Tilray, Inc. — Q3 2019 Form 10-Q
Business context and period. The filing covers the three and nine months ended September 30, 2019; amounts below are U.S. dollars. Tilray operates in one segment: developing and selling cannabis products. Growth reflected Canadian adult-use sales, international medical sales, and acquisitions including Manitoba Harvest, Natura and Smith & Sinclair.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $51.1m | $10.0m | $120.0m | $27.6m |
| Gross profit / margin | $15.9m / 31% | $3.1m / 31% | $33.5m / 28% | $11.1m / 40% |
| Operating loss | $(23.3)m | $(20.0)m | $(83.7)m | $(34.7)m |
| Net loss | $(35.7)m | $(18.7)m | $(101.0)m | $(36.7)m |
| Adjusted EBITDA (non-GAAP) | $(23.5)m | $(7.4)m | $(56.0)m | $(15.3)m |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(167.3)m | $(26.4)m |
- Revenue increased 409% in Q3 and 335% for the nine-month period. Adult-use sales were $15.8m in Q3; hemp products contributed $15.7m. International medical revenue rose to $5.7m in Q3, including $3.0m from Portugal exports to Germany.
- Q3 cannabis kilograms-equivalent sold rose 573% year over year, while average net selling price fell 48% to $3.25 per gram, reflecting channel and product mix. Average cost per gram fell 27% to $2.28. Management attributed improving unit costs to higher harvests and production efficiencies.
- Q3 gross margin held at 31%, but nine-month margin fell from 40% to 28%, with third-party supply, lower yields and facility ramp-up among the factors. Management reported sequential improvement during 2019, from 23% in Q1 to 31% in Q3.
- At September 30, cash and cash equivalents were $100.2m and short-term investments $22.2m, down from $487.3m and $30.3m, respectively, at year-end 2018. Current assets were $330.7m versus current liabilities of $130.2m. Inventory was $110.5m, up from $16.2m.
- Nine-month investing cash use was $264.8m, including acquisitions, the ABG arrangement and capital spending; financing provided $45.1m. Property and equipment additions were $94.9m.
- Convertible Notes have $475m face value, a 5% coupon and October 2023 maturity; net carrying value was $428.0m. The company reported covenant compliance. Cash and short-term investments totaled $122.4m at quarter-end.
Material changes and notable items
- Net loss and operating cash use increased substantially year over year as the company expanded, acquired businesses, invested in facilities and incurred higher interest expense on the notes issued in 2018.
- The company recorded $13.5m of Q3 acquisition-related income, mainly from a reduction in the fair value of acquisition contingent consideration; this offset acquisition and integration costs. The nine-month amount was $6.6m of net income on this line.
- Acquisitions added significant goodwill and intangible assets. Goodwill was $163.0m and intangible assets $329.9m at September 30. Manitoba Harvest revenue included in the quarter was $15.6m; Natura contributed $3.0m.
- Tilray issued 1.34m shares through its at-the-market program in Q3 for $38.2m gross proceeds. The program permits up to $400m in aggregate share sales.
- Inventory exceeded historical sales for the preceding 12 months, partly in anticipation of new Canadian adult-use product categories. Management stated it expected no loss on disposition; this inventory level and assumption merit monitoring.
Outlook, risks and controls
- Management expected continued revenue growth for the remainder of 2019, citing adult-use, hemp and international medical markets. It anticipated Canadian edibles, beverages and vape products becoming available starting December 16, 2019, and expected production efficiencies to further reduce cannabis unit costs. The filing provides no quantified earnings or revenue guidance.
- Management said existing cash should meet short-term working-capital requirements, but additional capital or financing may be needed to support planned growth and facility construction. Purchase obligations were approximately $172.9m. Additional contingent payments may arise under acquisition earn-outs and the ABG arrangement.
- Key exposures include evolving cannabis and hemp regulation, U.S. restrictions on CBD products, licensing and export approvals, competition and pricing pressure, customer concentration, foreign-exchange movements, crop and facility risks, and the company’s history of losses. Three customers represented 44% of Q3 revenue.
- The planned Privateer Holdings downstream merger remained subject to conditions and approvals. Tilray also disclosed potential conflicts and control-related risks associated with Privateer’s voting control.
- Internal control over financial reporting was deemed ineffective because of a previously reported material weakness involving manual inventory-cost calculations and financial-close processes. Management reported no material errors or restatements and continued remediation efforts.
Investor verification checklist
- Track cash burn, available liquidity, capital spending and whether additional financing or ATM share issuance is required.
- Assess whether revenue growth and gross-margin improvement persist as product mix, pricing and adult-use competition evolve.
- Review inventory sell-through, valuation and the assumptions supporting management’s expectation of no inventory loss.
- Verify acquisition earn-out outcomes, purchase accounting estimates, purchase obligations and progress on the FOUR20 transaction and Privateer merger.
- Monitor remediation and testing of the inventory-costing and financial-close controls weakness, alongside customer concentration and regulatory developments.