to its business and has said that it would be open to divesting these assets. In the meantime, the company's PA & MA assets are beginning to generate cash flow. In fact, the company's cannabis assets generated sales of $8M and was profitable 3Q19, with cultivation expansion in PA & MA expected to drive further top-line growth - though timing is uncertain given regulatory bottlenecks in MA (adult-use not deemed essential & stores awaiting approval).

Valuation & Price Target

Admittedly , valuation can get complex for TILT given the company has differing core assets as well as non-core assets on the P&L. However, we see the company’s valuation as attractive, looking at the consolidated company & core assets. We derive our C$0.75 price target based on a consolidated sales multiple of 1.25x our 2021 estimate, which represents a slight discount to US operators. This implies a 2021 EBITDA multiple of 6.0x. Based on its core assets, our price target is based on an implied sales multiple of 1.5x 2021 sales & an EBITDA multiple of 13x. This multi ple is roughly in-line with packaging/distribution peers outside cannabis (despite TI LT’ s more robust growth profile) and notable discount to SaaS peers (which gap we believe will narrow as the company builds out the Blackbird platform).