Tilray Earnings release.

The financials and MDA were published after the conference call… which we really find distasteful.  Let’s see if it is a one-time event versus a continuing issue.  I do know that CFO Merton was also frustrated not to have them published before the call.

Last Q: A very good run of Progress Quarters hits the reality that we have been identifying over past few Q’s.  The knife fight for sales has emerged as the sector leader gets hit with their first product returns on cannabis.  The covid lock downs are going to persist into Q4 F21 in all of their markets.  Q1 F22 will have a full Q of integration of Tilray.  It will be bumpy for a while.

As we said last Q, the slowing of sales shows why they bought Tilray. 

This Q:  Wow.  Tough spread and analysis.  Fold in of Tilray and Aphria as at April 30, 2021. CAD to USD. IFRS to US GAAP. Significant changes to MDA and financials. And let’s make it a Q4 to boot!

If it were not for the Analysts Primer at the back of their July 2021 Investor Presentation I would have been very frustrated versus just frustrated.

We are saying goodbye to Gains on Biologicals (YAY) and unfortunately the demise of several metrics that we have come to like: kilograms sold, kilograms harvested, segmentation of cannabis by products type, cash cost of cannabis, average selling price, …  I understand that there are legal reasons for the reduced disclosure, and the lack of a standalone Q4 in MDA which the 10-K “form” dictates for the Q4.

What I said last Q

Pluses

• SweetWater added $15 million in sales in their first full Q.
• SweetWater GM is their top segment by % of sales at 41% which includes an inventory step up of $1 million on the purchased inventory that will dissipate over the next 2-3 Q’s as the purchased inventory is sold.
• SGA reductions in absolute terms and remained consistent as a % of sales, despite the full Q of SweetWater SGA.
• Cannabis inventory levels remained consistent, but high, despite sale decrease.
• Adj EBITDA showed a slight increase and increased for eight consecutive Q.

Minuses

• Sales, despite adding SweetWater for the full Q of $15 million, decrease $7 million or -4%.
• Adult use cannabis decreases 17% to $60 million, reversing two Q’s of growth in one Q.
• International sales all but disappeared reducing from $5.3 million to $0.4 million.
• First ever return of $5 million in cannabis from Alberta.
• Gross Margin decreases to lowest level since Q3F20 hit by product return, unabsorbed overhead and inventory step up.
• Free Cash Flow, despite strong improvement QoQ, remains negative at $3.9 million

This quarter:

NOTE: I used 1.00 CAD = 0.80 USD to determine several comparisons that were not available in USD for prior Q’s.

Pluses

Minuses

• Distribution Sales decreased 5% due to lack of supply due to covid lockdowns in Germany
• Gross Margin decreases to 16% from 25% QoQ or -US$25 million, its lowest % on record as cannabis GM reduced to $4 million after a $20 million impairment to combined inventory.
• Opex less SBC increased from 34% to 40% of sales
• Net Income was largely aided by the swing in stock price QoQ which provided a boost this Q of US$113 million and a swing QoQ of US$325 million resulting from the convertible debenture.
• Current Period debt, contingent consideration, and warrant liability aggregates US$180 million for the next 12 months, which puts a dent in cash if not replenished.
• Goodwill and Intangibles increased USD 3.3 billion to USD 4.4 billion with Tilray folded into Aphria.

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

Income Statement Drivers and Breakeven Sales Levels – Trend

NOTE: I translated the Q4 into CAD so as not to have to change the entire graph.  I will update as we move along, and they provide USD QoQ comparison for Q1-Q4 F2022 to similar Q in F2021.

Sales

Table 1 Sales Segmentation

NOTE: Their Analyst Primer allowed me to get actual figures for May 31, 2020 through May 31, 2021 (top table), but for cannabis by segment I had to deduct Q1-Q3 at $0.80 and then deduct from year end (bottom table).  Thus, the slight difference.

Tilray recorded a +15% increase in Net Revenue of $18 million to $142 million QoQ. Cannabis revenue (net excise) increased $12 million or +29%, no mention what old Tilray contribution was. Last Q old Tilray had net cannabis revenue of $27 million. One month would have been $9 million.  So, there is some growth in there likely from old Aphria.

Distribution revenue continues its rocky covid period decreasing 5% or $3.4 million.  On the CC, they reported that covid lockdown in Germany did not allow them to procure product for resale and orders were there, but they simply did not have access to product to supply. 

SweetWater increased an impressive $4.2 million +34% to $17 million. 

Wellness (Manitoba Harvest) contributed $5.8 million for one month while old Tilray last full Q was $17 million, which would have been a slight improvement if a full Q was sold at that rate.

Using my back out of converted CAD Q1-Q3 for the components… Before Excise tax…

• Cannabis Revenue increased $16 million or 28% to $71 million before excise and increased $12 million and +29% after excise.
  • Adult use was +30% increasing by $14 million to $56 million, returns of $5 million in the prior Q were not mentioned this Q. 
  • Medical increased 21% by $1.2 million to $7.1 million. Old Tilray had $3.2 million before excise last Q.  So, the entirety of the increase looks to be the addition of old Tilray, as Aphria medical cannabis was backing up for seven previous Qs.
  • Wholesale decreased $1.2 million in sales to $0.1 million and
  • International increased $4.3 million to $4.7 million.   Old Tilray international revenue was quite strong at $8.6 million for a full prior Q but had been as high as $12 million in the past fiscal. No disclosure on which entity generated the increase.

• Distribution Revenue decreased $3.4 million or -5% to $67 million, the lowest of five Q’s under review.
• Sweetwater recorded $17 million in sales or +34% +$4 million.
• Wellness appears for the first time and is only a month at $5.8 million, tracking at the last Q pace for old Tilray.

Table: Revenue by Product Segment

Dislcosure ended this Q.

Table KGs Sold and Average Selling Price

Dislcosure ended this Q.

Adult Recreational Cannabis Revenue: Trend and Peer

After the first step back from Aphria on Rec last Q, the merged entity has a $17 million increase.  Note: Canopy has $20 million in retail store level sales.    

Medical Cannabis Revenue: Trend and Peer

Medical increased by C$ 7 million, largely on the increase in international sales. The Tilray platform trails CGC and ACB.

Wholesale Cannabis Revenue: Trend and Peer

Wholesale of $0.1 million. 

Income Statement Drivers and Breakeven Sales Levels – Peer

Note: Sundial, Aurora and OGI breakeven could not be calculated due to negative GM%. 

Tilray is the largest company by sales in the peer set (even with CGC included.  CGC was removed as it makes the chart even tougher to read).  Sales do include C$ 84 million in Distribution and $21 million beer sales.

Gross Margin:

Table 3: Gross Profit per Segment and Cost Per Gram Table

Overall gross margin decreased to 16% vs 25% QoQ and decreased to $22 million this Q in absolute terms from US$ 30 million, for a decrease of $8 million in absolute Gross Margin.  Without the US$ 20 million impairment GM would have increased to 30% of overall sales and US$ 42 million.

• -$12 million in cannabis GM to $4 million, which includes $20 million in impairment to inventory
• No mention of returns or unabsorbed overhead.
• +$5.8 million in GM from SweetWater with a 67% GM. Without last months step up on inventory acquired and sold GM% was 53%, so a nice GM increase QoQ.
• Distribution GM reduced to 9.5% well below the 12-14% range in the prior four Q’s.
• Wellness had a GM of 27% above Old Tilray 25% last Q, but well below the 33-42% range in the prior four Q’s

Gross Margin Cannabis Trend and Peer

Hexo leads the peer group with a 34% cannabis GM versus the next closest Tilray at 16%. Were it not for the impairment, Tilray would have had a GM of 45% on cannabis.

What I said last Q: Given this is the last Q under IFRS, Carl has gotten them through IFRS without an inventory impairment.  But one could be looming next Q and it might include costs.

Yup, $20 million.  And notice no inventory step up in the old Tilray acquired inventory, which means the fair value was equal or less than cost in more places than it exceeded costs.  Old Tilray, if not for the merger, would have had a very minimal GM. 

Expect cannabis GM to be under some pressure as the Tilray acquired inventory, which costs more than old Aphria gets sold through.

Gross Margin Large Peer Group

With a large chunk of revenue delivered from lower margin Distribution, Aphria ranks in the middle of the positive peer set.

Gross Margin North American Peer Group

The above has Tilray third from bottom of the positive GM.  But I want our subscribers to consider this… Tilray without the $20 million provision (and I realize that unless they balance supply and demand provision may re-occur) this Q would have evidenced a 45% GM on cannabis.  This is with tremendous competition and pricing pressure and no verticality.

That % of adjusted GM would have put them in the bottom third of the US MSO group.  BUT those MSOs are operating in limited competition state siloed markets with verticality.  Under the draft Bill from Senator Schumer, interstate trade would increase competition affecting pricing and gross margins as well as verticality. 

When you hear us say “MSO Gross Margins” are bubble wrapped, Tilray does not enjoy that bubble wrap.  When the bubble wrap comes off MSOs will look very similar to Canadian LP’s IMO.

Operating Expenses:

SGA & SBC as % of Sales: Trend Analysis

Note: I strip Transaction Costs from Opex to provide a more consistent peer comparison.

G&A increased by $8.3 million to $32.8 million QoQ, increasing 2% as a percentage of sales to 19%. Office and General increased $4.5 million, salaries and Wages increased $1.5 million and rent increased $1.1 million for an aggregate of $7.1 million.  G&A for old Tilray last Q was $26 million.  The increase is tracking for a full Q at $25 million, slightly below old Tilray.

Selling and marketing expenses increased $4.2 million QoQ and +2% as a percentage of sales.  Old Tilray selling expense last Q was $9.8 million or $3.3 million.  New Tilray is tracking above that amount.

Very important to note that SBC under US GAAP is different than under IFRS. Under IFRS they had to adjust the SBC as share price changed.  Under GAAP it is just the grant date fair value that gets expensed over the vesting period.    Therefore C$ 54 million in Q1-Q3 SBC turned into USD 17 million for the entire fiscal period.

SBC was $5.9 million for the Q.  The % is not comparable to past Q’s under IFRS.

Rounding out Opex is:

• R&D of $0.4 million vs $0.1 million last Q
• Amortization of non-production assets of $16 million versus $11 million last Q as old Tilray assets were brought in and intangibles get amortized.

Overall Opex (net of SBC) increased to $57 million from $42 million QoQ.

SGA & SBC as % of Sales: Peer Comparison

Compared to Peers, Tilray is the lowest in combined SGA & SBC at 33% with OGI next at 73%.  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.

Net Operating Profit Before IFRS Voodoo:

NOP was negative $40 million versus negative $45 million last Q.  Decrease in GM coupled with SBC decrease and SGA increases are the reason.

+NOP Breakeven Sales

Tilray is second highest in this ranking. Tilray requires an incremental sales increase of 180% to reach +NOP at present GM% and OPEX$’s.  Without the $20 million impairment to inventory this would improve to 47%.

Other Income & Expenses of Note:

• Finance Expense:
  • Interest Expenses was $9.4 million versus last Q $8.0 million. This increased with the one month of old Tilray debt for the Q.

• Other Expenses and Income:
  • Transaction costs of $33 million related to Tilray.  My guess last Q of “I would expect another $20 million or so next Q as Tilray closes” was quite off.
  • Unrealized gain on Convertible Debentures of $113 million versus a loss last Q of C$265 million. 
  • F/X gain of $1.2 million versus a loss last Q of C$5 million
  • Other income was US$ 6.8 versus expense of C$3.5 million last Q. No narrative provided.

Total Other Income was positive US$79 million after negative C$299 million last Q.

Income Before Tax was positive US $38 millionversus negative C$354 million last Q.

Taxes were $5 million.

Net Income after tax was +US$34 million versus -C$122 million last Q. The big swing is FV gain versus loss on debenture, increase transaction costs, reduction in GM, and decreases in SBC.

I cannot determine Non-Controlling Interest for the Q. But I do note Aphria Diamond had US$131 million in revenue for the year and $64 million in Net Income.  I will be doing some digging around on this some more in the next few days. Diamond revenue is notionally Tilray CoGS for cannabis.

+Adjusted EBITDA Breakeven Sales

Tilray is positive Adj EBITDA.  At current GM% and Cash OPEX they could run at 54% of existing sales and be +EBITDA. That 54% would have to be spread equally across their widely divergent GMs by segment.

EBITDA: Trend and Peer

I did not allow the USD $2.1 million facility startup cost in adjusted EBITDA that Tilray added back.  With EBITDA of C$12.8 million we now have nine successive Q’s of +EBITDA with sequential QoQ increases in each Q for the past eight Q’s.  As per CC

• Cannabis operations evidenced a $6.4 million EBITDA vs $6.1 million last Q.
• Distribution evidenced a $0.9 million EBITDA versus $1.0 million EBITDA last Q. The impact is from the reduction in sales and GM% decrease.  They have appeared to have offset partially with SGA decreases.
• SweetWater evidenced $6.5 million versus last Q $4.0 million EBITDA.
• Wellness had a -$1.5 million EBITDA

SweetWater is really looking impressive.  Sales increase, strong GM and strong EBITDA generation.

Operating Expense Burn: Trend

I cannor  figure this one out this Q without the standalone Q4.

Last Q I said: Carl is guiding to positive Free Cash Flow in the back half of F2021.  He has one more Q to get there.

This Q from presser: “Free cash flow increased 112% to $3.3 million in the fourth quarter “

Operating Expense Burn: Peers

Again, cannot determine from financials.

Balance Sheet Items of Note:

• Cash increased US$488 million from US$214 million as SweetWater loan closed in Q and roll in of old Tilray.   
• A/R reduced $15 million to $87 million.
• Inventory, now US GAAP, and with $20 million impairment is $256 million.

Cash versus Debt Service

• Annual debt service is $78 million (P due in 12 months + 4 times this past Q’s interest expense).  In order to get to a 1.20: EBITDA to Debt Service Coverage (a familiar covenant for traditional debt lending) Aphria would need EBITDA of $95 million annually to cover same (although P amortization is not included). They are at $41 million in annualized EBITDA.  However, the Aphria or Tilray Convertible Debentures could be flipped to equity, which changes the look of the company significantly.

 “Gas in the Tank”: Trend Analysis

Discontinued due lack of disclosure.

“Waterfall” – Trend Analysis

Discontinued due lack of disclosure.

Waterfall: Peer

Discontinued due lack of disclosure.

Harvest vs Sold KGs and Sales versus Inventory

Discontinued due lack of disclosure.

Inventory to Sales:

• Tilary inventory turnover drops to 3.46 GAAP Qs from 4.71 IFRS Qs last quarter. I said last Q:  “They are in dangerous territory.  With Tilray expected to close in this Q I would not be surprised with an inventory impairment next Q.” And they impaired $20 million.

• PPE increased to US $651 million from C$645 million. Very little capex planned for the next fiscal.

• Goodwill and Intangibles increased to $4.4 billion from $1.1 billion.

• A/P and accrued increased to $213 million from $134 million

• Contingent consideration of $61 million. SweetWater earnout. Moved from Long term to short term QoQ.

• Warrant Liability appears under GAAP at $78 million. Looks to be old Aphria warrants converted.

• Long Term debt and lease liabilities stable at $221 million.

• Convertible debentures $667 million from $498 million.  As old Tilray was added. $399 million is Aphria 2024 and $268 million is Tilray 2023.  The Tilray 2023 are so far out of conversion that these would be the most likely candidate to be paid out via negotiation.

What we said last Q

We have gone from Progress quarters to progress quarter to a solid step back this Q, one which might take more than a quarter to remount.

COVID has taken a toll.  But COVID has been here for a year.  The downturn in Adult use sales for Aphria is the main concern as is the Gross Margin taking a hit.  SGA controls were quite good given they went down despite onboarding SweetWater for the entire Q. 

The throttling of the grow in Q2 is seeing its affects in both inventory levels and unabsorbed overhead.

It is going to be bumpy for at least the next 2-3 quarters as Tilray is absorbed and integrated, dilution is likely but will also likely improve the balance sheet with a likely debt pay down of incoming Tilray convertible debentures (that are waaaaay out of strike price) and some higher priced term loans.

This quarter was very predictable if you have been a subscriber and have been following our takes on Canadian recreational sales increases slowing.  Aphria went on a very admirable streak of increased rec sales that have spanned eight quarters.  They will have to look to restart that streak with Tilray next Q and for the full Q in Q1F22.  The Q to keep an eye on will be Q2F22 (and for our subscribers we will be doing our best to dissect the onboarded sales via Tilray versus any organic growth for the next two Q’s).  Will they start adding to sales or will the knife fight continue?

This Q:

That was a load.

The stock price liked the quarter. Me, not so much.

The float is 80% retail investors who respond well to sales increases and positive net income, albeit net income was 100% due to the stock price dropping and the convertible debenture gain as a result.  The comments that Tilray would be pursuing US expansion (beverage and food) and THC related (MSO options until federally permissible) likely also appealed to shareholders. 

This acquisition will take awhile to digest and wring out the savings of $80 million via cost synergies. On the CC they said they already have $35 million in synergies in hand.  But the that is the low hanging fruit of staff, c-suite, filing fees, insurance… and it has been picked.  It gets harder from here.

The return to a reasonable cannabis gross margin without inventory stacking up is what I would be looking for going forward.

Next Q should prove very interesting.  Full Q of old Tilray sales.  Hopefully, no inventory impairments.  Seeing Distribution return to pre covid would be welcome.  SweetWater has done nothing but impress me so far.  Manitoba Harvest needs a kick in the pants. There has been calls for the FDA to bless CBD in food stuffs by the likes of Coca Cola.  That would likely bode well for MH.

SGA control, which has always been solid under Aphria, is something to watch for as well.

I have a feeling that CEO Simon has some targets for food and beverage acquisitions already in mind.  But what will be very interesting is if he pursues brands in the US THC via option or a full vertical MSO.  He was asked this question and he did not answer as the questioner probably would have liked.

Without the share expansion (vote is today) Marshal Simon will not have bullets in gun to achieve his end game.

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 a position in Aphria.