Tilray, Inc. (Tilray Brands, Inc. in request metadata) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless otherwise stated, financial amounts are in U.S. dollars; financial statement figures below are in millions, converted from the filing’s thousands. The filing covers Tilray, Inc., a cannabis products developer, producer and distributor operating in Canada and international markets.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $10.0 | $5.4 | $27.6 | $15.4 |
| Gross profit | $3.1 | $3.0 | $11.1 | $8.4 |
| Gross margin | 31% | 55% | 40% | 55% |
| Operating loss | $(20.0) | $(2.2) | $(34.7) | $(4.9) |
| Net loss | $(18.7) | $(1.8) | $(36.7) | $(4.9) |
| Adjusted EBITDA loss (non-GAAP) | $(7.4) | $(1.7) | $(15.3) | $(3.4) |
- Revenue mix and volumes: Q3 revenue rose 86% year over year; nine-month revenue rose 79%. Cannabis oils generated $5.2 million in Q3 and $12.7 million for nine months, while dried cannabis generated $4.8 million and $14.7 million, respectively. Kilogram equivalents sold increased 136% in Q3 and 90% for nine months. The filing attributes growth to patient demand, sales to other licensed producers, export wholesale distribution and extract products.
- Margins and costs: Average net selling price per gram was $6.21 in Q3 versus $7.53 a year earlier; the nine-month figure was $6.19 versus $6.34. Average cost per gram sold increased 22% in Q3 and 20% for nine months. Management cites third-party supply, lower-yield cultivars and a larger wholesale sales mix as factors behind higher costs and lower margins.
- Expenses: Q3 operating expenses were $23.1 million, including $11.2 million of stock-based compensation; nine-month expenses were $45.9 million, including $16.9 million of stock-based compensation. Increased sales and marketing and general and administrative costs also reflected expansion, public-company and IPO-related expenses.
- Cash flow: For nine months, operating cash use was $26.4 million, investing cash use was $53.5 million and financing provided $179.7 million. Property, plant and equipment purchases were $38.1 million. Cash and cash equivalents increased by $101.9 million to $104.2 million at September 30.
- Liquidity and debt: At September 30, cash and cash equivalents were $104.2 million and short-term investments were $14.7 million. Current assets were $145.9 million versus current liabilities of $26.9 million. The balance sheet showed $9.3 million of current mortgage debt and no Privateer Holdings debt facilities; the mortgage was repaid in October. Capital-lease obligations were $8.9 million noncurrent and $0.1 million current.
Material changes and notable developments
- The company completed its IPO in July, selling 10.35 million Class 2 shares at $17 per share and receiving net proceeds of approximately $163.7 million. Earlier in 2018, it raised approximately $55 million through Series A preferred shares, which converted to Class 2 shares at the IPO.
- In October 2018, Tilray issued $475 million principal amount of 5.00% convertible senior notes due 2023, for approximately $460.8 million net proceeds. The notes may be settled in cash, shares or a combination, at the company’s election; conversion and repurchase terms could affect liquidity and dilution.
- Tilray repaid $36.9 million of Privateer Holdings debt facilities in July and repaid its mortgage in October. It also acquired Chile-based Alef Biotechnology in October for approximately $3.9 million; purchase-price allocation was still being determined.
- Canada’s adult-use cannabis market became legal on October 17, 2018. Management expected adult-use sales to represent a greater share of revenue, while also expecting average selling prices to decline as wholesale channels grow faster than direct-to-patient sales.
Outlook, risks and contingencies
- Management said existing cash was expected to cover short-term working capital needs, but additional capital could be needed for planned growth and facility construction. The filing provides no specific revenue, earnings or cash-flow guidance.
- Key risks include licensing and regulatory compliance, uncertain adult-use market demand and supply, price pressure, the company’s history of losses, execution and construction risks, and reliance on third-party cannabis supply. Management reported third-party procurement represented approximately 31% of production in the first three quarters of 2018.
- One customer accounted for 28% of Q3 revenue and 29% of nine-month revenue; the filing says this customer had no purchase commitment and could change or cancel orders.
- Foreign exchange exposure is material: the company reported that a 10% change in Canadian-dollar exchange rates would affect the carrying value of net assets by approximately $1.3 million. It had not historically hedged and did not then plan to do so.
- Privateer Holdings held approximately 93% of voting power through high-vote Class 1 shares, creating concentrated control and potential conflicts. The company also disclosed substantial stock-price volatility after its IPO.
- Management said it was not party to legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether post-legalization adult-use sales and supply performance supported management’s expectations, and how the mix affected selling prices and gross margins.
- Whether production capacity, facility construction and reduced reliance on third-party supply improved unit costs and margins.
- The customer concentration, including subsequent purchasing trends and any changes in the customer relationship.
- Use of the October convertible-note proceeds, the notes’ conversion or repurchase exposure, and the resulting potential dilution and debt-service requirements.
- Repayment status of the mortgage, integration and economics of the Alef acquisition, and ongoing related-party services or arrangements with Privateer Holdings.