Tilray, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. The company produces and sells medical and adult-use cannabis, with operations centered in Canada and international medical markets. Canadian adult-use legalization began October 17, 2018. Financial amounts below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $43.1 million | $20.5 million |
| Gross profit / margin | $14.3 million / 33% | $11.4 million / 55% |
| Operating loss | $57.7 million | $7.5 million |
| Net loss | $67.7 million | $7.8 million |
| Adjusted EBITDA (non-GAAP) | $(33.1) million | $(5.5) million |
| Net cash used in operating activities | $46.2 million | $6.0 million |
| Net cash used in investing activities | $98.6 million | $11.8 million |
- Revenue increased 110%. Cannabis extracts generated $21.2 million, about 49% of revenue, versus $4.0 million and 19% in 2017. Adult-use sales contributed $4.4 million, or 10% of revenue, after Canada’s market opened in October.
- Gross margin fell to 33% from 55%. Management attributed the decline to third-party supply purchases, lower yields and throughput while new facilities scaled up. Average cost per gram sold rose 30% to $3.70; average net selling price increased 1% to $6.61.
- Operating expenses rose to $71.9 million from $18.9 million, including $21.0 million of stock-based compensation. The company reported a $7.2 million foreign-exchange loss and $9.1 million of net interest expense.
- Fourth-quarter revenue was $15.5 million, gross profit $3.1 million, operating loss $22.9 million and net loss $31.0 million. Fourth-quarter gross margin was approximately 20%.
- At year-end, cash and cash equivalents were $487.3 million and short-term investments were $30.3 million. Current assets were $554.3 million against current liabilities of $25.9 million. Operating cash outflow was funded principally by financing proceeds.
- The company issued $475 million of 5.00% convertible senior notes due October 2023, generating approximately $460 million net proceeds. Their year-end carrying value was $420.4 million; the initial conversion price was approximately $167.41 per share. The company reported no outstanding Privateer Holdings debt facilities or mortgage debt at year-end; capital-lease obligations were approximately $8.8 million.
Material changes and business developments
- Tilray completed its IPO in July 2018 and issued the convertible notes in October. It also raised approximately $55 million through Series A preferred shares, which converted to common shares at the IPO.
- Harvested volume rose 63% to 11,022 kilograms, while kilogram equivalents sold more than doubled to 6,478. Management linked production growth partly to High Park Farms coming online.
- Inventory increased to $16.2 million from $7.4 million. The company recorded $4.6 million of work-in-process inventory write-downs in 2018.
- Gross operating capacity was being expanded in Canada and Portugal. Management estimated that licensed facilities described in the filing could provide about 1.15 million square feet of production and processing space once required license amendments were obtained.
- After year-end, Tilray acquired Manitoba Harvest, for up to $319 million subject to revenue milestones, and Natura Naturals, for up to $53.4 million subject to cultivation milestones. Purchase accounting was incomplete when the 10-K was filed.
Outlook, risks and unusual items
- Management expected adult-use sales to represent a greater share of 2019 revenue, reflecting a full year of Canadian sales. It also expected higher 2019 interest expense from a full year of the convertible notes. The filing provides no quantified revenue, earnings or margin guidance.
- Management said adult-use wholesale channels can bring higher volumes but lower margins, and anticipated average selling prices could decline as sales mix shifts toward adult-use and wholesale. It expected costs at the High Park Processing Facility to decline as operations ramped toward capacity.
- Key risks include extensive licensing and regulatory requirements, uncertain market development and pricing, competition from licensed and illicit sellers, crop and facility disruption, construction and scaling risks, and the possibility that adult-use demand may not develop as expected.
- Customer concentration is significant: one customer accounted for 24% of 2018 revenue and had no purchase commitment. Two customers represented 16% and 30% of year-end accounts receivable, respectively.
- Management disclosed a material weakness in internal control over financial reporting involving inventory costing and the financial close process, driven by manual, spreadsheet-based procedures. Disclosure controls were deemed ineffective at December 31, 2018; remediation was planned. The auditor issued an unqualified opinion on the financial statements but did not audit internal controls.
- Privateer Holdings retained approximately 93% of voting power, including high-vote Class 1 shares. This concentrates control and may limit other shareholders’ influence. The company also noted substantial share-price volatility and no expected dividends in the foreseeable future.
- Management reported no legal proceedings expected to have a material adverse effect. The filing identifies prior product recalls and withdrawals, including a 2015 voluntary recall and a 2016 product withdrawal, but does not report a material current proceeding.
Important facts for investors to verify
- Whether revenue growth can translate into improved gross margins as facilities scale and third-party sourcing declines.
- The identity, purchasing pattern and ongoing exposure associated with the customer that supplied 24% of 2018 revenue, and the collectability of concentrated receivables.
- Cash use, capital spending and acquisition funding needs relative to year-end liquidity and the $475 million notes due in 2023.
- Progress in remediating the inventory-costing and financial-close control weakness, and any subsequent revisions or control deficiencies.
- Required permits, sales licenses and GMP approvals for planned capacity, and the timing, costs and integration results of the Manitoba Harvest and Natura acquisitions.
- The dilution and potential cash-settlement implications of convertible notes and equity awards; the filing reports 7.9 million potential dilutive common-share equivalents at year-end, though they were excluded from diluted loss per share because the company reported a net loss.