Tilray, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2021; filed July 28, 2021. The request metadata says “2020 Q4,” but this filing is the FY2021 annual report. It includes unaudited quarterly data for the quarter ended May 31, 2021.
Business context: Tilray operates cannabis, pharmaceutical distribution, beverage alcohol and hemp-wellness businesses. The April 30, 2021 Aphria combination was accounted for as a reverse acquisition: Aphria is the accounting acquirer, so prior-year results are Aphria’s, while FY2021 includes Aphria’s full year and only one month of legacy Tilray’s results. SweetWater was acquired in November 2020. Comparisons are therefore affected by acquisitions and are not fully like-for-like.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $513.1 million | $405.3 million |
| Gross profit | $123.2 million | $96.1 million |
| Operating loss | $(132.2) million | $(104.0) million |
| Net loss | $(336.0) million | $(100.8) million |
| Net loss per share, basic and diluted | $(1.25) | $(0.47) |
| Adjusted EBITDA, non-GAAP | $40.8 million | $5.8 million |
| Cash used in operating activities | $(44.7) million | $(100.6) million |
| Free cash flow, non-GAAP | $(83.6) million | $(199.4) million |
Unless otherwise stated, amounts are U.S. dollars. Revenue increased 27%, while net loss more than tripled. The substantial FY2021 loss included $184.8 million of net non-operating expense, including a $170.5 million unrealized loss on convertible debentures, and $63.6 million of transaction costs. Adjusted EBITDA improved, but is a company-defined non-GAAP measure and excludes significant items.
FY2021 segment net revenue was $277.3 million from distribution, $201.4 million from cannabis, $28.6 million from beverage alcohol and $5.8 million from wellness. Adult-use cannabis revenue rose 99% to $222.9 million; medical cannabis revenue declined 11% to $25.5 million. Distribution revenue was nearly flat year over year.
Reported cannabis gross margin fell to 35% from 47%, primarily reflecting a $19.9 million inventory write-down. Excluding that adjustment, management reported cannabis gross margin of 45%, down from 47%. Distribution gross margin was 13%; beverage alcohol was 56%; wellness was 27% and reflects limited post-acquisition results.
For the quarter ended May 31, 2021, net revenue was $142.2 million, gross profit was $22.5 million and consolidated net income was $33.6 million, or $0.18 per share. The filing does not establish that the quarterly profit is representative of ongoing performance.
Financial position and liquidity
- At May 31, 2021, cash and cash equivalents were $488.5 million, versus $360.6 million a year earlier; management attributed much of the increase to cash acquired in the Aphria combination.
- Current assets were $883.6 million and current liabilities were $401.2 million, yielding reported working capital of $482.4 million. The MD&A contains a conflicting reference to working capital of $488.5 million; the balance-sheet calculation supports $482.4 million.
- Total liabilities were $1.56 billion. Long-term debt, including its current portion, had a carrying amount of approximately $204.1 million; convertible debentures totaled $667.6 million. Lease liabilities were $58.2 million. Contractual commitments tabled for debt, convertible notes, the ABG liability, purchases and construction totaled $810.0 million.
- Management said it expected available cash to support operations for the next 12 months and characterized liquidity risk as low. The company nevertheless reported negative operating cash flow and said additional capital might be needed for U.S. growth or international expansion.
Material changes, outlook and risks
- The Aphria combination created a substantially larger international cannabis and consumer-products business. Management expects significant cost synergies within 18 months of closing, but integration was at an early stage and realization was not assured.
- Management described cost actions taken during the year, including temporary four-day work weeks at Canadian cannabis facilities, headcount management and reduced planned spending. It expected Canadian cannabis retail growth to resume after pandemic restrictions eased, while anticipating average selling-price pressure for at least the first half of the next fiscal year. No specific consolidated revenue or earnings guidance is provided.
- COVID-19 affected demand and operations, including medical visits and prescriptions, European pharmaceutical sourcing, SweetWater’s higher-margin on-premise sales and Canadian provincial cannabis ordering. The company also reported approximately $4.5 million of product returns associated with provincial inventory reductions.
- Other principal risks include evolving cannabis and hemp regulation, competition from licensed and illicit sellers, price compression and oversupply, customer and provincial purchasing variability, product liability, supply-chain disruption, foreign-exchange exposure, debt and convertible-security obligations, and stock-price volatility.
- Goodwill was $2.83 billion and intangible assets were $1.61 billion at year-end. No goodwill impairment was recorded in FY2021, but the auditor identified the business-under-development goodwill and intangible-asset impairment assessment as a critical audit matter; valuation depends on significant forecasts and assumptions.
- Pending litigation includes securities and shareholder actions, a Canadian product-labeling class action seeking $500 million plus punitive damages, and a contractual claim seeking C$110 million plus C$20 million in aggravated damages. Management said it had established appropriate reserves and did not expect pending matters to have a material effect, while acknowledging an unfavorable resolution could be material. The Wyckoff supply dispute was settled for $20 million cash and $5 million in stock, with a further payment due in cash or stock subject to specified conditions.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management’s control assessment excluded legacy Tilray and SweetWater because of acquisition timing; the auditor also excluded those entities from its controls audit. Legacy Tilray had previously disclosed material weaknesses and planned continuing remediation.
Important facts for investors to verify
- How much of revenue, adjusted EBITDA and cash generation is organic and recurring, given the reverse-acquisition presentation and partial-year inclusion of acquired businesses?
- Whether integration delivers the expected synergies, and what continuing transaction, restructuring and integration costs will be incurred.
- Whether cash, working capital and operating cash flow are accurately reconciled, including the conflicting working-capital figures in the filing text.
- The maturity, conversion, cash-settlement and dilution implications of the $667.6 million of convertible debentures, other debt and outstanding warrants.
- How cannabis inventory, average selling prices, gross margins and product returns evolve, particularly after the $19.9 million inventory write-down.
- Whether acquired goodwill and intangible-asset valuations remain supportable, and the status and potential financial effects of material litigation.