Cannabis producer Tilray Brands (TLRY 0.63%) delivered its fiscal 2022 third-quarter results last week. The highlights were undoubtedly the surprise profit it reported, and its year-over-year revenue growth of 23%.
The stock initially jumped in light of the results for the period, which ended Feb. 28, but it then resumed its downward trend, dropping below where it was prior to the report. And considering the many concerning aspects of the earnings report, it's understandable why.
The profit was due to non-operating items
First and foremost, that impressive profit that Tilray earned wasn't due to soaring sales, a leaner operating model, or declining expenses. What kept it out of the red was $72.7 million that was added to the bottom line as a result of non-operating items. Tilray actually reported an operating loss of $19.8 million for the period.
Those non-operating gains were due to changes in the fair value of its assets. During the quarter, it reported a change in fair value on convertible debt that added $56.1 million in gains and another $21 million due to fair value changes in warrant liabilities. The problem with these types of gains is that they can be unpredictable and lead to large swings on the bottom line. In the prior-year period, Tilray incurred a non-operating loss of $220.3 million that combined with its operating losses and resulted in an ugly net loss of $258.6 million.
Inconsistent, poor-quality earnings of this type can make it a nightmare for investors to try and gauge what direction a business's performance is actually going. Although I'm not a fan of adjusted numbers, in the case of marijuana companies, the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) metric has a lot of value because it factors out these wide fluctuations. And in fiscal Q3, Tilray's adjusted EBITDA profit was $10.1 million -- less than the $13.8 million that it recorded in fiscal Q2.
Sales fell for the second straight quarter
Tilray's sales lost ground too, but on this front as well, it's important to recognize what you're comparing a result against. On a year-over-year basis, the company boasted a 23% increase in revenue to $152 million. But a year ago, this business didn't include Aphria. That acquisition closed in May.
In this case, comparing quarters sequentially has more validity. And in Q2, Tilray's sales were higher -- $155.2 million. In its fiscal first quarter (which ended on Aug. 31), sales totaled $168 million, so its top line has declined by 9.5% since then.
Those declining sales are a cause for concern, especially as the cannabis company is aiming to get to a 30% market share in Canada. Currently, it's at just over 10%. And if that doesn't drastically improve soon, investors may want to brace themselves for more acquisitions (and stock dilution) as the company pursues an aggressive target of $4 billion in annual revenue by 2024.
Cash burn in Q3 was twice what it was in the prior quarter
Another problem is the company's growing cash burn. In fiscal Q3, Tilray reported adjusted free cash flow (excluding cash related to acquisitions) of negative $35.6 million. In fiscal Q2, its adjusted free cash flow was negative $16 million. A year ago, the company was reporting positive numbers.
Tilray needs to get back in the black by this metric -- particularly because that free cash flow calculation does not factor in money spent on acquisitions. If management determines it needs to make additional acquisitions to boost its sales, Tilray could be compelled to raise cash, further diluting its shareholders.
The case for buying Tilray didn't get any better
There really wasn't much for investors to get excited about in Tilray's latest earnings report. All that it proved was that the business has a long way to go if it's going to reach its target of $4 billion in annual revenue. If I were invested in it, I would have significant concerns that more secondary stock offerings are coming.
So it's not surprising that after the initial excitement worse off, the stock fell in the days following the earnings announcement. Even though Tilray's stock is down by 67% over the past year (worse than the 55% decline of the sector benchmark Horizons Marijuana Life Sciences ETF), it's still not a safe cannabis company to invest in today.