Tilray, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Unaudited financial statements are in U.S. dollars, in thousands unless stated otherwise. The filing describes Tilray’s medical cannabis business and plans to enter Canada’s adult-use market.
Financial performance and position
- Revenue: Q2 revenue was $9.744 million, up 95% from $4.992 million; first-half revenue was $17.552 million, up 75% from $10.019 million. Extract revenue rose to $4.438 million for Q2 and $7.545 million for the half-year, compared with $0.880 million and $1.871 million, respectively.
- Profitability: Q2 gross margin was $4.177 million, or 43% of revenue, versus $2.708 million, or 54%, a year earlier. First-half gross margin was $8.073 million, or 46%, versus $5.456 million, or 54%. Q2 net loss widened to $12.833 million from $2.435 million; first-half net loss widened to $18.014 million from $3.133 million. First-half adjusted EBITDA loss was $7.951 million versus $1.699 million.
- Costs and operating metrics: Q2 operating expenses rose to $15.167 million from $5.024 million, including $5.601 million of stock-based compensation. Kilogram equivalents sold increased 97% in Q2 and 71% in the first half; average net selling price per gram rose 3% and 6%, respectively. Average cost per gram sold rose 18% and 17%.
- Cash flow and capital investment: First-half cash used in operations was $2.905 million, compared with $2.810 million. Investing used $28.953 million, including $28.237 million for property and equipment. Financing provided $56.028 million, including $52.557 million net proceeds from preferred stock. Cash at June 30 was $25.331 million, up from $2.323 million at year-end.
- Liquidity and debt: Current assets were $38.744 million and current liabilities $62.846 million at June 30. Privateer Holdings debt facilities totaled $37.015 million; the mortgage, bearing 11.5% interest, had $9.128 million outstanding and was due in January 2019 after a July extension. In July, Tilray received $163.6 million net from its IPO and repaid approximately $36.940 million of Privateer Holdings debt.
- Balance sheet: Total assets were $106.478 million, liabilities $71.244 million, and stockholders’ equity $35.234 million, compared with a $4.852 million deficit at December 31, 2017.
Material changes versus the prior comparable period
- Sales growth reflected higher patient demand, bulk sales to other licensed producers, export wholesale sales, and growth in extracts, including high-CBD oil drops launched in January 2018.
- Gross margin percentage declined as third-party product procurement and wholesale-channel sales increased costs. Management also attributed higher average cost per gram to third-party sourcing and a shift toward high-THC and high-CBD cultivars with lower yields.
- Sales and marketing and general and administrative expenses increased substantially with staffing, promotion, professional fees, expansion, and public-company/financing-related costs. Stock-based compensation increased sharply following grants under the 2018 equity plan.
- Harvested kilograms declined 17% in Q2 and 13% in the first half, which management attributed primarily to cultivation mix changes toward lower-biomass-yield strains.
Outlook, risks, contingencies, and unusual items
- Management said existing cash was expected to meet short-term working-capital needs; the subsequent IPO added $163.6 million net. It also noted that further capital or financing may be needed for growth and facility construction. The filing provides no quantified revenue, earnings, or cash-flow guidance.
- Tilray expected Canadian adult-use legalization to take effect in October 2018 and had negotiated provincial and territorial supply agreements, subject to authorizing legislation. Results depended on regulatory implementation, licensing, construction, production scale-up, and market demand.
- Key risks include license renewal or restriction, changing cannabis regulations, adult-use market competition or oversupply, price and margin pressure, reliance on third-party supply, facility or crop disruption, international market restrictions, and foreign-currency exposure. The company said it did not hedge currency risk; a 10% Canadian-dollar exchange-rate change would affect the June 30 net-asset carrying value by approximately $793,000.
- Privateer Holdings was a major related party, lender, service provider, and controlling shareholder. Its debt was repayable on demand, and management and other services were charged to Tilray. The filing also describes potential conflicts of interest and concentrated voting control.
- Other notable items: the IPO closed in July at $17 per share; outstanding preferred shares automatically converted to Class 2 common stock. The company recorded $703,000 of first-half cannabis-oil inventory write-downs. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control during the quarter. Management stated there were no material pending legal proceedings or material changes in contractual commitments.
Important facts for investors to verify
- Confirm post-IPO cash, debt repayment, and remaining obligations to Privateer Holdings, including demand repayment terms and any continuing related-party fees.
- Assess whether facility construction, licensing, and production capacity can support demand without continued high-cost third-party sourcing or further margin erosion.
- Track the actual timing and terms of Canadian adult-use implementation, provincial distribution arrangements, and the effect on medical sales and pricing.
- Review ongoing stock-based compensation, potential dilution, and the preferred-stock conversion and post-IPO share count.
- Verify the company’s voting structure: the filing’s capital-stock note says Class 1 shares carry three votes each, while its risk discussion says they carry 10 votes each. The filing also describes Privateer Holdings as controlling the company; confirm the governing charter and actual voting power.