Tilray released third quarter fiscal 2020 earnings release last night.

USD unless stated otherwise.

What we said last Q:

Pluses

• International cannabis revenue was up 43% +$2.5 million to $8.3 million. This has doubled over 2 Q’s
• SGA decreased USD 8.3 million after a decrease of USD 19 million last Q.
• USD 250 million ATM still undrawn at Q end

Minuses

• Gross revenue decreased 3% with Gross Cannabis revenue decreasing 2%.  Conjuring sales is a must to hit +EBITDA guidance in Q4F20.
• Another $19 million inventory writedowns. $91 million over 3 Q’s
• Another $28 million in asset impairments. $170 million over 3 Q’s
• Gross Margin this Q is -USD 5.4 million – 11% or without revaluation +USD 13.2 million +26% versus Interest Expense of USD 10.6 million.  80% of GM (adj GM) going to interest is not a good thing.
• You cannot cut your way to +EBITDA.  You need revenue with decent GM%.
• Restrictions on drawing USD 250 million ATM due to secured debt conditions.

This Q:

Pluses

• Sales increased 2% after excise and cannabis increased 4.5%
• GM slowly ridding itself of impairments and long-term supply contracts
• SGA improved again this Q by $4.6 million and has improved $31 million in the three Q’s in F2020
• EBITDA improved from CAD -$14 million to -$1.4 million and has improved $41 million in the three Q’s in F2020
• Cash at $155 million is reasonable with ATM access in the high +$100 million range left.

Minuses

• On a CAD basis revenue actually went backwards 1% but cannabis in Canada advanced 3.2%.  FX swinging from 1.39 to 1.32 CAD:USD caused same.
• GM is very low at 7% and without inventory valuation adjustments it is 33%
• Still had a $13 million inventory valuation adjustment

The MDA is almost exclusively Year over Year versus QoQ.  Thus, the QoQ narrative is less.

Open up the fins and MDA and follow along.

Overview of the Quarter’s Income Statement Metrics:

USD unless stated otherwise.

Sales:

Sales Table

Total Revenue increase $1.0 million +2% to $51 million. Excluding excise tax, it was $47 million an increase of $1.0 million.

• Adult use saw a +$2.3 million increase to $20 million an increase of +13% after a decrease last Q.  Adult Use remains under the previous record of $21 million in March 2020 Q
• Canadian medical decreased to $3.4 million a decrease of $0.4 million or -11%
• International Medical decreased to $8.1 million a decrease of $0.2 million or -3% a. 
• Bulk decreased to $0 from $0.4 million
• Hemp decreased to $20 million a decrease of $0.3 million or -1%  

Segmented by product:

• Dried cannabis increased $1.0 million +5% to $21 million.   
• Extracts increased $0.3 million +3% to $10.2 million.
• Food products decreased $0.3 million to $20 million.   

USD all in cannabis selling price, excluding bulk, was USD 6.15/gram a +133% increase from last Q at USD 2.64/gram and more in line with $5.28/gram in Q1.  The international introductory sale at a lower price is the rational provided for the drop the previous Q.

Kilograms sold was 5,107 kgs versus 11,430 KGs last Q.  The increase last Q was a result of the large international shipment.  Wondering if trim was sold off for extract.

Recreational Cannabis Revenue: Peer and Trend

Tilray’s adult use trend line increased to $26 million inclusive of excise.  They are fourth highest in the peer group.

Tilray has engaged Kindred as a sales agent for the last two Q’s. Much along the lines of Aphria and Great Northern Distributors.  They seem to be improving traction.

No 2.0 sales data was provided in MDA or financials.   

Medical Cannabis Revenue: Peer and Trend

Medical decreased as both Cdn medical and international medical stepped backwards in the Q.   Covid affected import permits.  They expect to catch up next Q.

Wholesale Bulk Cannabis: Trend and Peer

And bulk wholesale is $0

Gross Margin:

Gross Margin Table:

Gross Margin Trend and Peer:

Gross Margin returned to a positive figure with 7% all in and Cannabis at -17% and Hemp at 42%.  Without the Cannabis inventory and hemp revaluation of $13.4 million, all in GM% would be at 36%.

Last Q Tilray has indicated their revaluations should be behind them.   With $90 million over the last three quarters, that would be good to see. Yet, this Q they adjusted for another $13 million.

GM for the period was +$3.7 million, without revaluation it would have been +$17 million. 

They indicate they have increased yield at their facilities in Canada by +40$ and all product is +20% THC.  It would be nice to see GM without a Q adjustment.

It will be interesting to see if they get to +EBITDA next Q WITH or WITHOUT more adjustments to valuation.  

Gross Margin -Larger Peer Base

Tilray emerges from basement.

Operating Expenses:

SGA & SBC Trend:

NOTE: I have moved Impairment of assets, acquisition related expenses and Loss from equity investee to Other Income Expenses to maintain peer comparison.

• Selling expense decreased in both $’s and as a percentage of sales -$2.8 million to $10 million and 26% to 20%,
• G&A expense also decreased in both $’s and as a percentage of sales -$1.8 million to $12.7 million and 29% to 25%. Professional fees were trimmed $2.4 million and Other was trimmed $1.6 million and were offset by $1.9 million increase in salaries.
• SBC remained relatively flat at $8.1 million versus $7.6 million last Q.

I am impressed that they can keep cutting these expenses.  They have taken $32 million out over 3 Q’s.

R&D increased to $0.9 million from $0.7 million.

All in OPEX was 71% of sales at $36.5 million versus 77% of sales or $38.9 million last Q.   With GM of only $17 million after adjustments and $10 million in interest expense, Tilray has a lot of work still to do.

SGA & SBC Peer:

Aggregate SGA for Tilray is 4th highest in the above peer group.

Other Expenses totaled $40 million last Q whereas this Q Income is $31 million, a swing of $71 million:

• Last Q there was $28 million in impairment for assets largely a result of closing High Park ($25 million in land and buildings, cultivation license and fx adjustment) and writing down Smith & Sinclair by $3.3 million in trademarks and patents.  This is not re occurring this Q

• Acquisitions and integration expense $1.8 million. This is not re occurring this Q
• Loss from Equity Investee $1.3 million. This is not re occurring this Q
• $9 million f/x gain as CAD strengthened
• $31 million positive change (versus -$11 million last Q) in Fair Value on warrants issued in connection with the equity raise in the Q
• $10.4 million in interest expense (versus $10.6 million last Q) from their convertible debentures and new Sr Debt facility drawn in the Q.

Taxes were a net of $0.3 million bringing Net income to negative $2.3 million versus negative $82 million last Q.

Breakeven Q Sales to +NOP divided by Current Q Sales:

With current GM% and Opex$’s, Tilray needs 876% increase in Q sales to reach breakeven.  With an improvement to GM% to 33% without a value adjustment to CoGS, they would need incremental sales of $60 million to reach +NOP.

Adjusted EBITDA: Trend and Peer

Tilray’s EBITDA improved to negative CAD 1.4 million (USD 1.0 million) from negative CAD 14 million (USD 10 million) last Q. 

The improved adjusted GM of USD 4 million and the reduction in cash Opex by USD 4 million were the reasons. 

Breakeven Q Sales to +EBITDA divided by Current Q Sales:

With current GM% and Opex$’s, Tilray needs 28% increase in Q sales to reach breakeven.  With an improvement to GM% to 33% without a value adjustment to CoGS, they would need incremental sales of $3 million to reach +EBITDA.

OPEX Burn: Trend

Opex burn improved to negative $11 million from negative $24 million last Q. The reduction in SGA and improved GM$’s are the drivers.   

The difference between Adj EBITDA and Opex Burn is almost exclusively in interest expense.

OPEX Burn: Peer

Balance Sheet Items of note:

Cash vs Debt Service

• Cash increased by $18 million to $155 million as a result of ATM draws
  • The Sr Debt facility is secured by all North American assets and matures in 2022 a year before the $500 million in converts mature.

“Gas in the Tank” Trend

Tilray has sufficient of inventory on hand, and they wrote down $13 million this Q and +$104 million over 4 Q’s. FG increased QoQ minimally by $2.8 million, despite inventory value adjustment of $13 million.  

They indicate their existing facilities should be sufficient to handle their requirements for the next 18-24 months.

“Waterfall” Trend

Harvest increased 2,122 KGs to 8,903 KGs.    Not inventorying cannabis trim is a reason for the decline over this fiscal.

Sold KGs decreased substantially to 5,107 KGs from 11,403 KGs. The shipment to international markets was the reason for previous Q increase. 

Harvest vs Sold and CoGS versus Inventory

• Inventory versus CoGS, adjusted for inventory writedown, yields 3.7 quarters of inventory, which is in good order.
• PPE increased $12 million with construction in progress in Portugal driving the increase.

• Warrant Liability decreased $32 million to $71 million.

Last Q I said:

• Other than international sales, they are giving back increases from the previous Q.
• International has been a real shining star for them sales wise, I wish they would show GM on the international sales to see if it is being subsidized by a low GM%.
• GM is negative, but they are signaling the writedowns of the last three Q’s are at an end.
• SGA cuts have continued but they need sales with GM to propel any chance at +EBITDA by Q4 F20.
• They have limited access to the USD 250 ATM given stock price is below the threshold allowed by the sr debt facility.
• Interest remains at 80% of GM$ after adding back the revaluation

Tilray needs to conjure sales.  They have been in $45-52 million range for the last 5 Q’s.  At a 35% GM they need $85 million to cover their SGA and R&D, which would get them to +EBITDA.   I do not see that happening by Q4 F2020.  Next Q will give us a better look if their guidance is doable.

This Q:

I often say you cannot cut your way to profitability.  With Tilray improving EBITDA $41 million this fiscal on the backs of $31 million in SGA decreases I might have to rethink that.  Sales have increased only $4 million over the same period.  The extra $10 million difference is writing off less inventory.

At a 35% GM they need $17 million in incremental sales to cover their SGA and R&D, which would get them to +EBITDA.   They could well reach +EBITDA next Q, BUT the Q will be are they still writing down inventory??  After they get to +EBITDA they have a $10 million interest expense to scale.

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 writer does not have a position in Tilray and will not be entering one in the next five days.