Shots fired on Big Cannabis
Liz Krueger and Crystal Peoples-Stokes authored a commentary piece in Time Union: Corporate interests are trying to distort the intent of cannabis law. "These corporate behemoths are ignoring the will of democratically elected legislators by asking the courts to move the goalposts because their lobbying efforts failed to produce their desired outcomes." - Sen. @LizKrueger & Majority Leader Peoples-Stokes.
In 2021, New York introduced the Marihuana Regulation and Taxation Act, aiming to rectify the damages caused by a century of prohibition and to establish a market where small businesses can flourish. Over the past two years, the state Cannabis Control Board and the Office of Cannabis Management have been working to implement the program. However, lawsuits concerning the Conditional Adult-Use Retail Dispensary (CAURD) license threaten the vision of an equitable cannabis market in New York. The legislation empowered the board and OCM to set rules to expedite the opening of the new cannabis market. The CAURD license was introduced for those most affected by the prohibition era, drawing from lessons learned from other states. The purpose of the "at the same time" clause was to ensure equity rather than giving precedence to existing medical operators. The CAURD program aligns with the law's intent, as evidenced by the Legislature's allocation of $50 million to support it. The board and OCM are gearing up to open the application period for general licenses, prioritizing social and economic equity applicants. However, national corporate interests, under the banner of "Coalition for Access to Regulated & Safe Cannabis," are attempting to dominate New York's market, claiming fairness. These corporations are challenging the intentions of elected officials and are seen as prioritizing their profits over addressing historical injustices. The Marihuana Regulation and Taxation Act was crafted to redress past wrongs, and corporate interests should not be allowed to hinder the benefits intended for New Yorkers.
TLRY Earnings
Tilray Brands was under pressure on Wednesday after reporting 1Q24 earnings that didn't meet expectations; EPS missed the mark by $0.05. However, the company's revenue surpassed predictions (benefitting from the acquisition of Montauk Brewing in November 2022 and Hexo in June 2023), and total net revenue increased by 15% YoY, reaching $177 million. The Cannabis net revenue grew by 20% (or 22% on a constant currency basis), and the shortfall is mainly due to Tilray's cannabis sector, as the cannabis segment's adjusted gross margin dropped 16% YoY to 35%. The company's overall adjusted gross margin of 28% was below consensus by roughly 410 bps.
- Distribution revenues increased by 14% (or 11% on a constant currency basis).
- Beverage-alcohol revenue rose by 17%.
- Wellness revenue saw a slight decline of 1% but remained flat on a constant currency basis.
- Gross profit stood at $44.2 million, down from $48.6 million in the prior year quarter. Adjusted gross profit was nearly flat at $49.3 million.
- The net loss declined to $55.9 million from $65.8 million in the prior year quarter.
- Adjusted EBITDA was $11.4 million, down from $13.5 million in the prior year quarter.
The company was asked a question about the short report:
"First off, regarding Double Diamond, could you help us fully understand the liability? What is the required annual payment to your partners? Is it variable based on performance, do you have the ability to throttle their production and, therefore adjust to market demands? And then the second question, do you pay some proportion of your minor shareholder in in stock, and if so, are these stocks added back to EBITDA? Thanks"
"Thanks, Andrew. I appreciate the opportunity to just make sure that everyone is crystal clear on this transaction. First, I want to start with that, there – we have never paid for an actual operating expense at Aphria Diamond out of the dividends we've issued. The dividends that we have issued to our partners in Aphria Diamond, has always been a payment of profit distribution at the – there's a couple – sorry, there's a quarterly payment that happens and then there's a true up at the end of the year, and that is the only amount that we have ever paid through those dividends. At one point, during the year last year we did provide some downside protection, and when that payment was triggered, that payment went through the income statement and that was added back to EBITDA. That is the only piece of those dividend parts that has ever flown through the income statement, and it was an extremely small amount and fully disclosed in our financial statements."
Is the company still playing games? The distribution of profits vs. cash operating expenses is splitting hairs. No matter how you look at it, it's still an ongoing cash obligation to a supplier settled in stock.
The only person making money with this shell game is Tilray CEO Irwin Simon. He received total compensation worth C$21.2 million (US$15.7 million) in fiscal 2023. That includes a C$2.6 million cash bonus (30% of the max target) for partially achieving financial targets. Here is the best part: Tilray shareholders lost C$2 billion in FY2023.
Sinking Ship
The diversification strategy is not working.
Late last week, Tilray completed its acquisition of eight beer and beverage brands from Anheuser-Busch. This acquisition includes brands such as Shock Top, Breckenridge Brewery, Blue Point Brewing Company, and HiBall Energy, along with their associated breweries and brewpubs. The company boasted The U.S. craft beer market is expected to generate around $30 billion in revenue in 2023, with a projected CAGR of 7.2% through 2030. With this acquisition, Tilray Brands is anticipated to rise from the 9th to the 5th largest craft beer business in the U.S. this year. The company did not say the brands it acquired are in a secular decline. The CEO also highlighted the company's readiness to dominate the cannabis CPG market once federal cannabis legalization occurs in the U.S. Ty Gilmore, President of Tilray Beer, expressed excitement over the acquisition and the potential for growth in the U.S. craft beer industry. That is a big IF, and the move to schedule three might be a big problem for the company. The acquisition does nothing to strengthen Tilray's position in the craft brewing industry, with projected craft beer pro-forma revenue of $250 million. The company plans to leverage modern facilities and operations to fuel innovation and commercial growth opportunities. As a reminder, Tilray also owns Breckenridge Distillery, Truss Beverage Co., and Happy Flower CBD sparkling non-alcoholic cocktails.
