Tilray, Inc. — Q2 2019 Form 10-Q
Quarter ended June 30, 2019; six-month comparisons are for the period ended June 30. Financial figures are unaudited and in U.S. dollars. The filing reports in thousands; amounts below are shown in millions unless stated otherwise.
Business context
Tilray develops and sells cannabis products, operating in one reportable segment. The period included the acquisitions of hemp-food company Manitoba Harvest and cannabis producer Natura, as well as the launch of Canadian adult-use sales. Manitoba Harvest expanded Tilray into U.S. hemp-derived CBD and food products. The filing was signed August 13, 2019.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $45.9 | $9.7 | $68.9 | $17.6 |
| Gross profit | $12.3 | $4.2 | $17.7 | $8.1 |
| Gross margin | 27% | 43% | 26% | 46% |
| Operating loss | $(32.5) | $(11.0) | $(60.4) | $(14.7) |
| Net loss | $(35.1) | $(12.8) | $(65.4) | $(18.0) |
| Adjusted EBITDA loss | $(17.9) | $(4.7) | $(32.5) | $(8.0) |
- Q2 revenue rose 371%; six-month revenue rose 293%. Growth reflected the Manitoba Harvest acquisition, Canadian adult-use sales, and international medical sales. Manitoba Harvest contributed $19.9 million of Q2 revenue; Natura contributed $5.8 million.
- Adult-use revenue was $15.0 million in Q2, or 33% of total revenue. Food products contributed $19.9 million. Excise taxes included in revenue were $3.9 million in Q2 and $5.8 million year to date.
- Margins weakened year over year amid third-party supply, startup and low-throughput costs at new facilities, product mix, excise taxes, and purchase-accounting inventory step-up. Q2 gross margin improved sequentially from 23% in Q1 to 27%.
- Operating expenses rose substantially, including acquisition and integration costs of $2.5 million in Q2 and $6.9 million year to date. Interest expense increased to $8.6 million in Q2 and $17.3 million year to date, primarily due to the 2018 convertible notes.
Cash, liquidity, and debt
- At June 30, cash and cash equivalents were $184.6 million and short-term investments were $36.3 million, down from $487.3 million and $30.3 million, respectively, at December 31, 2018. Current assets were $358.6 million and current liabilities $175.9 million.
- For the first six months, operating cash use was $110.2 million, investing cash use $198.6 million, and financing cash provided $5.7 million. Investing outflows included acquisitions, the ABG arrangement, facility investment, and a joint venture contribution.
- The company had $475.0 million principal amount of 5.00% convertible notes due October 2023; their net carrying amount was $425.4 million. The notes were not yet convertible at June 30, and Tilray reported compliance with the indenture covenants.
- Management said existing cash should meet working-capital needs, while noting that additional capital or financing may be needed for planned growth and facility construction.
Changes, outlook, and notable risks
- Management expected continued revenue growth in the remainder of 2019, further gross-margin improvement as facilities scale, and lower cannabis cost per gram as operations improve. It also expected harvest volumes to increase and Portugal exports to begin in the second half of 2019. Management cautioned that average cannabis selling prices could continue to decline as adult-use wholesale sales grow; R&D and full-year note interest expense were expected to increase.
- Manitoba Harvest and Natura purchase-price allocations remained preliminary. Manitoba Harvest consideration included deferred cash and stock payments and sales-based contingent consideration; Natura consideration included production-based contingent stock payments. The ABG arrangement included contingent payments of up to approximately $83 million upon specified regulatory or commercial triggers.
- Tilray identified significant industry and execution risks, including cannabis licensing and regulatory changes, uncertain U.S. CBD rules, pricing and supply-demand swings, competition from licensed and illicit markets, production ramp-up and construction costs, customer concentration, foreign-exchange exposure, and continued losses and cash consumption.
- Internal control over financial reporting was not effective at June 30 due to a previously reported material weakness in manual inventory-costing and financial-close processes. Management said no material errors or restatements had resulted and remediation was underway.
- After quarter-end, Tilray acquired Smith & Sinclair on July 11, 2019, for cash, shares, and potential contingent consideration. The filing reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to acquisitions, and whether acquired businesses meet operating and integration expectations.
- Whether gross margins improve as management anticipates, including the effects of adult-use pricing, excise taxes, third-party supply, and production ramp-up.
- Cash burn, planned capital spending, deferred acquisition payments, contingent obligations, and whether additional financing will be required.
- Progress on remediation of the inventory-costing and financial-close control weakness, and any implications as Tilray loses emerging-growth-company status at year-end 2019.
- Developments in cannabis licensing and U.S. CBD regulation, as well as the conversion, cash-settlement, and dilution implications of the convertible notes.