Business context and reporting period
Tilray, Inc. (Nasdaq: TLRY) filed this Form 10-K for the fiscal year ended December 31, 2019. The filing reports annual results, with unaudited quarterly data including the fourth quarter; it is not a standalone “2019 Q4” filing. Tilray operated licensed cannabis and hemp-product businesses, with the hemp segment added following its February 2019 acquisition of Manitoba Harvest. Figures below are in U.S. dollars unless indicated otherwise.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue, including excise duties | $167.0 million | $43.1 million |
| Gross profit (loss) | $(23.5) million; (14)% margin | $14.3 million; 33% margin |
| Operating loss | $(301.7) million | $(57.7) million |
| Net loss | $(321.2) million | $(67.7) million |
| Adjusted EBITDA (non-GAAP) | $(89.8) million | $(28.3) million |
| Cash used in operating activities | $(258.1) million | $(46.2) million |
| Cash used in investing activities | $(253.2) million | $(98.6) million |
| Cash and cash equivalents at year-end | $96.8 million | $487.3 million |
| Total assets / total liabilities | $896.3 million / $611.1 million | $656.7 million / $459.0 million |
| Working capital | $166.6 million | $528.4 million |
Year-end debt included $475 million principal of 5.00% convertible notes due October 2023; their net carrying value was $430.2 million. The notes are unsecured. At February 28, 2020, Tilray also entered a two-year senior secured facility of up to $59.6 million, with $49.7 million drawn at closing, at Canadian prime plus 8.05%.
Material changes versus the prior comparable period
- Revenue rose 287%, driven by cannabis revenue growth of 148% and the first-year contribution from Manitoba Harvest. Cannabis sales increased to $107.1 million; hemp contributed $59.8 million.
- Adult-use cannabis revenue increased to $55.8 million from $3.5 million. International medical revenue rose to $13.4 million from $2.9 million, while Canadian medical revenue fell 30% to $12.6 million, which management attributed partly to first-half supply constraints.
- Gross results deteriorated substantially. Cost of sales included $68.6 million of inventory valuation adjustments, versus $4.6 million in 2018. Excluding those adjustments, cannabis gross margin was 20% in 2019 versus 44% in 2018, a non-GAAP measure.
- Net loss widened by $253.4 million. Significant contributors included a $112.1 million impairment charge, higher operating costs and interest expense, and inventory write-downs. The impairment included $102.6 million for ABG participation rights; another $4.1 million related to a Chile cultivation license.
- Cash declined by $390.5 million during the year. Operating cash use increased more than fivefold; investing outflows reflected acquisitions, the ABG arrangement and capital spending. The company raised $111.1 million net through its at-the-market equity program.
Outlook, risks, contingencies and unusual items
- Management outlook: No consolidated revenue or earnings guidance is provided. Management expected continued growth in adult-use, international medical and hemp channels, but anticipated lower bulk sales in 2020. It expected lower cannabis production costs and improving cannabis margins as facilities scaled, and projected hemp gross margins of 43%–45% in 2020, excluding specified inventory adjustments and purchase-accounting step-up.
- Liquidity and going concern: The filing says continuing operations depend on financing to meet anticipated working-capital and capital-expenditure needs. Management concluded its plans—including the subsequent secured facility, possible ATM/equity financing and discretionary spending reductions—would probably address substantial doubt over the next 12 months. Funding access and forecast performance remain key uncertainties.
- Commitments and supply: Non-cancellable inventory purchase commitments were $132.7 million, with $131.0 million due in 2020. The company was renegotiating certain supply agreements and warned that failure could lead to above-market purchases, supply disruption or litigation.
- ABG amendment: In January 2020, Tilray eliminated a potential $83.3 million additional payment obligation but relinquished guaranteed minimum participation rights; participation rights would apply only after annual thresholds were exceeded. The amendment was expected to cause a $7.0 million receivable write-off through earnings and a $28.9 million reduction to accumulated deficit.
- Legal matters: 420 Investments sought specific performance of a terminated acquisition agreement or C$120 million plus C$20 million in aggravated damages. A separate stockholder class and derivative action challenged the 2019 Privateer merger. Outcomes were uncertain; the filing notes an adverse judgment could trigger default under debt agreements.
- Financial reporting controls: Management and Deloitte reported material weaknesses in the control environment and control activities. Disclosure controls and internal control over financial reporting were deemed ineffective at December 31, 2019; remediation was ongoing.
- Other risks: The filing highlights regulatory uncertainty for cannabis and U.S. CBD products, competition and illicit-market pressure, customer concentration (two customers each represented 13% of 2019 revenue), potential product recalls, currency exposure, and the early-2020 coronavirus outbreak’s possible impact on operations and supply chains.
Important facts for investors to verify
- Whether the $68.6 million inventory valuation adjustments, including the $15.3 million loss on supplier advances, fully reflect excess inventory and recoverability risks.
- Whether the company can reduce operating cash burn, improve segment margins and fund obligations without further dilutive equity issuance; verify actual draws and terms under the 2020 secured facility.
- Progress in remediating material weaknesses, including whether controls operate effectively and whether acquired businesses are brought into the control assessment.
- Actual performance of Manitoba Harvest and U.S. CBD sales against the assumptions behind goodwill, intangible-asset and impairment valuations.
- Developments in the 420 Investments and Privateer-related litigation, and any effect on liquidity, debt covenants or the terminated transaction.
- Customer concentration, supply-contract renegotiations and the timing and demand for new Canadian Cannabis 2.0 products.