Business context and reporting period
Tilray Brands, Inc. filed this unaudited Form 10-Q for the three months ended August 31, 2023, its fiscal 2024 first quarter. The company operates in cannabis, beverage alcohol, distribution and wellness. Results include HEXO from its June 22, 2023 acquisition and Truss from August 3, 2023; the prior-year comparison does not include these acquisitions on a consolidated basis. All amounts below are U.S. dollars.
Financial performance
| Metric | Q1 FY24 | Q1 FY23 | Change |
|---|---|---|---|
| Net revenue | $176.9m | $153.2m | +15% |
| Gross profit / margin | $44.2m / 25% | $48.6m / 32% | Margin down 7 percentage points |
| Operating loss | $(34.4)m | $(21.2)m | Loss widened |
| Net loss | $(55.9)m | $(65.8)m | Loss narrowed 15% |
| Net loss attributable to Tilray shareholders | $(71.5)m | $(73.5)m | Loss narrowed |
| Basic and diluted loss per share | $(0.10) | $(0.13) | Improved |
| Adjusted EBITDA (non-GAAP) | $11.4m | $13.5m | Down 15% |
| Operating cash flow | $(15.8)m | $(46.3)m | Cash use reduced |
| Cash and marketable securities, net of restricted cash (non-GAAP) | $464.9m | $490.6m at August 31, 2022 | Down $25.8m year over year |
Revenue growth was led by cannabis, distribution and beverage alcohol. Net cannabis revenue rose 20% to $70.3m, distribution revenue rose 14% to $69.2m, and beverage alcohol revenue rose 17% to $24.2m. Wellness revenue was nearly flat at $13.3m. Cannabis gross margin fell to 28% from 51%; excluding acquisition inventory step-up, adjusted cannabis gross margin was 35% versus 51%. Total adjusted gross margin (non-GAAP) was 28%, compared with 32%.
Liquidity, debt and capital
At August 31, 2023, cash and cash equivalents were $177.5m, marketable securities were $287.3m and restricted cash was $1.6m. Working capital was $292.0m, versus $637.6m at August 31, 2022. The filing attributes the lower year-over-year working capital largely to the prior-year equity financing and changes in current liabilities.
Balance-sheet carrying amounts included $166.0m of long-term debt, $14.6m of bank indebtedness and $372.5m of convertible debentures. The company reported compliance with long-term debt covenants. The $127.3m carrying amount of TLRY 23 notes was due October 1, 2023; after quarter-end, Tilray repurchased $20.0m principal with shares and cash, then repaid the remaining $107.3m in cash on October 2. The company also issued 39.7m shares for the HEXO acquisition and other shares for settlements and note conversion. It had 723.3m shares outstanding at quarter-end and 730.3m on October 2.
Operating cash use improved year over year, while investing activities used $26.3m, including $45.4m of net purchases of marketable securities, partly offset by cash acquired with HEXO. Financing activities provided $14.0m. The statement of cash flows reports ending cash, including restricted cash, of $179.1m.
Material changes, outlook and risks
- Acquisitions and integration: HEXO contributed to Canadian adult-use growth and reported market share gains. Management cited a $27m annualized pre-tax HEXO synergy target; $17.1m of run-rate savings had been achieved, including $2.9m of actual savings during the quarter. The company also reported $22m of run-rate savings against its existing $30m cannabis cost-optimization plan and $6.8m of run-rate savings against an $8m international cannabis plan.
- Margin pressure: Management estimated Canadian cannabis price compression reduced quarterly revenue by about $3.1m. Higher excise taxes, intense competition and a wholesale cannabis sale with a $2.7m negative gross-profit impact also pressured results. Management cautioned that facility optimization and integrating acquired operations may temporarily weigh on performance.
- Management outlook: No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said it is focused on positive operating cash flow and free-cash-flow generation, and stated that cash, marketable securities, operating cash generation and potential external funding are expected to meet near- and long-term needs. These are forward-looking statements, not guarantees.
- Subsequent events: Tilray completed its acquisition of craft beer brands and businesses from Anheuser-Busch on September 29, 2023, for $85m cash, subject to adjustments; $20m was drawn under a delayed-draw loan to help fund it. The filing warns that expected acquisition benefits may not be realized.
- Contingencies and other risks: Litigation accruals were $35.1m, up from $25.0m at May 31, primarily reflecting liabilities assumed with HEXO, net of settlements. The company says unfavorable litigation outcomes could be material. Other highlighted risks include cannabis regulation and legalization, competition and price compression, acquisition integration, possible further asset impairments, agricultural and supply-chain risks, and financing or dilution related to debt, warrants and convertible securities.
- Unusual items: The quarter included $8.5m of transaction costs, $2.0m of litigation costs and $0.9m of restructuring costs. A $11.1m fair-value gain on contingent consideration reduced operating expenses; fair-value and foreign-exchange movements also affected non-operating results.
Most important facts for investors to verify
- Whether post-quarter repayment of TLRY 23 and the craft-beer acquisition funding leave adequate liquidity after scheduled debt, interest and integration costs.
- Whether HEXO and other cost-saving plans deliver the stated savings, and whether those savings offset cannabis margin compression and excise-tax pressure.
- How much reported revenue growth reflects acquired businesses versus organic growth, and how acquired operations perform after integration.
- Whether the company can convert positive adjusted EBITDA into sustained positive operating and free cash flow; adjusted EBITDA is non-GAAP and excludes significant expenses.
- Progress and potential exposure in material litigation, acquisition contingencies, warrants and convertible securities, including possible share dilution.
- The filing’s control evaluation refers to effectiveness as of May 31, 2023; verify the period-specific assessment and the implications of excluding acquired businesses from the controls review.