Tilray Brands, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2022. Unless otherwise noted, financial amounts below are in U.S. dollars, millions. Comparisons are with the corresponding prior-year period; balance-sheet comparisons are with May 31, 2022.
Business context and key financial metrics
Tilray is a global cannabis, beverage-alcohol, pharmaceutical-distribution and wellness-products company. It reports four segments: cannabis, distribution, beverage alcohol and wellness.
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $144.1, down 7% from $155.2 | $297.3, down 8% from $323.2 |
| Gross profit / margin | $40.1 / 28%, versus $32.8 / 21% | $88.7 / 30%, versus $83.7 / 26% |
| Operating loss | $(51.8), versus $(55.5) | $(73.0), versus $(124.9) |
| Net income (loss) | $(61.6), versus $5.8 | $(127.4), versus $(28.8) |
| Adjusted EBITDA (non-GAAP) | $11.7, versus $13.8 | $25.2, versus $26.5 |
| Cash from (used in) operations | $29.2, versus $(17.1) | $(17.1), versus $(110.3) |
At November 30, cash and cash equivalents were $190.2 and marketable securities were $243.3, totaling $433.5. Working capital was $388.2 (current assets $814.7 less current liabilities $426.5). Current liabilities included $181.5 of convertible debentures and $20.7 of current long-term debt. Long-term debt was $172.8 net of financing fees; convertible debentures totaled $404.8. Bank indebtedness was $15.3. The company reported compliance with debt covenants.
Material changes versus prior period
- Revenue declined, principally in cannabis and distribution. Cannabis net revenue fell 15% for the quarter and 16% for six months; distribution revenue fell 13% and 11%, respectively. Beverage-alcohol revenue increased 56% and 44%, mainly reflecting Breckenridge and Montauk acquisitions. Wellness revenue declined 8% and 9%.
- Higher gross profit and reported margin partly reflect the absence of a $12.0 million cannabis inventory write-down recorded in the prior-year periods. Adjusted gross profit, excluding inventory valuation adjustments and purchase-accounting step-up, was $41.2 million for the quarter, down 8%, and $91.0 million for six months, down 5%.
- The prior-year period included significant favorable fair-value movements. This period recorded non-operating expense of $18.5 million for the quarter and $51.4 million for six months, versus income of $65.6 million and $115.3 million. Changes in convertible-debt and warrant valuations, foreign exchange and other derivative items contributed to the comparison.
- Cash from operations improved for the quarter, but six-month operating cash flow remained negative. Investing cash outflow was $272.9 million, including $243.2 million for marketable securities and cash paid for Montauk. Cash and cash equivalents declined $225.7 million from May 31.
- Share count increased from 532.7 million at May 31 to 613.2 million at November 30. Six-month equity activity included 32.5 million shares issued under the ATM program for $129.6 million net proceeds, as well as shares issued in connection with HEXO and other transactions.
Guidance, outlook, commentary, risks and unusual items
- The filing provides no formal consolidated revenue or earnings guidance. Management says it is pursuing positive operating cash flow and free-cash-flow generation, including through cost reductions and reduced production in response to slower-than-expected legalization.
- Management reported $19.6 million of annualized run-rate savings achieved against a $30 million cannabis cost-optimization plan; $6.3 million represented savings realized during the period. It also said the $100 million annualized Tilray-Aphria synergy target had been achieved.
- Under its HEXO alliance, Tilray recognized $7.9 million of advisory-services revenue in the quarter and $15.7 million for six months. Management expected approximately $40 million of revenue and interest income in the first 12 months under the note and related arrangements. Realization of expected alliance savings and returns is uncertain.
- Management anticipated potential recovery of Quebec cannabis sales volume in the second half of the fiscal year after discontinued products affected market share. It cited Canadian price compression, excise taxes, competition and changing demand for higher-potency products. European adult-use legalization remains uncertain and may progress more slowly than previously expected.
- Business exits and customer issues increased the quarterly net loss by an aggregate $9.6 million, including a $3.1 million Israel revenue return adjustment, inventory and gross-profit reductions, exit and bad-debt costs, and a $2.2 million write-off of distribution-business assets. The filing also describes a one-time wellness customer inventory reduction.
- Montauk was acquired November 7, 2022 for $35.1 million initially, including $28.7 million cash and $6.4 million in shares, with up to $18.0 million additional contingent cash consideration. The purchase-price allocation was preliminary.
- A proposed $39.9 million cash settlement of Tilray reorganization litigation was submitted to the Delaware Court of Chancery on December 20, 2022, after quarter-end; it required court approval. Tilray shareholders would not receive direct payment. Other disclosed litigation includes securities and commercial disputes; outcomes are uncertain.
- Key risks include regulatory and legalization uncertainty, intense competition and price pressure, macroeconomic and foreign-exchange volatility, inflation and interest rates, execution of acquisitions and strategic alliances, potential litigation exposure, and the company’s history of net losses. Management stated that cash, marketable securities, operating cash generation and external funding access were expected to meet liquidity needs, while noting possible future debt or equity financing needs.
Important facts for investors to verify
- Whether cash, marketable securities and operating cash generation can cover near-term debt maturities and ongoing cash requirements; confirm the terms and repayment or conversion options for the 2023 convertible notes.
- Whether reported cash-flow improvement is sustainable: six-month operating cash flow remained a use of $17.1 million, and adjusted EBITDA is a non-GAAP measure.
- How much reported cannabis profitability depends on HEXO advisory fees, and whether expected alliance savings and the stated first-year $40 million contribution are realized.
- Whether cannabis revenue, Canadian market share and margins recover, particularly in Quebec, amid price compression, excise-tax burdens and changing product preferences.
- The final Montauk acquisition valuation and contingent consideration, the court’s decision on the proposed $39.9 million settlement, and developments in other litigation.
- The effects of share issuance and potential conversion or exercise of convertible securities and warrants on future dilution.