As a commercial lender EBITDA is a very core tenant of lending decisions. It drives if you will lend, how much you will lend, and at what interest rate you will lend at. While it is one of many tools for commercial lenders, and not a perfect tool, it is also a tool public companies trot out to illustrate their performance.

EBITDA as a metric was meant to “normalize” peers for comparison by removing jurisdictional tax differences, capital structure decisions (eg. debt load versus equity and thus interest), and equipment versus labour decisions (eg. depreciation of capital assets versus cost of hiring more employees).  The use of EBITDA has morphed into being a measuring stick.  But when the type of “adjustments” are left to management discretion the comparability between peers can vaporize under Adjusted EBITDA.

For management and investors to speak of Adjusted EBITDA (after they make “adjustments” more aggressively than peers) without taking into consideration the debt profile, and its servicing requirements, and cash taxes that need to be paid – to this +three-decade commercial lender – it is quite a departure from the intent of the metric.

I often say, “EBITDA is not a destination it is a mile marker”. Taxes and interest payments are paid in cash. That is why we add them back into one of our many metrics when analyzing companies that are +EBITDA. Ultimately you want EBITDA to be 1.20X the debt servicing (including amortized principal) as mile marker, as that is a fairly standard bank financial covenant.

I have written a lot about EBITDA: Earnings Before Interest, Depreciation and Amortization and OPEX Burn/Generation; Cash Position and Projected Debt Service: Life after you make it to +EBITDA; and most recently TIL: Today I Learned Something Disquieting About EBITDA and Non-Controlling Interests on April 14, 2021.

I have been waiting for Aphria/New Tilray to change to US GAAP as I wanted to see the Revenue and Net Income from their joint venture with Double Diamond through US GAAP versus IFRS, as IFRS has gain on biologicals and the like that tend to skew the Net Income figure more so than US GAAP.  Actually, Non-Controlling Interest (“NCI”) on Aphria Diamond was the item that I was most keen to look at in these financial statements.  I wanted to get some idea of how much of Tilray’s Adj EBITDA was attributable to the owners of the 49% interest in Aphria Diamond that is not owned by Tilray shareholders.

Why would I care? 

As a commercial lender in automotive manufacturing, I once asked a parts manufacturer, “why, with a $200 million cash balance, are you borrowing on your operating line $300 million?” As it made little sense on the surface to incur an interest rate on a loan that would be higher than the interest rate that you could get on a deposit instrument. Why not use the cash to zero out the operating line?

The parts makers said, “the money is in China with our Joint Venture and the Chinese government has foreign exchange controls, so we cannot get the funds out of the country”.

In that latest article I wrote above, I explain that the financial results (eg. Net Income) and the EBITDA calculations generated therefrom, are for the reporting entity and NOT what accrues to the shareholder. It sure sounds like it accrues to the shareholder with Earnings Per Share as a main focus of most analysts and investors at each quarterly earnings report.

But through the ability to consolidate 100% of earnings, cash balances, liabilities (for the company with >50% ownership and/or controlling interests) that produces the Net Income numerator in the EPS calculation, we are missing the amount of Net income in the numerator of EPS, as well as EBITDA, assets and liabilities that are “owned” (“entitled” might be a better choice of words) by the joint venture partner.

Control does not mean 100% ownership; it simply is a consolidation trigger. The Brothers Mastronardi have ownership of 49% of Aphria Diamond via Double Diamond.

Double Diamond is the “Chinese” JV partner in this instance. Tilray gets to roll 100% of the JV into net income and EBITDA.  The leakage occurs in the NCI line item at the very bottom of the Income Statement, but the portion of EBITDA that the 49% interest is entitled to doesn’t get reflected in the EBITDA calculation.

How much of that EBITDA is attributable to Tilray shareholders, and how much EBITDA is attributable to the Diamond side of the JV?

So, I did what a Cannaylst would do… and tried to figure out how much of Tilray’s EBITDA “belongs” to Double Diamond and how much accrues to Tilray shareholders.

In F2021 (US$000)

• Tilray generated $40,772 in Adjusted EBITDA
• Aphria Diamond generated $64,351 in Net income of which 49% is Double Diamond’s interest or $31,532

• Right there… that reduces Tilray Adjusted EBITDA to $9,240 if you back out Double Diamond’s portion of Net Income

In order to approximate the add backs of Interest, Tax and depreciation, I assumed:

In order to approximate the add backs of Interest, Tax and depreciation, I assumed:

• Interest of 5% on $63 million loan (originally $80 million) for the facility = $3,150 per annum
• A 27% tax rate = $8,514 per annum
• 25-year depreciation of non-current assets of the JV of $156 million = $6,240 per annum (I do assume non-current is the Aphria Diamond facility and does not include other non-current assets.)
• Aggregate = $17,904 per annum
• 49% of those aggregate figures = $8,773

That would reduce Adjusted EBITDA to $467

During F2021, SweetWater generated $10,740 in EBITDA, Distribution generated $5,938 in EBITDA (Distribution also has NCIs with ColCanna S.A.S. but it lost $923 this fiscal year and is less impactful), and Wellness was -$1,500. If these were further deducted, Tilray’s cannabis operations owned by Tilray shareholders would have generated Adjusted EBITDA of -$14,711 in Adjusted EBITDA from the +$40,772 corporate level reported.

What are the implications?  Would investors care?  Should investors care?

As to implications… if Aphria Diamond has a positive cash position it could be used to pay down Aphria Diamond debt or be re-invested in Aphria Diamond. But that portion of cash is “effectively restricted” in its deployment.

Should you care? I don’t see retail investors understanding the differentiation. More sophisticated investors might as this is complicated.

Investors have been conditioned like Pavlov’s Dogs to excite when the EBITDA grows or exceeds analysts’ expectations. 

I imagine social media “haters” of Tilray could use this as another reason to hate them.

I do not see c-suites finding some new religion and disclosing the NCI’s to any extent greater than they presently do. Tilray is not alone in this, as we pointed out in the TIL article Cresco Labs has a substantial JV and retail JVs that generates their EBITDA.

Is it a shrug for me?… Not really.  I think it matters when forecasting growth of EBITDA and its meaning for the company, especially if Aphria Diamond becomes debt free or ends up with a cash balance sizeable as compared to Tilray’s overall cash balances.  It is a measure of health at Tilray, and it tells me the cannabis operations owned by shareholders of Tilray are not as healthy as many would believe. 

IF Aphria Diamond becomes debt free 49% of that cash balance will be like having it in a Chinese JV.

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 Tilray.