Tilray Inc. (NASDAQ:TLRY) shares dropped 15 per cent on Wednesday after Canada’s fourth largest cannabis company reported a larger-than-expected second-quarter loss, despite surging revenues propelled by higher recreational pot sales in Canada, its Manitoba Harvest acquisition, and growth in international medical markets.
The Nanaimo, B.C.-based pot producer released its quarterly report late Tuesday, with revenues hitting $45.9 million in the three-month period ended June 30. That’s nearly five times the $9.7 million the company generated in the prior year, and ahead of the consensus estimate of $40.3 million. (All figures reported in US dollars.)
Investors, however, appeared to be focused on Tilray’s bottom line. The company reported a net loss of $35.1 million, or 36 cents per share, nearly triple its loss from the same quarter last year. Adjusted EBITDA was a loss of $17.9 million, which was a wider loss than the $14.4 million expected by analysts at a time when investors are searching for profits in the cannabis industry.
— Tilray (@tilray) August 13, 2019
Soaring costs gobble up rising revenues
Tilray said the mounting losses were due to the increase in operating expenses related to growth initiatives, recent acquisitions, and the expansion of international operations.
The company’s operating expenses of $44.8 million dwarfed the modest $8.1 million year-over-year increase in gross profit it was able to achieve, and was nearly enough on their own to clear out its sales during the quarter. General and administrative expenses of $16.5 million for the quarter alone were enough to wipe out the company’s gross profit of $12.3 million.
Tilray CEO Brendan Kennedy told Bloomberg News he wasn’t concerned about the company’s piling losses saying “you’d be constraining yourself if you were focused on profitability at this point,” adding now is the time to invest to expand globally in the nascent cannabis industry.
Tilray generated a 27 per cent gross margin, which was up from 24 per cent over its last quarter, but below the consensus analyst estimate of 28.7 per cent and at a percentage that doesn’t leave much room for incremental sales to help cover the company’s operating expenses. Tilray said its margins were impacted by the costs of ramping up growing facilities in Canada and Portugal and buying third-party cannabis supply. The company did say, however, it expects to hit a mid-40 per cent range by the end of 2020.
The company sold 5,588 kilograms of cannabis in the second quarter, up 86 per cent from its previous quarter. But the average net selling price fell to $4.61 from $5.60 in the previous quarter, which Tilray attributed to the lower prices per gram in Canada’s adult-use market compared to other channels. The company sold $15 million worth of product in the adult-use market, almost doubling sales from the first quarter.
Wall Street analyst Michael Lavery with Piper Jaffray said, “we expect Tilray to remain in investment mode to drive growth and do not expect positive earnings in the near-term,” adding he doesn’t see the company posting positive total company EBITDA for four to six quarters.
Tilray burning through cash to fund growth
The past six months, Tilray has burned through more than $300 million in cash. Nearly $200 million of that came as a result of acquisitions and investments, and $110 million was used to fund its existing day-to-day operations. Although the company avoided dipping into the equity markets the last quarter, it could be something to watch for, especially if Tilray requires more cash to make further acquisitions.
Kennedy said revenues the company’s international operations should “kick in” in the next few quarters and help contribute to Tilray’s top line. The company has invested close to CAD$30 million in its medical marijuana operations in Portugal this year where it employs over 150 people, and announced earlier this month it is adding more cultivation space in the region. It said it plans to sell medical-grade cannabis to as many as six more countries this year.
Over the past six months, Tilray has lost around half of its value and it is down around 70 per cent in the past year. News surrounding troubled pot producer CannTrust Holdings has pulled down the entire cannabis sector, and Kennedy called the regulatory fiasco “an infuriating situation” as investors have grown weary of the industry since the compliance breaches were first revealed.