TILT: Long-Term Opportunity Intact; Expect 1H/22 Pressures And Likely To Need Capital

TILT Holdings (OTCQX:TLLTF) reported Q4/21 revenues of $54.1M and $4.8M in adjusted EBITDA. Both came in modestly below our estimates ($57M/$6.8M) and guidance of $56M/$7M. The underperformance can be attributed to more cautious customer spending on hardware inventory for 1H/22 along with continued higher freight costs for Jupiter. Despite the miss on earnings, Q4 marked another period of significant progress in TILT’s turn-around toward becoming a well-positioned MSO that is poised to take share in its core plant-touching markets this year. In Q4, TILT furthered its position as a partner to leading third party cannabis brands by adding new products to its portfolio and deepening the penetration of existing relationships, enhanced cultivation and production capabilities in both Massachusetts and Pennsylvania and finally received long-awaited approval to commence recreational retail sales opening two rec dispensaries in Massachusetts. We expect each to bear fruit this year and beyond.

With that said, as with many operators in the industry, TILT expects to face some challenges in the first half of 2022 related to pricing pressure on wholesale products sold and lower customer spending on hardware given the pushout of some new market openings (including New Jersey and New York). Management guided to 2022 revenues in the range of $255M to $265M and adjusted EBITDA between $27M and $32M. Guidance comes in well below our prior estimates of $284M/$54M however we note that by Q4 we expect the company to be on an annualized run rate for both revenues and adjusted EBITDA that exceeds those levels with additional upside to come if TILT is successful in getting its planned Long Island dispensary open before year-end at scale or if a Q1/23 start to the New York adult market appears certain in 2H/22. TILT as a leading hardware supplier should be an early beneficiary an anticipated New York market ramp as operators in the state shore up vape hardware supply ahead of year-end.

We revise our estimates to guidance and reduce our price target to $0.50. Our rating remains Buy as we are positive on the stock given its cheap valuation particularly on an EV/Sales and on TILT’s numerous opportunities for profitable growth in the coming years particularly if Pennsylvania and/or Ohio pass rec legislation this year. With that said, we believe additional capital is required for growth and maturing debt and feel cash should be a focus of investors in the immediate term. We are confident that non-dilutive financing options are available however execution bears watching.

Partnership Provides Low Cost Exposure to NY

On the earnings call, management highlighted the expectation that initial contributions from TILT’s New York tribal partnership with the Shinnecock should come before year-end so long as state regulators permit existing medical operators to supply the market with wholesale product ahead of the flip to rec. TILT’s planned cultivation and production facility will likely be ready in early 2023.

Whether the opening at any scale happens this year or not, the Shinnecock operation has a runway to scale and become a significant asset in the state before the larger adult use operators are able to scale in any way. The early mover benefits could be meaningful for TILT which is contracted to collect 11.25% of all revenues collected and nearly 19% of cash in exchange for an upfront investment and management of the operation. TILT’s total investment is expected to be roughly $18M which pales in comparison to the amount being invested by MSOs in seeking out the original medical licenses (including yesterday’s >$240M investment by RIV Capital to buy Etain Health).

Additional Capital Required

TILT ended Q4 with roughly $7M in cash and has drawn down the majority of its $10M credit facility. We remain confident that TILT can be cash flow neutral with existing operations for the foreseeable future however it appears that additional financing will be required in order to fund the New York project ($18M committed) and any additional expansion projects. While management will also need capital in order to fulfill the company’s looming debts ($36M due in November and another $36M next year). In having improved the balance sheet in recent years and by becoming a more profitable operation in recent quarters, we believe management has put TILT in position to raise additional capital in a non-dilutive fashion including with a sale lease back of the recently acquired Taunton cultivation/production facility or by taking on a capital partner that has New York interests. With that said, we expect the stock performance will remain constrained until the issue is resolved.

We revise our estimates and reiterate our price target

• Revenues: Q1/22 from $65M to $50M; 2022E from $284M to $257M; 2023E initiated at $309M.
• Adjusted EBITDA Q1/22 from $9.4M to $2.2M; 2022E from $54.2M to $28.8M; 2023E initiated at $50.2M.

Our $0.50 Price Target reflects an EV/EBITDA multiple of 10.4x our 2022 estimate and EV/Sales of 1.2x and 2023 multiples of 6.0x and 1.0x respectively.

FY Income Statement ($M)

	2020	2021	2022					2023
	2020	2021	Q1 ’22E	Q2 ’22E	Q3 ’22E	Q4 ’22E	2022	Q1 ’23E	Q2 ’23E	Q3 ’23E	Q4 ’23E	2023
	Dec-20	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22	Dec-22	Mar-23	Jun-23	Sep-23	Dec-23	Dec-23
Revenues	163 .7	202 .7	50 .0 60 .0 72 .0 75 .0				257 .0	68 .0 74 .0 84 .0 83 .0				309 .0
Gross Profit	58.5	58.2	13.0 15.6 20.2 25.4				74.1	20.4 22.9 26.9 28.2				98.4
Opex	101.2	98.8	18.0 18.0 19.0 19.0				74.0	18.0 18.0 20.0 20.0				76.0
Operating Income	-42.7	-40.6	-5.0 -2.4 1.2 6.4				0.1	2.4 4.9 6.9 8.2				22.4
Other Income	-22.9	-6.8	-2.5 -2.5 -2.5 -2.5				-10.0	-2.5 -2.8 -2.8 -2.8				-10.9
Pre-tax Income	-65.6	-47.4	-7.5 -4.9 -1.3 3.9				-9.9	-0.1 2.1 4.1 5.4				11.5
Taxes	-6.6	-4.8	4.4 4.3 4.4 4.4				17.5	4.4 4.3 4.4 4.4				17.5
Net Income	-105 .8	-43 .5	-11 .9 -9 .2 -5 .7 -0 .5				-27 .4	-4 .5 -2 .2 -0 .3 1 .0				-6 .0
EPS	-0.3	-0.11	-0.03 -0.02 -0.01 0.00				-0.1	-0.01 -0.01 0.00 0.00				0.0
Shares	366.0	377.4	388.9 390.8 392.8 394.7				391.8	395.1 397.1 399.1 401.1				398.1
	0.0
Interest	-3.8	-0.6	-0.8 -0.8 -0.8 -0.8				-3.2	-0.8 -0.8 -0.8 -0.8				-3.2
Finance Expense	10.8	11.0	3.2 3.1 3.1 3.3				12.7	3.2 3.1 3.1 3.3				12.7
Income Tax	-6.6	-3.9	4.4 4.3 4.4 4.4				17.5	4.4 4.3 4.4 4.4				17.5
Depreciation	22.8	23.3	5.5 5.5 5.5 5.5				22.0	5.5 5.5 5.5 5.5				22.0
EBITDA	-35.8	-13.7	0.4 2.9 6.5 11.9				21.6	7.8 9.9 11.9 13.4				43.0
	0.0
Adjusted EBITDA	10 .2	22 .5	2 .2 4 .7 8 .3 13 .7				28 .8	9 .6 11 .7 13 .7 15 .2				50 .2
Gross Margin	36%	29%	26% 26% 28% 34%				29%	30% 31% 32% 34%				32%
Adjusted EBITDA	6%	11%	4% 8% 11% 18%				11%	14% 16% 16% 18%				16%
OPEX	62%	49%	36% 30% 26% 25%				29%	26% 24% 24% 24%				25%
Operating Income	-26%	-20%	-10% -4% 2% 8%				0%	4% 7% 8% 10%				7%
Net Income	-65%	-21%	-24% -15% -8% -1%				-11%	-7% -3% 0% 1%				-2%
Revenue Growth
Y/Y	7%	24%	7% 24% 35% 39%				27%	36% 23% 17% 11%				20%
Q/Q			-8% 20% 20% 4%					-9% 9% 14% -1%
Adjusted EBITDA
Y/Y		120%	-64% -28% 67% 184%				28%	336% 150% 66% 12%				74%
Q/Q			-54% 114% 76% 65%					-30% 22% 17% 11%

Source: Company Reports, Viridian Capital Estimates

Required Research Disclosures

Distribution of Ratings/IB Services
			IB Services in Past 12 months
Rating	Count	Percent	Count	Percent
Buy (Buy)	14	100%	0	0%
Hold (Hold)	0	0%	0	0%
Sell (Sell)	0	0%	0	0%
Not Rated (NR)	0	0%	0	0%

Analyst Certification

The research analyst responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to Bradley Woods & Co. Ltd.; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Meaning of Ratings

Bradley Woods & Co. Ltd.’s rating system of Buy, Hold, Sell, Not Rated reflects the analyst’s best judgment of risk- adjusted assessment of a security’s 24-month performance.

Buy: A Buy recommendation is assigned to stocks with low risk and approximately 10% expected return or stocks with high risk and approximately 25% expected return. The analyst recommends investors add to their position.

Hold: A Hold recommendation is assigned to stocks with low risk and less than 10% upside or less than 15% downside or to stock with high risk and less than 25% upside or less than 15% downside.

Sell: A Sell recommendation is assigned to stocks with an expected negative return of approximately 15%. The analyst recommends investors reduce their position.

Not Rated: A Not Rated recommendation makes no specific Buy, Hold or Sell recommendation.

Compensation or Securities Ownership

The analyst(s) responsible for covering the securities in this report receives compensation based upon, among other factors, the overall profitability of Bradley Woods & Co. Ltd. including profits derived from investment banking revenue and securities trading and market making revenue. Unless noted in the Company Specific Disclosures section above, the analyst(s) that prepared the research report did not receive any compensation from the Company or any other companies mentioned in this report in the previous 12 months, or in connection with the preparation of this report. Unless noted in the Company Specific Disclosures section above, neither the analyst(s) responsible for covering the securities in this report, nor members of the analyst(s’) household, has a financial interest in the Company, but in the future may from time to time engage in transactions with respect to the Company or other companies mentioned in the report.

For compendium reports (a research report covering six or more subject companies) please see the latest published research to view company specific disclosures.

Other Important Disclosures

This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell a solicitation of an offer to buy or sell any financial instruments or to particular trading strategy in any jurisdiction. The information and opinions in this report were prepared by registered employees of Bradley Woods & Co. Ltd. The information herein is believed by Bradley Woods & Co. Ltd. to be reliable and has been obtained from public sources believed to be reliable, but Bradley Woods & Co. Ltd. makes no representation as to the accuracy or completeness of such information.

Bradley Woods & Co. Ltd. is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers.

Opinions, estimates, and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Bradley Woods & Co. Ltd. and are subject to change without notice. In addition, opinions, estimates and projections in this report may differ from or be contrary to those expressed by other business areas or group of Bradley Woods & Co. Ltd. and its affiliates. Bradley Woods & Co. Ltd. has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Bradley Woods & Co. Ltd. does not provide individually tailored investment advice in research reports. This report has been prepared without regard to the particular investments and circumstances of the recipient. The securities discussed in this report may not suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. Estimates of future performance are based on assumptions that may not be realized. Furthermore, past performance is not necessarily indicative of future performance. Investment involves risk. You are advised to exercise caution in relation to the research report. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.

Bradley Woods & Co. Ltd. salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed in this research. Bradley Woods & Co. Ltd. may seek to offer investment banking services to all companies under research coverage. Bradley Woods & Co. Ltd. and/or its affiliates expect to receive or intend to seek investment-banking related compensation from the company or companies mentioned in this report within the next three months.

This research report (the “Report”) is investment research, which has been prepared on an independent basis by Bradley Woods & Co. Ltd., a member of FINRA and SIPC, with offices at 805 Third Avenue, 18th Floor, New York, NY USA, 10022. Electronic research is simultaneously available to all clients. This research report is provided to Bradley Woods & Co. Ltd. clients and may not be redistributed, retransmitted, disclosed, copied, photocopied, or duplicated, in whole or in part, or in any form or manner, without the express written consent of Bradley Woods & Co. Ltd. Receipt and review of this research report constituted your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion or information contained in this report (including any investment recommendations, estimates, or target prices) without first obtaining express permission from Bradley Woods & Co. Ltd. In the event that this research report is sent to you by a party other than Bradley Woods & Co. Ltd., please note that the contents may have been altered from the original, or comments may have been added, which may not be the opinions of Bradley Woods & Co. Ltd. In such case, neither Bradley Woods & Co. Ltd., nor its affiliates or associated persons, are responsible for the altered research report.

This report and any recommendation contained herein speak only as of the date of this report and are subject to change without notice. Bradley Woods & Co. Ltd. and its affiliated companies and employees shall have no obligation to update or amend any information or opinion contained in this report, and the frequency of subsequent reports, if any, remain in the discretion of the author and Bradley Woods & Co. Ltd.

Bradley Woods & Co. Ltd. may effect transactions in the securities of companies discussed in this research report on a riskless principal or agency basis. Bradley Woods & Co. Ltd.’s affiliated entities may, at any time, hold a trading position (long or short) in the securities of the companies discussed in this report. Bradley Woods & Co. Ltd. and its affiliates may engage in such trading in a manner inconsistent with this research report. All intellectual property rights in the research report belong to Bradley Woods & Co. Ltd. Any and all matters related to this research report shall be governed by and construed in accordance with the laws of the State of New York.

This report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Bradley Woods & Co. Ltd. and its affiliates to any registration or licensing requirements within such jurisdictions.

The Bradley Woods Form CRS, Client Relationship Summary, can be accessed here.

Original Post