Tilray Brands, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Quarter and nine months ended February 29, 2024; comparative periods ended February 28, 2023. Unaudited U.S. GAAP financial statements. Amounts below are U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and reporting period
Tilray reports four segments: beverage alcohol, cannabis, distribution and wellness. The period included the integration of HEXO, acquired in June 2023; Truss, acquired in August 2023; and eight craft beverage brands acquired from Anheuser-Busch in September 2023. These acquisitions materially affected revenue, assets, debt and year-over-year comparability.
Financial performance and liquidity
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net revenue | $188.3 | $145.6 | $559.1 | $442.9 |
| Gross profit (loss) | $49.4 | $(11.7) | $141.0 | $79.8 |
| Gross margin | 26% | (8)% | 25% | 18% |
| Operating loss | $(82.1) | $(1,206.7) | $(158.2) | $(1,279.7) |
| Net loss | $(105.0) | $(1,195.8) | $(207.0) | $(1,323.2) |
| Adjusted EBITDA (non-GAAP) | $10.2 | $13.3 | $31.0 | $37.2 |
| Cash used in operating activities | $(15.4) | $(18.6) | $(61.6) | $(35.7) |
Q3 net revenue rose 29%; nine-month revenue increased 26%. Beverage alcohol and cannabis drove most of the growth, while quarterly distribution revenue declined. Adjusted gross profit was $51.6 million and adjusted gross margin was 27% in Q3, compared with $44.3 million and 30% a year earlier. Adjusted EBITDA fell 24% in the quarter and 17% year to date; management attributed the decline primarily to cannabis gross-margin pressure.
At February 29, 2024, cash and cash equivalents were $146.3 million and marketable securities were $79.6 million, totaling $225.9 million (management’s non-GAAP measure), down from $408.3 million at the prior fiscal year-end. Working capital was $302.1 million. Total current assets were $631.2 million and current liabilities $329.1 million. Reported carrying amounts included $178.0 million of long-term debt, $209.9 million of convertible debentures and $15.0 million of bank indebtedness. The $83.4 million current APHA 24 convertible-note balance was due June 2024. Total liabilities were $869.8 million.
Capital expenditures on capital and intangible assets were $19.5 million over the nine months. Cash from investing activities was $83.3 million, largely reflecting net sales of marketable securities; financing activities used $82.3 million. Shares outstanding increased to 774.0 million at period-end from 656.7 million at May 31, 2023, mainly through acquisition consideration and debt exchanges or settlements.
Material changes versus the prior comparable period
- Q3 net revenue increased $42.8 million, supported by acquired beverage brands and HEXO/Truss, as well as cannabis growth. Beverage alcohol revenue more than doubled to $54.7 million; cannabis net revenue rose 33% to $63.4 million.
- Q3 gross profit improved from a loss to $49.4 million. The comparison benefited from the absence of the prior-year $55 million cannabis inventory valuation charge. However, adjusted gross margin fell to 27% from 30%; beverage alcohol and cannabis adjusted gross margins each declined 14 percentage points year over year.
- Prior-year operating and net losses included $934 million of impairment charges. The current quarter had no impairment charge, but included a $42.7 million non-cash write-down of the MedMen convertible note receivable.
- Nine-month operating cash use worsened by $25.9 million, which management linked mainly to settlement of pre-acquisition HEXO liabilities and the absence of a prior-year $18.3 million cash collection related to a purchase-price derivative.
- Cash and marketable securities declined 45% from May 31, 2023. The company also completed several debt exchanges and repayments and issued shares in connection with these transactions and acquisitions.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: No specific consolidated revenue or earnings guidance is provided in the filing. Management says cash, marketable securities, operating cash generation and access to external funding are expected to meet short- and long-term needs, while emphasizing a focus on positive operating cash flow and cost reduction. It notes that additional debt or equity financing may be needed for long-term growth.
- Synergies and cost actions: HEXO annualized synergy expectations were increased from $27 million to $30–35 million. Tilray reported $27.5 million achieved on an annualized run-rate basis, including $15.6 million of actual savings during the period. It is also rationalizing facilities, including plans to sell the Quebec cultivation facility and reduce outdoor cultivation.
- Market conditions: Management cites Canadian cannabis price compression, competition and fixed excise taxes; it estimated price compression reduced revenue by $3.1 million in Q3 and $9.8 million year to date. Canadian market share slipped from 12.5% to 11.6% quarter over quarter, which management associated with seasonal product preferences. The U.S. craft beer market was challenging, and distribution revenue faced IT outages, weather impacts and regulatory-rebate issues.
- Regulatory developments: Germany’s Cannabis Act and medical-cannabis reforms took effect after quarter-end, which management views as a potential market opportunity. Regulatory changes and delays in legalization remain material uncertainties.
- Debt and financing: Tilray exchanged $50.7 million principal of APHA 24 notes for shares during Q3 and stated it intended to pursue further exchanges. On April 9, 2024, it agreed to exchange another $41.9 million principal for up to 25 million shares. ABC Group had obtained a waiver addressing a potential leverage-covenant default; a related credit-agreement amendment was completed March 29, 2024.
- Unusual items and contingencies: After quarter-end, an arbitrator awarded Cannfections C$19.95 million plus interest against subsidiary High Park Farms. High Park Farms filed for bankruptcy on April 5, 2024; the company reported a $4.6 million reduction in the value of its equity investee and did not expect further financial-statement impact. A separate C$110 million damages claim, plus C$20 million aggravated damages, remains disputed; Tilray obtained summary judgment for collection of a C$7 million bridge loan plus interest and costs.
- MedMen exposure: The $32 million carrying value of the secured convertible note reflects a $42.7 million impairment in the nine-month period. MedMen appointed a chief restructuring officer and had pending asset sales; further impairment is a stated risk. The note’s conversion rights depend on U.S. federal cannabis legalization or a waiver and regulatory approvals.
- Other risks: The filing highlights acquisition integration and synergy execution, possible further asset impairments, regulatory and licensing uncertainty, intense competition, litigation, agricultural and supply-chain risks, and volatility or dilution from equity and convertible securities. Management concluded disclosure controls were effective; acquired businesses were excluded from the period’s controls assessment.
Most important facts for investors to verify
- Whether cash generation improves: operating cash flow remained negative, and cash plus marketable securities fell to $225.9 million.
- How the June 2024 APHA 24 maturity was addressed, including subsequent exchanges, cash repayments and resulting share dilution.
- Whether adjusted EBITDA and segment margins recover, particularly in cannabis and the acquired craft beverage operations.
- Whether announced HEXO synergies and facility actions translate into realized savings, and whether asset sales proceed as planned.
- The ultimate recoverability of the MedMen note and the financial and legal consequences of the Cannfections award and High Park Farms bankruptcy.
- How regulatory changes, Canadian excise taxes and price compression affect cannabis economics, and whether German reforms create meaningful commercial growth.