Tilray’s Illusory Profit Masks Fundamental Weakness – New Cannabis Ventures
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We were surprised to see Tilray rise initially after its report this week. The company missed analysts’ estimates for revenue and profitability, but rallied nonetheless. We thought the positive reaction may have been due to relief that the numbers weren’t even worse, but we think the market may have been tied to something beyond revenue and adjusted EBITDA. Instead, traders likely took note of reported net profit and earnings per share (EPS), which were well ahead of expectations.
Tilray’s press release trumpeted its earnings but did little to explain them. The first of five detailed points of his net income of $52.5 million, but it was never discussed in the body of the press release:
The income statement included in the release, of course, made it easy to see what was going on, at least for those watching. Historically, the company had always released its documents before the earnings call and before the market opened, but that was not the case. After issuing a press release before the market opened, the 10-Q was not filed until after the close. With this information, it became much easier to understand how Tilray generated its so-called profit. Quite simply, most are due to its share price falling during the quarter.
Much of the accounting profit was due to $72.7 million of non-operating revenue. In other words, without this element, which was detailed in the file, the company would have declared a loss. The 10-Q broke down non-operating earnings into primarily $56.1 million of change in the value of its convertible debentures and $21.1 million of change in the value of warrant liabilities. Falling stock prices drove down the value of these liabilities, which generated $77.2 million in revenue. This was helped by an unspecified $1.4 million gain and somewhat offset by small losses in currencies and long-term investments.
Another item that helped boost earnings was an operating charge of -$29.1 million, a change in the fair value of the contingent consideration for the recently acquired Sweetwater company. This means that the cash award due from December 2023 is now less likely. In other words, because its acquisition does not meet previous expectations, Tilray is unlikely to realize the payment it had previously expected.
Tilray reported pretax profit of $50.6 million. Had it not had the non-operating and operating adjustments detailed above, it would have reported a pre-tax loss of $51.2 million.
While Tilray wants investors to believe things are going well, we suggest ignoring its boasts of profitability, as falling stock prices and deals that fall short of expectations are not the foundations of success. The company also bragged about revenue growth, but compared not only the results of the combined company, but also those of the recently acquired Breckinridge Distillery this quarter to those of Aphria a year ago. . The cannabis segment on an apple-to-apple basis declined, but the company highlighted its 32% growth. Similarly, the 64% growth recorded for alcoholic beverages is mainly due to acquisition.
One thing that rose sharply was the number of shares. While the company spent a lot of verbiage on revenue growth and other metrics, the weighted average share count growth was even higher at 84%, the highest growth number we’ve seen in this press release. To make matters worse, Tilray did exactly what we expected and discussed in this letter recently, hitting its At-The-Money (ATM) shelf hard. After the quarter ended, the company sold 16.9 million shares between March 3 and April 6, raising $90 million (at an average of around $5.31) and leaving it with 310 available. millions of dollars. As a result of these share sales, the company incurred an additional potential cost of $6.45 million, as it was forced to reduce the exercise price of its warrants from $5.95 to 4 $.91.
Tilray’s press release gave the impression that things were going well, but a close look at the financials paints a different picture. The company suffered from negative growth on an organic basis and its share count exploded. Operating cash flow was -$46.3 million and net debt continues to increase. It’s no wonder the company is selling its shares so aggressively, especially since so much of its debt is about to become current. The company is talking about aggressive M&A plans, but it doesn’t have the financial capacity to do anything other than stock-based deals from our perspective. We continue to believe that investors should prepare for more stock sales by Tilray in the months ahead.
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Alan and Joe