Tilray, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless otherwise noted, amounts are in U.S. dollars and thousands. The company cultivates, processes and distributes cannabis and sells hemp-based food and wellness products. Comparative results reflect updated accounting standards; hemp sales in Q1 2019 covered only one month following the Manitoba Harvest acquisition.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $52,102 | $23,038 |
| Gross profit / margin | $10,870 / 20.9% | $5,385 / 23.4% |
| Operating loss | $(71,250) | $(28,443) |
| Net loss | $(184,123) | $(29,369) |
| Net loss per share, basic and diluted | $(1.73) | $(0.31) |
| Adjusted EBITDA (non-GAAP) | $(19,678) | $(15,302) |
| Cash used in operating activities | $(54,031) | $(24,841) |
- Revenue included excise duties of $4,972, versus $1,559 a year earlier. Cannabis revenue rose 76% to $30,776; hemp revenue increased to $21,326 from $5,582, with the comparison affected by the partial 2019 quarter.
- Cash and cash equivalents were $173,990 at quarter-end, up from $96,791 at December 31, 2019. Working capital was $167,595, compared with $166,600.
- Investing activities used $18,119, including $18,290 of property and equipment purchases. Financing activities provided $159,786, principally from equity offerings and the new senior facility.
- Convertible notes had $475,000 face value and a $432,807 net carrying amount. The senior facility had $46,841 outstanding before transaction costs and a $43,829 net carrying amount. The notes bear 5% interest; the senior facility bears Canadian prime plus 8.05% and is secured by North American assets.
- Total liabilities were $725,256, compared with $611,059 at year-end; stockholders’ equity was $190,308, down from $285,271. Current liabilities included a $92,339 warrant liability.
Material changes and unusual items
- Revenue grew 126%, but gross margin declined from 23% to 21%. Management attributed cannabis margin pressure mainly to a greater adult-use sales mix, which carries lower margins than medical sales.
- Inventory valuation adjustments rose to $4,044 from $324, including $3,247 for cannabis and $797 for hemp. These adjustments reduced reported gross profit.
- Net loss included a $71,978 non-cash increase in the fair value of warrant liabilities, a $28,069 foreign exchange loss and $29,839 of asset impairment charges. Impairments included write-offs of ABG-related intangible assets and an ABG finance receivable.
- Sales and marketing costs rose 129% to $17,876; general and administrative costs rose 37% to $17,776. The company reported $7,677 in stock-based compensation and $1,861 in severance costs.
- The company eliminated 258 positions during the quarter, estimating annualized savings of $21 million net of severance, and cited approximately $19 million of additional expected annual savings from other efficiency measures. A further $466 of severance costs was incurred after quarter-end.
Outlook, risks and contingencies
- Going concern and funding: The filing identifies dependence on additional financing to meet anticipated working capital and capital spending needs over the next 12 months. Management concluded its plans were probable to mitigate substantial doubt, citing the February debt financing, March equity offering, planned cost controls and a May 4 notice to draw an additional $9,900 under the senior facility. Forecasts remain uncertain, particularly because of COVID-19 and capital-market access.
- Equity-raising restrictions: Warrants issued with the March offering contain anti-dilution terms and restrict certain security issuances pending stockholder approval. If approval is not obtained, the company says its ability to issue securities could be materially constrained. The warrants are liability-classified and their revaluation drove a large non-cash quarterly loss.
- Management outlook: The company expected continued adult-use and medical sales growth and lower bulk sales as it pursued higher-margin opportunities. It anticipated improved cannabis margins from cost reductions, operational efficiencies and lower third-party supply costs. These are expectations, not quantified earnings guidance.
- COVID-19: Operations remained open and management reported no material disruption to date, but warned of possible staffing, supply-chain, demand, construction and capital-raising impacts. Construction delays in Portugal could affect planned production and sales. The company noted that future revenue could decline and further asset impairments or cost reductions may be required.
- Commitments and disputes: Non-cancellable inventory purchase commitments totaled $113,047, largely due in the remaining nine months of 2020; Portugal construction commitments were $17,423. The filing describes a dispute with 420 Investments seeking specific performance or C$110 million plus C$20 million in aggravated damages, and a Wyckoff arbitration claiming a C$59.8 million minimum purchase obligation, among other litigation. Management disputes the claims; outcomes are uncertain.
- Controls: Management concluded disclosure controls and procedures were not effective at March 31, 2020 because of previously identified material weaknesses in the control environment and control activities. Remediation was ongoing.
Important facts for investors to verify
- Progress on the planned additional senior-facility draw, liquidity forecasts and compliance with debt covenants and the $28,412 minimum unrestricted-cash covenant.
- Whether stockholders approved the warrant anti-dilution provisions and how the warrant liability and related equity-issuance restrictions evolve.
- Whether revenue growth translates into stronger gross margins and lower operating cash outflows, especially given inventory write-downs and customer concentration.
- The realized savings and any further restructuring costs, alongside COVID-19 effects on demand, operations and Portugal construction.
- Developments in the 420 Investments, Wyckoff and securities-related proceedings, and remediation of internal-control material weaknesses.