Tilray Earnings release July 28, 2022 and financials published later that day.

What I said last Q

Revenue might tell a story of consumers like a duck on a pond, but Gross Margin is the furious paddling that duck is doing out of view under the water.  And Tilray’s duck is paddling.

Pluses

• International cannabis sales increase to $15.8 million +$2.1 million +15%
• Beverage sales increase +$5.9 million +43%, as they add Breckenridge Distillery in Dec 2021 (PP $114 million of which 100% is Goodwill and Intangible. Run rate of $6 million revenue per Q) and SweetWater Fort Collins facility adds sales.
• Gross Margin increase QoQ by $7.1 million but… see minuses
• SGA flat QoQ but in the mix is an insurance claim receipt from CC Pharma and last year’s flooding for $4.0 million and $0.9 million in gain on sale. SGA are understated.
• +Net Income +$52 million but … see minuses

Minuses

• Sales go backwards QoQ $3.2 million -2%
• Cannabis revenue decreases QoQ $3.7 million or -6%
• Adult Use cannabis sales decreases QoQ $6 million or -12%
• Distribution revenue decrease $6.3 million -9%, but apparently that is USD to Euro FX driven when comparing YoY. But Distribution GM also decreases.
• Gross Margin increase QoQ by $7.1 million BUT last Q they had a $12 million impairment. Net of impairment GM falls $4.9 million or 11% in $s to 26% of sales from 29%.
• Cannabis GM net of Impairment decreases QoQ by $7.5 million to 30% of cannabis sales, the lowest level that I can find. Apparently, the wholesale revenue of $2.8 million was getting rid of stale inventory which was sold at a negative margin. Without that it was reportedly 40%. I have it at 39%.
• aEBITDA (their figure) decreases from $13.8 million to $10.1 million
• aEBITDA (my figure) decreases from $12.1 million to $2.7 million.  Difference from above includes insurance proceeds in Feb/22, facility open/closure costs, and gain on sale.
• Net Income was aided by $29 million in change in fair value of contingent liability and $73 million unrealized gains on convertible debenture and warrant liability, all because stock price fell.

This Q:

And the duck (and GM) is being held underwater this Q… Unless they fix production to sales the duck will drown.

Pluses

• Gross Adult Use revenue QoQ +$3 million or +8% (Note: excise tax increase $1 million QoQ, which, given medical is flat, is likely attributable to adult use.  This would reduce the adult use revenue by $1 million or +$ 2 million)
• Distribution revenue QoQ +$4 million or + 7%
• Wellness revenue QoQ increases $1.5 million or + 10%
• OPEX Burn improved $10 million QoQ to -$5 million.

Minuses

• Net Revenue QoQ declines $10 million or -6%
• Net cannabis revenue QoQ (all segments) -$1.3 million or -2%
• International cannabis revenue QoQ decreases $2 million or -11%
• Alcohol, despite Breckenridge for full Q, decreases $4 million or -19%
• Gross Margin negative, as $47.5 million in cannabis inventory and $7.5 million in distribution inventory was impaired.
• SGA (remember … last Q they ran an insurance claim credit from CC Pharma through SGA of $5 million) increased $7.5 million QoQ.
• aEBITDA (my figure) was $4 million or +$1.4 million QoQ
• Impairment of Long-term assets of $378 million. Attributable to rationalization of production assets given Hexo working agreement.

Now, open up the financials and MDA and let’s get to it, shall we.

Income Statement Drivers and Breakeven Sales Levels – Trend CAD

Sales

Table 1 Sales Segmentation

Tilray recorded a -6% decrease in Net Revenue of $10 million to $142 million QoQ, the lowest sales Q of F22. Sales are on a QoQoQoQ downtrend, with May 2021 sales not reflecting a full Q of combined sales of Tilray-Aphria.

Cannabis revenue (net excise) decreased $1.3 million or -2%.

In the August 2021 Q, Distribution revenue was impacted by four days of flooding in Germany (they had an insurance claim for $4 million – paid in Q3F22 – under business interruption insurance but that does not show up on top line revenue) and continues its rocky covid period.  This Q revenue increases by USD 4.3 million +7%, second worst Q of F22. Exchange rate is partially to blame. But sales remain even below flood impacted August 2021 by $0.5 million.

Alcohol net revenue decreased $3.7 million -19% to $16.5 million.  Breckenridge acquisition contributes $6 million per Q.  Sweetwater did expand into new states and are producing new products (more seltzers, 420 Imperial, and hard teas), so the decrease QoQoQ including a full Q of Breckenridge is a little concerning. More effort for less sales is not a good combination.

Wellness (Manitoba Harvest) contributed $16 million or +$1.5 million, while old Tilray last full Q was $17 million, which represents a -6% decrease.  Two q’s ago they indicated that MH has stabilized at that level. They believe this is the new level of sales for MH.

Cannabis revenue before excise tax removal:

• Cannabis Revenue increased $2.2 million or +3% to $71.4 million before excise and decreased $1.3million and -2% after excise.
  • Adult use was +8% increasing by $3.4 million to $47 million.
  • Medical increased +3% by $0.2 million to $7.2 million.
  • Wholesale decreased $2.7 million in sales to $0.1 million and
  • International decreased $1.7 million to $14.1 million.   They indicate they withheld a $6 million shipment to Israel as they were worried about collection of the A/R.

• Distribution Revenue increased $4.3 million or +7% to $69 million, F/X Euro to USD assisted.
• Alcohol recorded $16 million in sales after excise or -19% -$4 million. Breckenridge acquisition was onboard for the entire Q versus a partial Q in prior Q. The QoQ drop of $3.9 million inclusive of a full Q of Breckenridge is something to watch.
• Wellness was $16.1 million +$1.5 million +10% QoQ, still tracking below old Tilray’s last Q of $17 million.

Adult Recreational Cannabis Revenue: Trend and Peer- CAD

Recreational sales decreased CAD +0.7 million.  Recreational sales are CAD 33 million (including excise) from peak in Q1F22. Note: there is some FX exchange at play QoQ as USD strengthened against the CAD and EURO (IIRC… in CC they said the monthly would have added 4% sequentially to cannabis revenue without the fx). 

Medical Cannabis Revenue: Trend and Peer- CAD

Canadian Medical increased by $0.1 million to CAD 8.9 million, while international medical decreased CAD 1.8 million. The Tilray’s medical platform trails CGC and ACB.

Wholesale Cannabis Revenue: Trend and Peer

Wholesale of CAD 0.1 million versus CAD $3.5 million last Q which they sold at a loss.

Income Statement Drivers and Breakeven Sales Levels – Peer

Note: Tilray, Hexo, CGC, Sundial and ENTG breakeven could not be calculated due to negative GM%. 

Tilray is the largest company by sales in the peer set.  Sales do include C$ 84 million in Distribution, C$21 million alcohol sales and $20 million in wellness.

Gross Margin:

Table 2: Gross Profit per Segment

Overall gross margin decreased to -4% vs 26% QoQ and decreased to -$7 million this Q in absolute terms from +US$ 40 million, for a decrease of $47 million in absolute Gross Margin. GM was hampered by $47.5 million in cannabis impaired inventory and $7.5 million in Distribution impaired inventory. Removing the impairment and GM improved +$11 million QoQ. But keep in mind prior Q’s GM would have been inflated due to the spreading of costs over that impaired inventory.

• -$37 million in cannabis GM to -$19 million, with a $47 million impairment. No mention of returns or unabsorbed overhead. But they did reduce pricing
• -$0.1 million in GM from alcohol with a 17% GM to $11 million.  Breckenridge addition for a full Q was not enough to move GM upwards.
• Distribution GM was -$4 million and dropped to -25% after +8% the prior Q. This is the lowest Distribution GM$ since acquisition. Any cannabis revenue is not included in Distribution but in international sales.
• Wellness had a GM of 30% or $5 million, slid QoQ from 36% and $5.3 million and above Old Tilray 25% last Q, and now in the 33-42% range in the prior three Qs of Old Tilray.

C-suites like to tout “noncash charges” when they impair inventory PPE, goodwill, and intangibles.  It is really “no new cash” as they did get money from shareholders in the past to pay for what they impaired. Putting this Q’s inventory impairments into perspective:

• The $7.5 million cannabis impairment at their Adjusted GM of 6% would require fresh revenue of $125 million to make that back for shareholders. That is over a 2.0X Q in incremental revenue, without further impairment.

“Noncash” but costly, especially when you factor they need incremental revenue to recoup, and revenue has been going backwards QoQoQ.

Gross Margin Cannabis Trend and Peer

The above is strictly the cannabis GM%.

What we said four Qs ago: Expect cannabis GM to be under some pressure as the Tilray acquired inventory and inventory produced at the old Tilray facilities, which costs more than old Aphria, gets sold through.

Tilray impaired inventory by $47.5 million in the Q.  They indicate they are rationalizing inventory as Hexo agreement has Aphria One production moving to Hexo and Hexo production moving to Aphria One.

If you believe inventory impairments are over and they have rightsized production… then the 53% Adjusted GM on cannabis is quite good.

Gross Margin Large Peer Group

GM has entered the basement at -4%.

Operating Expenses:

SGA & SBC as % of Sales: Trend Analysis

Note: I strip Transaction Costs, Long Term asset Impairment, Fair Value changes in contingent consideration from Opex to provide a more consistent peer comparison.

Trend line is not promising.

G&A increased by $3.3 million to $32 million. But last Q had credits in G&A of $4 million and $0.9 million in Insurance proceeds and gain on sale which, if netted, would have yielded GA of $43 million.  As such, this Q showed a $1.7 million improvement. Insurance and rent were the biggest contributors to the decrease with an aggregate improvement of $3.2 million… but these might be Q4 true ups unless the shuttering of facilities yielded lower expenses in Q4.

Selling and marketing expenses increased +$4.2 million to $20 million QoQ and +2% to 13% as a percentage of sales QoQ.   It would be nice to see this expense translate into increased sales.

SBC was $9.0 million for the Q versus $9.4 million the prior Q, decreasing to 5.8% of sales from 6.2%. 

In Q1F22 SGA was $53 million. In Q4F22 SGA is $53 million.  Granted they added Breckenridge in Q3, but I am having trouble seeing the improvement.

Rounding out Opex is:

• R&D of $0.05 million vs $0.2 million last Q
• Amortization of non-production intangible assets of $31 million versus $25 million last Q. Adding Breckenridge for the full Q the likely reason.

Overall Opex was increased by $13 million to $93 million QoQ (61% of sales from 52%) QoQ.

SGA & SBC as % of Sales: Peer Comparison

Compared to Peers, Tilray is the second lowest in combined SGA & SBC at 35% with VFF ahead at 24%.  Again, Tilray has a low margin high revenue Distribution business that drives the lower figure and a US GAAP SBC advantage to all but CGC, who is also US GAAP. VFF has low-cost tomato business impacting their figures.

Net Operating Profit:

NOP was negative $99 million versus negative $40 million last Q.  Decrease in GM of -$46 million (all impairment related) and increase in Opex +$13 million was reason.

+NOP Breakeven Sales

With a negative GM, we cannot calculate breakeven sales required for +NOP.

Other Income & Expenses of Note:

• Finance Expense:
  • Interest Expenses NET was $5.5 million versus last Q $2.3 million. On annual basis, they had interest income of $12 million versus interest expense of $40 million.

• Other Expenses and Income of note:
  • Transaction costs of $1.2 million related to Hexo and other transactions they reviewed. This was $9.2 million last Q.  Transaction costs is a regular event. The last Q without Transaction costs is November 2017.
  • $378 million impairment of long term assets. All cannabis related. LATAM G/I has been written off as well as other cannabis G/I.
  • $4 million in litigation costs. Likely due to settlement reached in July 2022 for $27 million in lawsuit.
  • Unrealized gain on Convertible Debentures of $12 million versus a gain prior Q of $56 million. Related to falling share price for the convertible feature.
  • Change in fair value of warrants of $5 million after $21 million last Q. Stock prices decreasing the reason
  • Gain on long term investment of $8 million versus loss of $3.3 million last Q on MedMen.
  • Change in FV of contingent consideration provides Income of $16 million as EBITDA targets for Sweetwater acquisition look to be not fully met. Does this mean a possible impairment of Sweetwater G/I in the future?
  • F/X loss of $20 million Q versus -$2.5 million last Q.  (Note: They do have a translation adjustment of $11 million to get to comprehensive net income of -$447 million)

Total Other Income was negative $362 million after positive $90 million last Q.

Income Before Tax was negative $461 millionversus last Q of +$51 million.

Taxes were $3.8 million recovery versus recovery of $1.8 million last Q. Likely had a pickup in Deferred tax with impairment of G/I.

Net Income after tax was -$458 million versus +$52 million last Q. The big swing impairments.

+Adjusted EBITDA Breakeven Sales

Tilray is positive Adj EBITDA.  With a negative GM for the Q, we cannot calculate their % sales to achieve breakeven aEBITDA.

EBITDA: Trend and Peer

I did not allow the USD $3.3 million facility startup and closure cost in adjusted EBITDA that Tilray added back. I also added back the Litigation expenses of $4.1 million. Litigation was self-inflicted.

I have aEBITDA at only USD 4.1 million (theirs $11 million) versus USD 2.7 million last Q. They have $74 million in long term debt maturing in next 12 months that they will either need to pay or refinance.

Please keep in mind that the Adjusted EBITDA includes the portion of Non-Controlling Interest owned by JV partners at Aphria Diamond and does not accrue to Tilray shareholders. Interestingly, Aphria Diamond sales revenue was down by $24 million to $88 million from $112 million YoY at Q3F22. Yet at year end Revenue to Aphria Diamond was $148 million (Q4F22 $60 million) an increase YoY of $17 million. Must have had a big harvest moving through. If Aphria Diamond contribution of Net Income of $64 million (Q4 $26 million) which is not owned by Tilray shareholders (49% or $13 million in Q4) is backed out, my aEBITDA would be negative.

Operating Expense Burn: Trend

Cash used in

• Operating activities $21 million of which $5 million was Opex Burn (a $10 million QoQ improvement) and $16 million used in non-cash working capital
• Investing activities $5 million
• Financing activities $161 million as they whack the ATM pinata for $262 million including shares for Hexo and repay $88 million in convertible debt.

Balance Sheet Items of Note:

Cash increased $108 million to $416 million.  Not enough on hand, so they launched a $400 million ATM.

Inventory is $245 million a $28 million decrease. The impaired inventory of $57 million the driver.

Cannabis inventory constitutes $143 million of inventory a decrease of $18 million QoQ despite impairing $47.5 million.

Cash versus Debt Service

• Annual debt service can no longer be determined as they are not providing a schedule of the netting of interest expense. Current Portion of Long-Term debt is $77 million.  That will have to come from somewhere.

Inventory to Sales:

• Tilray inventory turnover is decreased sharply at 1.53:1 Qs. What we said last Q: When they finally close Nanaimo expect an inventory impairment to clean out the last of legacy inventory. That they sold wholesale at a loss is worrisome and contributes to my opinion. Nailed it. Watch this ratio to see if they have inventory right sized.

• Capital assets (PPE) down $16 million to $587 million. Could be sale of Nanaimo. Very little capex planned for the fiscal.

• Goodwill and Intangibles decreased by $444 million to $3.9 billion as cannabis assets were impaired.

• Long term investments decreased $123 million to $10 million while a new Promissory Note receivable of $111 million is added re HEXO.

• Contingent consideration decreased $16 million to $16 million. SweetWater earnout has been trimmed.  

• Warrant Liability decreased $5 million to $14 million.  Leftover from previous Legacy Tilray raise. Stock price decline is the reason.

• Convertible debentures -$99 million to $402 million.  $216 million is Aphria 2024 and $185 million is Tilray 2023.  We said last Q: The Tilray 2023 are so far out of conversion that these would be the most likely candidate to be paid out via negotiation… Yup, they paid down $88 million this Q.

What we said last Q

Much of last Q repeats itself this Q.  Sales decline, Gross margin decline net of impairments, add to that SGA increase net of insurance claim, and aEBITDA drops significantly.

The purchase of Tilray was meant to absorb their sales and move production to lower costs operations.  Problem is sales have decayed and until this stops the Tilray operating model is not self-sustaining.  Big Quarterly sales wins are going to be hard to come by. They have dropped $26 million in adult use sales in two Qs.  That will likely take a year plus to regain, if ever.

They are once again diluting via the ATM.

It is one thing to quote savings being achieved, but if there is a hole in the sales and GM buckets those savings are just keeping the situation from being worse. And this situation is getting worse, not better, operationally.

This Q:

A very tough Q for Tilray.

We are in year four of Adult Use and they sales Q4F21 to Q4F22 have dropped $13 million. On the cannabis side, only International has increased materially at +$9 million over the same period, with Net cannabis revenue flat.

Gross Margin is the bane of the Canadian cannabis industry. Until inventory impairments are behind them, Tilray published “Adjusted GM” are meaningless.  Without harvest info and corresponding sales info, it is very difficult to see if they have this under control.  Follow the inventory turnover to give you an idea.

SGA needs to show an inflection as a % of sales.  Whether that is by increasing sales or hacking more SGA.  Their “Adjusted GM” of $50 million for the Q versus $53 million in SGA (not inclusive of R&D, Depreciation or SBC).

aEBITDA is assisted by the portion of Aphria Diamond not owned by Tilray shareholders. Without same it would be negative.

They have a reasonable cash position thanks to printing more shares last Q.

The conference call reminded me of a hockey coach trying to get the team pumped up before a game.  Laying out ALL the positives that needs to happen to reach the “promised land”.  The problem is the “promised land” doesn’t seem to be aby closer this year than last, and many of the positives in the future are in the hands of governments.  There is no catalyst on horizon that improves operations (not share price) by the measure they require to be successful operationally.  This will be a slow turn requiring them to turn multiple knobs successfully to show a modicum of progress.

Unfortunately, I cannot see the progress over the past year.

That’s all I got.

GoBlue

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has no position in Tilray and will not initiate one within the next five days.