Tilray Brands, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended November 30, 2023. Unaudited results are presented in U.S. dollars. The business spans cannabis, beverage alcohol, pharmaceutical distribution and wellness.
Financial results and liquidity
| Metric | Three months ended Nov. 30, 2023 | Prior-year quarter | Six months ended Nov. 30, 2023 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $193.8 million | $144.1 million | $370.7 million | $297.3 million |
| Gross profit | $47.4 million | $42.9 million | $91.6 million | $91.5 million |
| Gross margin | 24% | 30% | 25% | 31% |
| Operating loss | $41.8 million | $51.8 million | $76.1 million | $73.0 million |
| Net loss | $46.2 million | $61.6 million | $102.0 million | $127.4 million |
| Adjusted EBITDA (non-GAAP) | $10.1 million | $11.0 million | $20.8 million | $23.8 million |
| Operating cash flow | $(30.4) million | $29.2 million | $(46.3) million | $(17.1) million |
Quarterly diluted and basic loss per share was $0.07, compared with $0.11 a year earlier. Net loss attributable to Tilray shareholders was $49.0 million for the quarter and $120.5 million for the six months.
Segment performance: Quarterly net revenue rose across cannabis (35%), distribution (12%) and beverage alcohol (117%); wellness was up 2%. Cannabis gross margin fell to 31% from 43%, while beverage alcohol gross margin declined to 34% from 47%. Distribution gross margin was 11% versus 13%, and wellness was 29% versus 31%. Management cited cannabis pricing, mix and integration effects, and lower utilization at acquired breweries as margin pressures.
Liquidity and debt: Cash and cash equivalents were $143.4 million and marketable securities $116.4 million at November 30, 2023, totaling $259.8 million, down from $448.5 million at May 31, 2023. Working capital was $247.0 million. The company used $46.3 million in operating cash during the six-month period. Long-term debt was $182.1 million net of financing costs; convertible debentures totaled $252.1 million carrying value, and bank indebtedness was $20.2 million. Current liabilities included $128.4 million of convertible notes, including APHA 24 notes maturing in June 2024.
Material changes and notable items
- Revenue growth reflects acquisitions and expanded operations, notably HEXO, acquired June 2023; Truss, acquired August 2023; and a craft beverage portfolio acquired in September 2023. Acquisition-driven growth should be distinguished from organic growth.
- Tilray issued approximately 39.7 million shares for HEXO and issued shares in other debt settlements and transactions. Shares outstanding increased to 732.9 million at November 30, 2023, from 656.7 million at May 31, 2023; 742.7 million were outstanding January 5, 2024.
- Six-month interest expense increased to $18.5 million from $7.5 million. The company repaid the remaining TLRY 23 notes at maturity in October 2023 and settled its HTI convertible note in shares. After the quarter, it exchanged $18.5 million principal of APHA 24 notes for shares.
- Acquisition-related costs, restructuring, fair-value changes and foreign exchange affected reported results. The six-month results included a $10.8 million operating expense benefit from the change in fair value of contingent consideration; fair-value movements also affected non-operating income or expense.
Outlook, management commentary and risks
- Management says it is focused on cost control, positive operating cash flow and free-cash-flow improvement. It expects to realize HEXO synergies over time: the target was increased to $30–$35 million of annualized pre-tax savings, with $22 million achieved on an annualized run-rate basis by November 30, of which $14 million represented savings during the period.
- No specific consolidated revenue or earnings guidance is provided in the filing. Management expects to continue pursuing cost savings and may require additional debt or equity financing to fund long-term growth and acquisitions.
- Canadian cannabis market share dipped from 13.4% to 12.5% versus the immediately preceding quarter, according to cited market data. Management attributed this partly to acquisition integration and product availability gaps, and anticipated recovery as integration issues are addressed. Price compression reduced revenue by an estimated $3.6 million for the quarter and $6.7 million for the six months.
- European cannabis legalization may progress more slowly than previously expected. Management views possible German regulatory changes as an opportunity, but timing and final rules remain uncertain.
- As of November 30, 420 was not in compliance with a leverage-ratio covenant under its secured credit agreement. The lender granted a waiver on January 5, 2024. This is a material liquidity and covenant matter.
- Reported litigation accruals were $25.3 million. The company settled Docklight litigation for $3.0 million and settled a HEXO-related MediPharm judgment through cash, product credits, shares and other consideration. Other legal matters remain, including a securities class action and a contractual dispute seeking substantial damages; outcomes are uncertain.
- Other risks include cannabis regulation and licensing, competition and price pressure, acquisition integration and synergy execution, potential asset impairments, agricultural and supply-chain risks, beverage demand, litigation, dilution and the company’s history of net losses.
Most important facts for investors to verify
- Whether operating cash burn improves and the company can meet near-term obligations, particularly the APHA 24 maturity in June 2024.
- Whether the 420 covenant waiver resolves the breach risk and what conditions or ongoing covenant requirements apply.
- Whether reported revenue growth is sustained after separating acquisitions, currency effects and discontinued HEXO advisory revenue; and whether cannabis and beverage gross margins recover.
- Whether management delivers the stated HEXO savings target and integrates HEXO, Truss and the craft beverage acquisitions without further material costs or impairments.
- The timing and cost of remaining litigation and contingencies, and the final purchase-accounting valuations for recent acquisitions.
- The effects of further debt exchanges, share issuance or other financing on dilution and the capital structure.