Tilray Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended August 31, 2022; unaudited results, in U.S. dollars. Tilray operates cannabis, distribution, beverage alcohol and wellness businesses across North America, Europe and other markets.
Financial performance and position
| Metric | Quarter ended Aug. 31, 2022 | Prior-year quarter |
|---|---|---|
| Net revenue | $153.2 million | $168.0 million |
| Gross profit / gross margin | $48.6 million / 32% | $51.0 million / 30% |
| Operating loss | $(21.2) million | $(69.4) million |
| Net loss | $(65.8) million; $(0.13) per share | $(34.6) million; $(0.08) per share |
| Adjusted EBITDA (non-GAAP) | $13.5 million | $12.7 million |
| Cash used in operating activities | $(46.3) million | $(93.2) million |
Gross profit and revenue declined year over year, while reported gross margin rose to 32% from 30%. Adjusted gross profit, excluding purchase-accounting inventory step-up, was $49.7 million and adjusted gross margin was 32%. The company attributed adjusted EBITDA improvement to cost efficiencies, while noting revenue and gross profit pressure, including currency effects.
Net loss worsened despite lower operating expenses, principally because non-operating items swung from $49.7 million of income to $33.0 million of expense. The current quarter included a $25.6 million foreign-exchange loss and a $7.9 million loss from the fair-value change in convertible debentures; the prior-year quarter included a $39.4 million gain on convertible debentures.
At August 31, cash and cash equivalents were $490.6 million, current assets $910.9 million, current liabilities $273.3 million and working capital $637.6 million. Cash increased $74.7 million during the quarter, mainly reflecting $129.6 million of net proceeds from ATM share sales, partly offset by operating cash use. Carrying amounts included $178.4 million of long-term debt, $444.3 million of convertible debentures and $18.3 million of bank indebtedness. The company reported compliance with long-term debt covenants.
Material changes versus the prior-year quarter
- Total revenue decreased 9%; on the company’s constant-currency basis, it decreased 1% to $166.5 million.
- Cannabis net revenue fell 17% to $58.6 million, principally reflecting Canadian market price compression and competition. Canadian adult-use revenue declined 16%; reported market share was 8.5%, versus 15.3% a year earlier. The quarter included $7.8 million of HEXO advisory-services revenue.
- Distribution revenue fell 10% as reported, but increased 5% on a constant-currency basis. Beverage alcohol revenue rose 34%, primarily reflecting the Breckenridge acquisition. Wellness revenue declined 10%.
- Operating expenses fell 42% to $69.8 million, substantially reflecting transaction income of $12.8 million versus transaction costs of $24.4 million in the prior-year quarter. General and administrative expense and amortization also declined.
- The company issued 32.5 million shares through its ATM program for $129.6 million net proceeds and 33.3 million shares as part of the HEXO note transaction. Shares outstanding were 601.0 million at quarter-end.
Outlook, management commentary and risks
- HEXO alliance: Agreements include advisory services, co-manufacturing and procurement/cost-savings arrangements. Tilray received an $18 million annual advisory fee; management expected approximately $40 million of revenue and interest income in the first 12 months, comprising about $31 million of adult-use cannabis revenue and $9 million of interest income. These are transaction-specific expectations, not company-wide revenue guidance.
- Cost initiatives: The cannabis business’s additional $30 million optimization plan had achieved $13 million of annualized run-rate savings, including $2 million of savings in the quarter. The Tilray-Aphria integration had generated $95 million of run-rate synergies and $65 million of actual cash savings; management anticipated another $5 million by fiscal year-end, for $100 million of identified synergies.
- Liquidity outlook: Management stated that cash, cash equivalents, operating cash generation and access to external funding were expected to meet domestic and foreign capital needs for the foreseeable future. Operating cash flow remained negative in the quarter, and the filing identifies substantial scheduled debt and convertible-note obligations.
- Subsequent event: On September 15, 2022, Tilray purchased $50 million principal amount of its TLRY 23 convertible debentures for cancellation; remaining principal was $139.8 million.
- Market and operating risks: Management cited intense cannabis competition, price compression, regulatory and legalization uncertainty, inflation, higher interest rates, supply-chain disruption, currency volatility and the Russia-Ukraine conflict. It also noted provincial delivery disruptions, including strikes and cyber-attacks, which it estimated reduced quarterly sales by $2.5 million.
- Legal matters: A Delaware reorganization-litigation settlement was agreed in principle for $26.9 million payable to Tilray, subject to definitive agreements and court approval. The Docklight litigation remained ongoing. The company said it intended to defend the claims and could not assure outcomes.
- The company reported no material off-balance-sheet arrangements and concluded disclosure controls and procedures were effective as of August 31, 2022.
Important facts for investors to verify
- Whether cannabis revenue and reported market share stabilize, and whether the improved cannabis margin persists excluding HEXO advisory revenue.
- Realization and cash impact of the HEXO alliance, including advisory fees, shared savings and the value and collectability of the convertible note receivable.
- Progress converting announced cost synergies and optimization run rates into sustained cash savings.
- Cash burn, working-capital requirements, debt maturities and the effects of subsequent convertible-debenture repurchases and potential conversions.
- Final terms, timing and court approval of the proposed $26.9 million litigation settlement, as well as developments in other litigation.
- Exposure to foreign-exchange movements, cannabis regulation and legalization, market price compression, inflation and financing conditions.