Business context and reporting period
Tilray, Inc. (now identified in the request as Tilray Brands, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2019. The company develops and sells cannabis products and operates as one reportable segment. Unless noted otherwise, amounts below are in U.S. dollars.
Quarterly results reflect two acquisitions completed during the period: Natura, a Canadian cannabis cultivator, and Manitoba Harvest, a hemp-based food and wellness products business. Reported results include each business only from its acquisition date, so acquisition timing affects year-over-year comparisons.
Key financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $23.0 million | $7.8 million; up 195% |
| Cost of sales | $17.7 million | $3.9 million |
| Gross profit / margin | $5.4 million / 23% | $3.9 million / 50% |
| Operating loss | $(27.9) million | $(3.7) million |
| Net loss; diluted loss per share | $(30.3) million; $(0.32) | $(5.2) million; $(0.07) |
| Adjusted EBITDA (non-GAAP) | $(14.6) million | $(3.2) million |
| Cash used in operating activities | $(24.8) million | $(1.7) million |
| Cash used in investing activities | $(169.5) million | $(42.8) million |
| Cash and cash equivalents, March 31 | $294.2 million | $487.3 million at December 31, 2018 |
| Short-term investments, March 31 | $31.2 million | $30.3 million at December 31, 2018 |
| Total assets / total liabilities, March 31 | $1,076.6 million / $694.7 million | $656.7 million / $459.0 million at December 31, 2018 |
Revenue growth included Canadian adult-use cannabis sales of $7.9 million, hemp food sales of $5.6 million, international medical sales of $1.8 million, and ACMPR sales of $7.8 million. One customer represented 13% of quarterly revenue. Cannabis volume sold increased 132% and kilograms harvested increased 396% year over year; food-product sales were new following the Manitoba Harvest acquisition.
At March 31, current assets were $399.6 million and current liabilities were $170.4 million. The company had $475 million face value of 5.00% convertible notes due October 2023, carried at $422.9 million net of discount and issuance costs. Notes require no scheduled principal payments before maturity; interest expense was $8.7 million in the quarter. The company reported compliance with the indenture covenants.
Material changes versus the prior comparable period
- Revenue rose sharply with the launch of Canada’s adult-use market, increased production and sales, international growth, and acquired food-product revenue. Acquisitions make reported growth less comparable with the prior year.
- Gross margin fell from 50% to 23%. Management attributed the decline to third-party cannabis sourcing, lower yields, new-facility ramp-up and throughput, and a non-cash inventory fair-value step-up charge of approximately $0.7 million.
- Operating expenses increased to $33.3 million from $7.6 million, including higher staffing and public-company costs, sales and marketing investment, $5.3 million of stock compensation, and $4.4 million of acquisition and integration expense.
- Interest expense increased from $0.4 million to $8.7 million, principally due to the convertible notes issued in October 2018. The accumulated deficit increased to $138.5 million from $108.2 million at year-end.
- Cash declined by $193.1 million in the quarter. Investing outflows included $109.1 million for Manitoba Harvest, $15.1 million for Natura, $33.3 million invested in the ABG arrangement, and $9.0 million of property and equipment purchases.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings, or cash-flow guidance is provided. Management expects adult-use sales to represent a greater share of 2019 revenue and anticipates a full year of adult-use sales compared with 2018.
- Management expects cannabis costs to decrease as the High Park Processing Facility operates at capacity, but described near-term margin pressure from new facilities and third-party sourcing. It expects an additional approximately $1.4 million non-cash inventory purchase-accounting charge in Q2 2019. It also expects higher 2019 interest expense from a full year of convertible-note costs and expects R&D expense to increase as it pursues clinical trials and product development.
- Management said existing cash should meet short-term working-capital needs, while noting that additional capital or financing may be needed for planned growth and facility construction.
- The ABG arrangement provides participation rights in certain brands’ net cannabis revenue, guaranteed minimum receipts of $10 million annually for ten years (prorated to consideration paid), and preferred supplier and royalty rights. Tilray had paid approximately $33 million in cash and issued 1.68 million shares; it also agreed to a further payment of approximately $83 million, subject to specified regulatory or commercial triggers.
- Acquisition-related current liabilities included $69.4 million payable for Manitoba Harvest and $49.2 million of contingent consideration for the acquisitions. Acquisition purchase-price allocations were preliminary and subject to adjustment. Contingent payments depend on Manitoba Harvest CBD sales and Natura production levels.
- Management disclosed an unresolved material weakness in internal control over financial reporting relating to manual, spreadsheet-based inventory costing and financial-close processes. No material errors or restatements were identified; remediation was underway but not yet complete.
- Key risks include cannabis licensing and regulatory changes, uncertain U.S. hemp-derived CBD rules, competition and pricing, supply and facility ramp-up, customer concentration, foreign-exchange exposure, ongoing losses, financing needs, and the company’s dual-class voting structure and Privateer Holdings control. The filing reports no legal proceeding expected to have a material adverse effect, but notes that Tilray began a recall in April 2019 of one adult-use preroll lot due to a labeling error.
Important facts for investors to verify
- How much of revenue growth and future performance is attributable to acquired businesses versus organic cannabis growth, and whether the acquisitions meet operating expectations.
- Whether production scale-up lowers unit costs and restores gross margins, including the effect of inventory step-up charges and third-party supply.
- Cash use, remaining acquisition and ABG commitments, facility spending, and the company’s ability to fund operations without additional financing.
- Progress in remediating the inventory-costing and financial-close material weakness, and whether controls operate effectively over a sufficient period.
- Terms and potential dilution from contingent acquisition consideration, the convertible notes, equity compensation, and future share issuance; also verify the voting influence of Privateer Holdings.