Business context and reporting period
Tilray, Inc. (Nasdaq: TLRY) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company operates cannabis and hemp businesses; figures below are in U.S. dollars, generally in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $50.4 | $45.9 | $102.5 | $68.9 |
| Gross profit (loss) | $(5.4) | $12.3 | $5.5 | $17.7 |
| Operating loss | $(75.8) | $(33.0) | $(147.1) | $(61.4) |
| Net loss | $(81.7) | $(36.3) | $(265.8) | $(65.7) |
| Adjusted EBITDA (non-GAAP) | $(12.3) | $(18.0) | $(31.0) | $(32.4) |
- Q2 revenue grew 10%; six-month revenue increased 49%. Q2 cannabis revenue rose 16% to $30.2 million, while hemp revenue increased 2% to $20.2 million. Six-month hemp growth chiefly reflects six months of Manitoba Harvest results versus four months in 2019.
- Q2 gross margin was approximately negative 11%, versus 27% a year earlier. Inventory valuation adjustments were $18.6 million in Q2 and $22.7 million year to date, including write-downs of cannabis and hemp inventory, a supplier deposit, and destroyed unharvested flower. Excluding inventory adjustments, management reported cannabis gross margin of 10% in Q2 and 15% for the first half (non-GAAP).
- Cash used in operating activities was $90.5 million in the first half, compared with $110.2 million in 2019. Investing activities used $29.4 million; financing activities provided $165.2 million. Cash rose $40.4 million to $137.2 million.
- At June 30, current assets were $289.8 million and current liabilities $163.7 million; reported working capital was $126.1 million, down from $166.6 million at year-end 2019. Total assets were $855.7 million and stockholders’ equity $131.5 million.
- Convertible notes have $475 million face value and a 5% coupon, due 2023; carrying value was $435.5 million. The Senior Facility had $47.4 million outstanding, bears interest at Canadian prime plus 8.05%, and principal is due February 28, 2022. The lender declined the requested additional $9.9 million draw; the facility was amended to interest-only payments through maturity. The filing’s risk discussion separately states aggregate principal indebtedness of $480.1 million, which does not appear to reconcile with the disclosed note and facility principal amounts.
Material changes versus the prior comparable period
- Q2 net loss more than doubled year over year. Results included $28.4 million of asset impairment, a $11.2 million non-cash warrant-liability fair-value expense, and a $13.3 million foreign-exchange gain. For the first half, impairment was $58.2 million and warrant remeasurement expense was $83.2 million.
- Revenue growth reflected adult-use, international medical, and hemp sales; cannabis extracts rose 155% in Q2. Dried-cannabis revenue fell 8% in Q2, and average cannabis selling price per gram decreased 43% to $2.64, partly due to channel and product mix and a one-time bulk transaction.
- High Park Gardens was closed and classified as held for sale. Related charges included $25.1 million of impairment, including the write-down of its cultivation license, plus $1.8 million for destroyed flower. Management estimated annualized net savings of approximately $6 million and expected the facility sale within 12 months.
- Management reported 415 positions eliminated, with approximately $34 million of annualized savings net of severance, and approximately $17 million of further efficiency savings—about $52 million total annualized savings versus the Q4 2019 run rate. These are management estimates, not reported realized savings.
Outlook, commentary, risks and contingencies
- Management expected continued growth in adult-use and international medical sales, a higher cannabis share of revenue, and improved cannabis margins in the remainder of 2020 from cost reductions, operating efficiencies, and lower-cost third-party supply. It described hemp growth as likely modest pending greater U.S. FDA clarity on CBD. The filing provides no clear numerical revenue or earnings guidance.
- COVID-19 moderated sales growth, including through reduced access to retail locations and prescribers and a reversal of earlier “pantry loading.” Management said it had not experienced product-supply disruptions but warned that the pandemic could suppress sales and delay Portugal greenhouse construction, affecting harvests and international sales.
- Management said forecasts supported meeting obligations and operating for the next 12 months, and concluded mitigation plans made it probable substantial doubt about going concern could be addressed. However, it highlighted uncertainty around future equity financing and COVID-19. The company reported continuing operating cash burn and $79.7 million of minimum inventory purchase commitments at June 30 before subsequent contract termination.
- Warrants issued with the March equity offering created a $103.5 million liability at June 30 and include anti-dilution terms. Below the $5.95 exercise price, ATM issuance is constrained to $20 million in aggregate and $6 million per quarter without triggering price protection. The filing also describes potential cash penalties if required warrant shares cannot be delivered under an effective registration statement.
- Material weaknesses in internal control remained unremediated; management concluded disclosure controls were not effective as of June 30. Remediation included finance hires and a new Portugal accounting system, which went live August 1.
- Material proceedings include a 420 Investments claim seeking C$110 million plus C$20 million aggravated damages; a Canadian cannabis-labeling class action seeking $500 million plus $5 million punitive damages; a Zenabis arbitration seeking approximately C$24 million; and a Wyckoff supply dispute involving a demanded 13,000 kg purchase for $59.8 million. Tilray disputes the claims. Management said it had established appropriate reserves, but unfavorable outcomes could be material.
- Subsequent events: Tilray raised approximately $5.8 million gross through its ATM in July. On August 5, it terminated supplier commitments of $17.4 million, waived recovery of a $4.9 million advance already written off, and paid $3.7 million cash plus $1.5 million in shares.
Most important facts for investors to verify
- Reconcile the filing’s stated $480.1 million aggregate principal indebtedness with the $475 million convertible-note face amount and $47.4 million Senior Facility principal.
- Track cash burn, working capital, liquidity forecasts, debt-covenant compliance, and whether additional financing is needed.
- Assess whether inventory write-downs, impairments, and reported cost savings recur or indicate persistent demand, pricing, or capacity issues.
- Monitor warrant liability remeasurement, anti-dilution provisions, ATM restrictions, and potential dilution.
- Review progress on material-weakness remediation and developments in the disclosed litigation, arbitrations, and supply commitments.