Tilray Brands, Inc. (then Tilray, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Unless otherwise stated, dollar amounts below are U.S. dollars in millions. The filing reports unaudited interim results.
Business context and reporting period
Tilray operated cannabis and hemp businesses. Cannabis activities included medical and adult-use products; the hemp segment sold food and wellness products. Results were affected by the pandemic, cost reductions, a planned reduction in bulk cannabis sales, and the closure of the High Park Gardens facility.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $51.4 | $51.1 | $153.9 | $120.0 |
| Gross profit | $3.7 | $15.9 | $9.2 | $33.5 |
| Gross margin | 7% | 31% | 6% | 28% |
| Operating loss | $(32.8) | $(23.8) | $(179.8) | $(85.2) |
| Net loss | $(2.3) | $(36.4) | $(268.1) | $(102.0) |
| Adjusted EBITDA (non-GAAP) | $(1.5) | $(21.9) | $(32.5) | $(54.3) |
- Revenue mix: Q3 cannabis revenue fell 11% to $31.4 million, while hemp revenue rose 28% to $20.0 million. For the nine months, cannabis revenue grew 17% to $92.4 million and hemp revenue rose 50% to $61.5 million.
- Cash flow and liquidity: Cash and cash equivalents were $155.2 million at September 30, up from $96.8 million at year-end 2019. Working capital was $171.3 million. Nine-month operating cash use was $104.5 million, versus $167.3 million in 2019; investing cash use was $41.9 million and financing provided $210.1 million.
- Debt: Convertible notes had $475.0 million face value, bear 5% interest, and mature in 2023. Their net carrying value was $438.2 million. The Senior Facility had $48.3 million principal outstanding and $45.9 million net carrying value; principal is due February 28, 2022, with interest-only payments until then at Canadian prime plus 8.05%. The company reported covenant compliance.
- Balance sheet: Total assets were $887.4 million, total liabilities $700.6 million, and stockholders’ equity $186.7 million. Inventory was $89.9 million.
Material changes versus comparable periods
- Q3 revenue was nearly flat year over year, but gross profit fell to $3.7 million. Inventory valuation adjustments were $13.4 million in the quarter, compared with $0.2 million in Q3 2019; management said adjusted cannabis gross margin excluding these adjustments was 27% for Q3.
- Q3 net loss narrowed substantially, but this reflected, in part, a $31.9 million non-cash gain from the change in warrant fair value and a $9.3 million foreign-exchange gain. For the nine months, net loss worsened, including $58.2 million of asset impairments, $51.3 million of warrant fair-value expense, and $36.1 million of inventory valuation adjustments.
- Adult-use and international medical sales increased, while bulk cannabis sales declined sharply. Cannabis equivalents sold fell 53% in Q3, largely due to reduced bulk sales; hemp units sold rose 25%.
- Cash increased through equity financing and debt proceeds. Tilray issued shares through its at-the-market program and raised net proceeds of approximately $85.3 million in a March registered offering. The offering’s 19 million outstanding warrants were recorded as a liability and create potential dilution and financing constraints.
Outlook, management commentary, risks and unusual items
- Outlook: No numeric revenue or earnings guidance was provided. Management expected continued growth in adult-use and international medical cannabis, modest to little hemp top-line growth while U.S. CBD regulation remained unclear, and improved cannabis margins as cost reductions and facility efficiencies take effect. It also cautioned that COVID-19 and construction delays in Portugal could limit sales and production.
- Cost actions: The company eliminated 482 positions, citing expected annualized savings of $38 million net of severance; other efficiency measures were expected to add about $17 million in annual savings. The High Park Gardens closure was expected to save approximately $6 million annually and avoid capital spending.
- Going concern and liquidity: Management stated that forecasts supported meeting operating needs for the next 12 months and concluded it was probable that mitigating plans could address conditions raising substantial doubt. It also cited uncertainty about future equity financing and COVID-19 effects. Cash needs include debt service, leases, inventory commitments and construction obligations.
- Commitments: Future minimum inventory purchase commitments totaled approximately $100.0 million, including $69.7 million due in the remaining three months of 2020. The filing also listed $4.9 million in Portugal construction commitments and significant debt and lease obligations.
- Unusual items and contingencies: The company recorded $25.1 million of impairments associated with High Park Gardens, including land, buildings and a cultivation license; other impairments contributed to the $58.2 million nine-month total. Litigation and arbitration matters included a C$110 million damages claim (plus C$20 million aggravated damages) by 420 Investments, a securities class action, and other shareholder and supplier disputes. Management said no claims met its criteria for recording a loss contingency, while acknowledging an unfavorable resolution could be material.
- Controls: Management concluded disclosure controls and procedures were not effective at September 30, 2020 because previously reported material weaknesses remained under remediation. A new CFO and Global Corporate Controller had been added; remediation was not yet considered complete.
- Other risks: COVID-19-related retail and supply-chain disruption, customer concentration, regulatory uncertainty for cannabis and CBD, foreign-exchange exposure, debt service, warrant-related dilution and limitations on equity issuance, and ongoing losses were identified as material risks.
Most important facts for investors to verify
- Whether gross margins recover as inventory write-downs and supply-contract termination costs abate, and whether the stated cost savings are realized.
- Cash burn, access to additional financing, and ability to meet the 2022 Senior Facility maturity and other commitments.
- Progress on the High Park Gardens sale, including proceeds available to Tilray after the lender’s 40% share of net sale proceeds.
- Warrant liability remeasurement, anti-dilution provisions, potential share dilution, and related limits on below-strike at-the-market issuance.
- Developments in significant litigation and arbitration, COVID-19 effects, and remediation of material weaknesses in internal controls.