Tilray Brands, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended November 30, 2021. Unaudited consolidated financial statements are in U.S. dollars. Tilray acquired Aphria on April 30, 2021; the prior-year comparative results are Aphria’s, and the filing cautions that comparisons may not be meaningful.
Financial performance and position
Unless noted otherwise, amounts are in millions of U.S. dollars.
| Metric | Three months ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Net revenue | $155.2; up 20% | $323.2; up 31% |
| Gross profit / margin | $32.8 / 21%, versus $35.3 / 27% | $83.7 / 26%, versus $70.2 / 28% |
| Operating loss | $(54.7), versus $(26.0) | $(123.2), versus $(34.4) |
| Net income (loss) | $5.8, versus $(89.2) | $(28.8), versus $(111.0) |
| Adjusted EBITDA (non-GAAP) | $13.8, versus $10.1 | $26.5, versus $18.2 |
| Operating cash flow | $(17.1), versus $2.4 | $(110.3), versus $(53.7) |
| Free cash flow (non-GAAP) | $(24.1), versus $(6.9) | $(125.9), versus $(76.9) |
- Quarterly reported net income included $64.8 million of non-operating income, primarily fair-value gains on convertible debentures and warrants. Tilray-attributable net loss was $0.2 million for the quarter and $41.9 million for the six months.
- Cash and cash equivalents were $331.8 million at November 30, down $156.7 million from May 31. Working capital was $393.4 million.
- Long-term debt had a net carrying amount of $183.3 million; convertible debentures were $554.9 million and bank indebtedness was $8.7 million. The company reported compliance with all long-term debt covenants.
- Total assets were $5.76 billion, including $2.81 billion of goodwill and $1.45 billion of intangible assets. Total shareholders’ equity was $4.47 billion.
Material changes and business developments
- Revenue growth reflected the broader business following the Aphria combination and SweetWater acquisition. Cannabis net revenue rose 7% in the quarter; beverage alcohol and wellness added $13.7 million and $13.8 million, respectively, while distribution revenue fell 7% to $68.9 million.
- Canadian adult-use cannabis revenue declined 15% in the quarter to $49.5 million. Management cited price-focused consumer behavior, discounting and increased competition; Canadian market share fell to 12.8% from 15.7% at May 31.
- Cannabis gross margin fell to 23% from 46% in the quarter, reflecting higher-cost legacy Tilray products and a $12.0 million inventory write-down. Excluding that write-down, cannabis adjusted gross margin was 43%.
- Operating expenses increased, notably amortization ($29.0 million in the quarter) and transaction costs. For the six months, transaction costs were $33.7 million.
- Cash used in operating activities increased year over year. Management cited payments associated with the Arrangement, taxes and lower accounts payable, partly offset by inventory reductions and receivable collections.
Outlook, commentary, risks and unusual items
- Management said it had achieved $70 million in annualized run-rate cost savings and $36 million in actual cash savings from integration efforts as of the filing date; the company had committed to at least $80 million of synergies.
- The company’s stated strategic ambition includes reaching $4 billion of revenue by the end of fiscal 2024; this is a goal, not a specific quarterly forecast. The filing provides no clear near-term revenue or earnings guidance.
- Management said it believed existing cash, cash generated from operations and access to external funding would meet foreseeable capital needs. However, operating cash flow and free cash flow were negative for the six-month period.
- COVID-19 effects included price-driven shifts in Canadian cannabis purchasing, delays in international medical-cannabis access, pressure on on-premise beverage sales and supply-chain disruption. Management said the duration and impact remained uncertain.
- Key risks include integration and synergy execution, evolving cannabis regulation and licensing, competition and pricing, supply-chain and facility disruption, litigation, international operations, stock volatility, and the ability to fund or settle convertible securities. The company also highlighted its history of losses and uncertainty around achieving its long-term revenue ambition.
- Subsequent to quarter-end, Tilray acquired Breckenridge Distillery for $102.9 million in shares, acquired the SweetWater brewery property for $30.7 million and Alpine and Green Flash brand assets for $5.1 million. A December credit amendment reduced outstanding debt under the facility to $79.4 million, raised the line of credit to $30.0 million, and the company drew $10.0 million.
- The company reported that disclosure controls were effective. The assessment excluded internal controls over financial reporting at legacy Tilray, which represented 25.8% of quarterly revenue; integration of those controls remained in progress.
Facts investors should verify
- Whether Canadian cannabis pricing and market-share pressure continue, and whether the planned shift toward more price-competitive products improves sales without further weakening margins.
- Progress toward the $80 million synergy commitment, including whether reported run-rate savings translate into sustained cash savings and improved operating performance.
- The quality and repeatability of reported net income and Adjusted EBITDA, given large fair-value movements, non-GAAP adjustments and acquisition-related expenses.
- Cash burn, liquidity after subsequent acquisitions and borrowing, upcoming debt maturities, and potential dilution from share-funded transactions and convertible securities.
- Integration of acquired businesses and internal controls, as well as developments in the disclosed litigation and regulatory environment.