tlry-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission File Number: 001-38594

 

Tilray, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

82-4310622

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1100 Maughan Road

Nanaimo, BC, Canada, V9X IJ2

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (844) 845-7291

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 14, 2018, the registrant had 16,666,667 shares of Class 1 Common Stock, $0.0001 par value per share, and 76,498,178 shares of Class 2 Common Stock, $0.0001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

  

 

Page

PART I.

  

FINANCIAL INFORMATION

 

1

Item 1.

  

Financial Statements (Unaudited)

 

1

 

  

Condensed Consolidated Balance Sheets

 

1

 

  

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

 

2

 

  

Condensed Consolidated Statements of Cash Flows

 

3

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

 

4

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

  

Controls and Procedures

 

24

PART II.

  

OTHER INFORMATION

 

25

Item 1.

  

Legal Proceedings

 

25

Item 1A.

  

Risk Factors

 

25

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

Item 6.

  

Exhibits

 

49

Signatures

 

50

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TILRAY, INC.

Condensed Consolidated Balance Sheets

(in thousands of U.S. dollars, except for per share data, unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

104,245

 

 

$

2,323

 

Short-term investments

 

 

14,712

 

 

 

 

Accounts receivable, net

 

 

5,746

 

 

 

983

 

Other receivables

 

 

4,696

 

 

 

1,131

 

Inventory

 

 

12,107

 

 

 

7,421

 

Prepaid expenses and other current assets

 

 

4,431

 

 

 

545

 

Total current assets

 

 

145,937

 

 

 

12,403

 

Property, plant and equipment, net

 

 

75,580

 

 

 

39,985

 

Intangible assets, net

 

 

1,387

 

 

 

934

 

Deposits and other assets

 

 

897

 

 

 

626

 

Total assets

 

$

223,801

 

 

$

53,948

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,107

 

 

$

5,563

 

Accrued expenses and other current liabilities

 

 

7,340

 

 

 

2,021

 

Accrued obligations under capital lease

 

 

103

 

 

 

379

 

Current portion of long-term debt

 

 

9,348

 

 

 

9,432

 

Privateer Holdings debt facilities

 

 

 

 

 

32,826

 

Total current liabilities

 

 

26,898

 

 

 

50,221

 

Accrued obligations under capital lease

 

 

8,789

 

 

 

8,579

 

Total liabilities

 

$

35,687

 

 

$

58,800

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Convertible preferred stock ($0.0001 par value, 10,000,000 shares authorized

   and none issued or outstanding at September 30, 2018; none authorized,

   issued or outstanding at December 31, 2017)

 

$

 

 

$

 

Class 1 common stock ($0.0001 par value, 250,000,000 shares authorized

   and 16,666,667 shares issued and outstanding at September 30, 2018;

   none authorized, issued or outstanding at December 31, 2017)

 

 

2

 

 

 

 

Class 2 common stock ($0.0001 par value; 500,000,000 shares authorized

   and 76,477,375 shares issued and outstanding at September 30, 2018;

   none authorized, issued or outstanding at December 31, 2017)

 

 

8

 

 

 

 

Class 3 common stock ($0.0001 par value, none authorized, issued or

   outstanding at September 30, 2018; none authorized, issued or

   outstanding at December 31, 2017)

 

 

 

 

 

 

Capital stock (none authorized, issued or outstanding at September 30, 2018;

   1 share authorized, issued and outstanding at December 31, 2017)

 

 

 

 

 

 

Additional paid-in capital

 

 

261,944

 

 

 

31,736

 

Accumulated other comprehensive income

 

 

3,328

 

 

 

3,866

 

Accumulated deficit

 

 

(77,168

)

 

 

(40,454

)

Total stockholders’ equity (deficit)

 

 

188,114

 

 

 

(4,852

)

Total liabilities and stockholders’ equity (deficit)

 

$

223,801

 

 

$

53,948

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


TILRAY, INC.

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

(in thousands of U.S. dollars, except for per share data, unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

10,047

 

 

$

5,406

 

 

$

27,599

 

 

$

15,425

 

Cost of sales

 

 

6,979

 

 

 

2,439

 

 

 

16,458

 

 

 

7,001

 

Gross margin

 

 

3,068

 

 

 

2,967

 

 

 

11,141

 

 

 

8,424

 

Research and development expenses

 

 

802

 

 

 

729

 

 

 

2,416

 

 

 

2,431

 

Sales and marketing expenses

 

 

3,493

 

 

 

1,469

 

 

 

9,061

 

 

 

3,912

 

General and administrative expenses

 

 

7,540

 

 

 

2,916

 

 

 

17,530

 

 

 

6,881

 

Stock-based compensation expense

 

 

11,245

 

 

 

35

 

 

 

16,877

 

 

 

104

 

Operating loss

 

 

(20,012

)

 

 

(2,182

)

 

 

(34,743

)

 

 

(4,904

)

Foreign exchange loss (gain), net

 

 

(1,592

)

 

 

(838

)

 

 

913

 

 

 

(1,417

)

Interest expense, net

 

 

480

 

 

 

432

 

 

 

1,393

 

 

 

1,428

 

Other income, net

 

 

(225

)

 

 

(9

)

 

 

(422

)

 

 

(15

)

Loss before income taxes

 

 

(18,675

)

 

 

(1,767

)

 

 

(36,627

)

 

 

(4,900

)

Income tax expense

 

 

24

 

 

 

 

 

 

87

 

 

 

 

Net loss

 

$

(18,699

)

 

$

(1,767

)

 

$

(36,714

)

 

$

(4,900

)

Net loss per share - basic and diluted

 

 

(0.20

)

 

 

(0.02

)

 

 

(0.39

)

 

 

(0.07

)

Shares used in computation of net loss per share - basic and diluted

 

 

93,144,042

 

 

 

75,000,000

 

 

 

93,144,042

 

 

 

75,000,000

 

Net loss

 

$

(18,699

)

 

$

(1,767

)

 

$

(36,714

)

 

$

(4,900

)

Foreign currency translation gain (loss)

 

 

450

 

 

 

(1

)

 

 

538

 

 

 

(241

)

Comprehensive loss

 

$

(18,249

)

 

$

(1,768

)

 

$

(36,176

)

 

$

(5,141

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


TILRAY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands of U.S. dollars, except for per share data, unaudited)

 

 

 

Nine months ended

September 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(36,714

)

 

$

(4,900

)

Adjusted for the following items:

 

 

 

 

 

 

 

 

Foreign currency loss (gain)

 

 

859

 

 

 

(1,417

)

Provision for doubtful accounts

 

 

17

 

 

 

(9

)

Inventory write-downs

 

 

281

 

 

 

205

 

Depreciation and amortization

 

 

2,552

 

 

 

1,402

 

Stock-based compensation expense

 

 

16,877

 

 

 

104

 

Non-cash interest expense

 

 

463

 

 

 

640

 

Deferred income tax expense

 

 

87

 

 

 

 

(Gain) loss on disposal of property, plant and equipment

 

 

(2

)

 

 

7

 

Changes in non-cash working capital:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,808

)

 

 

(566

)

Other receivables

 

 

(3,553

)

 

 

(267

)

Inventory

 

 

(7,754

)

 

 

(2,083

)

Prepaid expenses and other current assets

 

 

(4,686

)

 

 

(1,210

)

Accounts payable

 

 

3,399

 

 

 

168

 

Due to related parties

 

 

1,014

 

 

 

 

Accrued expenses and other current liabilities

 

 

5,528

 

 

 

1,027

 

Net cash used in operating activities

 

 

(26,440

)

 

 

(6,899

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(44,061

)

 

 

 

Proceeds from sales of short-term investments

 

 

29,257

 

 

 

 

Proceeds from maturities of short-term investments

 

 

136

 

 

 

 

Purchases of property, plant and equipment

 

 

(38,076

)

 

 

(3,298

)

Dispositions of property, plant and equipment

 

 

34

 

 

 

23

 

Purchases of intangible assets

 

 

(834

)

 

 

(107

)

Net cash used in investing activities

 

 

(53,544

)

 

 

(3,382

)

Financing activities

 

 

 

 

 

 

 

 

Repayment under Privateer Holdings debt facilities

 

 

(36,940

)

 

 

 

Advances under Privateer Holdings debt facilities

 

 

3,700

 

 

 

4,872

 

Proceeds from Preferred Shares - Series A

 

 

52,638

 

 

 

 

Lease payments under capital lease

 

 

(516

)

 

 

 

Proceeds from issuance of common stock pursuant to IPO

 

 

176,084

 

 

 

 

Payment of costs from issuance of common stock pursuant to IPO

 

 

(15,299

)

 

 

 

Net cash provided by financing activities

 

 

179,667

 

 

 

4,872

 

Effect of foreign currency translation on cash

 

 

2,239

 

 

 

413

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

101,922

 

 

 

(4,996

)

Cash and cash equivalents, beginning of period

 

 

2,323

 

 

 

7,531

 

Cash and cash equivalents, end of period

 

$

104,245

 

 

$

2,535

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

930

 

 

$

787

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Tilray, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except for shares and per share amounts, unaudited)

1.

Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements (the “financial statements”) reflect the accounts of Tilray, Inc. and its wholly owned subsidiaries (collectively “Tilray”, the “Company”, “we”, “our”, or “us”). The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all the information and footnotes required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s final prospectuses for its initial public offering (“IPO”) filed on July 19, 2018 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, for the year ended December 31, 2017 (the “Annual Financial Statements”).

These financial statements reflect all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of results that can be expected for the full year.

Other than described below, there have been no changes to our significant accounting policies described in our Annual Financial Statements that have had a material impact on our consolidated financial statements and related notes.

Cash and cash equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

Cash and cash equivalents include amounts held primarily in U.S. dollar, Canadian dollar, Euro, certificates of deposit and money market funds.

Short-term investments

The Company invests cash resources primarily in corporate bonds, certificate of deposits and treasury bills. The Company’s intent is to convert all investments into cash to be used for operations and has classified them as available-for-sale, which are reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income in stockholders’ equity (deficit). Realized gains, realized losses and unrealized losses that are other than temporary, are included in investment and other income, net. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. The Company classifies investments maturing within one year of the reporting date, or where management’s intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments.

If the estimated fair value of a security is below its carrying value, the Company evaluates whether it is more likely than not that it will sell the security before its anticipated recovery in market value and whether evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. The Company also evaluates whether or not it intends to sell the investment. If the impairment is considered to be other-than-temporary, the security is written down to its estimated fair value. In addition, the Company considers whether credit losses exist for any securities. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Other-than-temporary declines in estimated fair value and credit losses are charged against investment and other income, net.

Fair value measurements

The carrying value of the Company’s accounts receivable, other receivables, accounts payable, accrued expenses and other current liabilities and Privateer Holdings debt facilities approximate their fair value due to their short-term nature. Investments that are classified as available-for-sale are recorded at estimated fair value. The estimated fair value for securities held is determined using quoted market prices or broker or dealer quotations.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

4


Stock-based compensation

The Company’s employees historically participated in Privateer Holdings’ equity-based compensation plan (the “Original Plan”). Equity-based compensation expense for awards under the Original Plan have been allocated to these financial statements based on the awards and terms previously granted to Privateer Holdings’ employees. The Company adopted a new 2018 Equity Incentive Plan (the “New Plan”), amended in May 2018, and has reserved 9,199,338 shares of common stock for issuance under the New Plan.  Under the New Plan, common shares reserved for issuance automatically increases 4% at the end of December of each year.  In May, June and August 2018, the Company granted stock options and RSUs as well as performance-based awards in the form of stock options and RSUs. For the performance-based awards granted, the performance condition was satisfied on the effectiveness of the registration statement for the Company’s IPO, which occurred in July 2018.

The Company measures and recognizes compensation expense for stock options on a straight-line basis over the vesting period based on their grant date fair values. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. For those awards granted in May and June 2018, prior to the Company’s IPO, the fair value of common stock at the date of grant was determined by the Board of Directors with assistance from third-party valuation specialists. The Company estimates forfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates.

The critical assumptions and estimates used in determining the fair value of stock-based compensation on the grant date are: fair value of common shares on the grant date, risk-free interest rate, share price volatility of comparable companies, and the expected term.

For performance-based stock options and awards, the Company records compensation expense over the estimated service period once the achievement of the performance-based milestone is considered probable. At each reporting date, the Company assesses whether achievement of a milestone is considered probable, and if so, records compensation expense based on the portion of the service period elapsed to date with respect to that milestone, with a cumulative catch-up, net of estimated forfeitures. The Company will recognize remaining compensation expense with respect to a milestone, if any, over the remaining estimated service period.

New Accounting Pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue recognition. Further, the FASB has issued a number of additional ASUs regarding the new revenue recognition standard. The new standard, as amended, will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which amends ASU 2014-09 to defer the effective date by one year. For public companies, the new standard is effective for annual reporting periods beginning after December 31, 2017, including interim periods within that reporting period. For all other entities, including emerging growth companies, this standard is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company does not plan to early adopt. The Company is evaluating the impact and expects to implement the provisions of ASU 2014-09 as of January 1, 2019 and has not yet selected a transition method. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods beginning after December 15, 2019. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (1) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (2) eliminates most real estate specific lease provisions, and, (3) aligns many of the underlying lessor model principles with those in the new revenue standard. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public companies, the new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Entities are required to use a modified retrospective approach when transitioning to the ASU for leases that exist as of or are entered into after the beginning of the earliest comparative period presented in the financial statements. The Company expects to implement the provisions of ASU 2016-02 as of January 1, 2019. The Company is currently evaluating the impact of the new standard on its financial statements.

5


In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either assets or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted the provisions of ASU 2016-09 as of January 1, 2018.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require financial institutions and other organizations to use forward-looking information to better formulate their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. This update will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company expects to implement the provisions of ASU 2016-13 as of January 1, 2022. The adoption of this ASU is not expected to have a material effect on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). ASU 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s financial statements.

2.

Investments

As at September 30, 2018, available-for-sale securities recorded in short-term investments consist of:

 

 

 

Amortized

 

 

Fair

 

 

 

Costs

 

 

Value

 

Corporate bonds

 

$

9,314

 

 

$

9,393

 

Certificates of deposit

 

 

1,555

 

 

 

1,555

 

Treasury bills

 

 

3,760

 

 

 

3,764

 

Total

 

$

14,629

 

 

$

14,712

 

 

3.

Fair Value Measurement

The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2018, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

identical

 

 

observable

 

 

unobservable

 

 

 

 

 

 

 

assets

 

 

inputs

 

 

inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

9,972

 

 

$

 

 

 

 

 

$

9,972

 

Certificates of deposit

 

 

 

 

 

2,185

 

 

 

 

 

 

2,185

 

Total cash equivalents

 

 

9,972

 

 

 

2,185

 

 

 

 

 

 

12,157

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

9,393

 

 

 

 

 

 

 

 

 

9,393

 

Certificates of deposit

 

 

 

 

 

1,555

 

 

 

 

 

 

1,555

 

Treasury bills

 

 

3,764

 

 

 

 

 

 

 

 

 

3,764

 

Total short-term investments

 

 

13,157

 

 

 

1,555

 

 

 

 

 

 

14,712

 

Total

 

$

23,129

 

 

$

3,740

 

 

 

 

 

$

26,869

 

 

6


4.

Inventory

Inventory is comprised of the following items:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Raw materials

 

$

1,209

 

 

$

163

 

Work-in-process – dry cannabis

 

 

7,611

 

 

 

1,396

 

Work-in-process – cannabis extracts

 

 

1,980

 

 

 

30

 

Finished goods – dry cannabis

 

 

226

 

 

 

3,501

 

Finished goods – cannabis extracts

 

 

998

 

 

 

2,158

 

Finished goods – accessories

 

 

83

 

 

 

173

 

Total

 

$

12,107

 

 

$

7,421

 

 

Inventory is written down for any obsolescence or when the net realizable value of inventory is less than the carrying value. For the three and nine months ended September 30, 2018, the Company recorded write-downs related to cannabis oil within work-in-process of $795 and $1,498, respectively (September 30, 2017 – $447 and $617), in cost of sales.

5.

Property, Plant and Equipment

The Company had $35,725 (December 31, 2017 – $10,464) in property, plant and equipment additions related to building and leasehold improvements, laboratory and manufacturing equipment, construction in process and foreign currency exchange adjustments during the nine months ended September 30, 2018. Additions to building and leasehold improvements primarily related to the Company’s Enniskillen, Ontario facility being placed into service. Additions to construction in process primarily related to the ongoing construction of the Company’s London, Ontario and Portugal facilities.

For the three and nine months ended September 30, 2018, depreciation on property, plant and equipment was $1,235 and $2,202, respectively (September 30, 2017 – $364 and $1,038). Depreciation expense included in cost of sales relating to manufacturing equipment and production facilities was $208 and $467, respectively (September 30, 2017 – $87 and $249). Depreciation expense included in general administrative expenses related to general office space and equipment is $34 and $93, respectively (September 30, 2017 – $29 and $82). The remaining depreciation is included in inventory.

6.

Intangible Assets

Intangible assets include the internally developed patient portal for online orders. For the nine months ended September 30, 2018, the Company had $830 (December 31, 2017 – $509) in intangible asset additions related to construction in process and foreign currency exchange adjustments. For the three and nine months ended September 30, 2018, amortization expense on intangible assets was $169 and $350, respectively, (September 30, 2017 – $83 and $364) and is included in general and administrative expenses. The net carrying value of intangible assets includes $36 (December 31, 2017 – $381) of intangible assets under construction, relating to expenditures incurred to develop additional functionalities for the patient portal.

The amortization expense for the next five years on intangible assets in use is: remaining three months of 2018 – $172; 2019 – $639; thereafter – $551.

7.

Long-term Debt

Long-term debt is as follows:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Mortgage payable, due January 2019, annual interest 11.5%

 

$

9,348

 

 

$

9,537

 

Unamortized deferred financing costs

 

 

 

 

 

(105

)

 

 

 

9,348

 

 

 

9,432

 

Less current portion of long-term debt

 

 

(9,348

)

 

 

(9,432

)

Total

 

$

 

 

$

 

 

7


In December 2016, Tilray Canada, Ltd. entered into a mortgage for an amount of $8,909 ($12,000 CAD) with an annual interest rate of 11.5% maturing in June 2018. In July 2018, the Company entered into a Mortgage Loan Extension Agreement to extend the mortgage. The term of the mortgage was extended for a further period of six months to January 1, 2019 with a renewal fee of CAD $90, or .75 basis points of the loan balance.

The mortgage is secured by a deed of trust on all assets of Tilray Canada, Ltd. and is guaranteed by Privateer Holdings. The carrying value of the mortgage approximates its fair value because the interest rate on the mortgage is equivalent to current market rates.  In October 2018, the Company repaid the outstanding mortgage balance.

8.

Related-Party Transactions

The Company was a wholly owned subsidiary of Privateer Holdings, Inc. (“Privateer Holdings” or “Parent”) prior to its Series A preferred stock financing and its IPO. The various components of the Privateer Holdings debt facilities which represents the related-party balances outstanding are as follows:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Privateer Holdings credit facility

 

$

 

 

$

24,700

 

Privateer Holdings construction facility

 

 

 

 

 

6,395

 

Privateer Holdings start-up loans

 

 

 

 

 

1,731

 

Total

 

$

 

 

$

32,826

 

 

Privateer Holdings credit facility

Effective January 1, 2016, Tilray Canada, Ltd. entered into an agreement with Privateer Holdings for a demand revolving credit facility in an aggregate principal amount not to exceed $25,000. As of December 31, 2017, the facility bore interest at a floating rate of 2.54%, reset annually based on the mid-term applicable federal U.S. rate.

Effective April 1, 2018, Tilray, Inc. entered into an agreement with Privateer Holdings for a demand revolving credit facility in an aggregate principal amount not to exceed $7,000. The facility bears interest at a floating rate of 2.62%. The interest rate resets annually based on the mid-term applicable federal U.S. rate.

For the three and nine months ended September 30, 2018, the Company recognized $74 and $490, respectively, (September 30, 2017 – $31 and $396) in interest expense related to the Privateer Holdings credit facility.

Privateer Holdings construction facilities

High Park Farms, Ltd. construction facility

Effective November 1, 2017, High Park Farms, Ltd. entered into an agreement with Privateer Holdings for a demand revolving construction facility in an aggregate principal amount not to exceed $10,000 to be used for the construction of its facility in Enniskillen, Ontario, Canada. Beginning January 1, 2018, the facility bears interest at a floating rate of 2.54%, reset annually based on the mid-term applicable federal U.S. rate.

Tilray Canada, Ltd. construction facility

Effective December 1, 2017, Tilray Canada Ltd. entered into an agreement with Privateer Holdings for a demand construction facility of $1,000. The proceeds of the facility were to be used to fund capital expenditures for Tilray Canada, Ltd. and its affiliated company, High Park Farms, Ltd. Beginning January 1, 2018, the facility bears interest at a floating rate of 2.54%, reset annually based on the mid-term applicable federal U.S. rate.

8


Privateer Holdings start-up loans

As part of the Company’s strategic initiatives to expand into additional geographic locations, Privateer Holdings provided the Company with initial working capital funding in the form of non-interest-bearing loans. The advances are repayable upon demand. The outstanding balances under these loans are:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Tilray Deutschland GmbH

 

$

 

 

$

1,340

 

Tilray Portugal Unipessoal, Lda.

 

 

 

 

 

105

 

Other

 

 

 

 

 

286

 

 

 

$

 

 

$

1,731

 

 

In July 2018, the Company repaid $36,940 of the outstanding Privateer Holdings debt facility, which included repayment of the Privateer Holdings credit facility, Privateer Holdings construction facility and the Privateer Holdings start-up loans.

Privateer Holdings management fees

Prior to the repayment of the credit facility, accrued management fees charged by Privateer Holdings for services performed, including management services, support services, business development services and research and development services were included in the credit facility and reported within Privateer Holdings debt facility. Following the repayment of the credit facilities, and due to the change in nature of the relationship with Privateer Holdings, management services are reported under accounts payable.  Management services owed to Privateer Holdings in accounts payable as of September 30, 2018 was $1,014.  Management services for the three and nine months ended September 30, 2018 was $1,014 and $2,887, respectively, (September 30, 2017 – $878 and $3,066) and were included in operating expenses.  

Amounts for the provision of management and support services are charged at cost based on the compensation of the respective employees of Privateer Holdings, which is estimated from the time devoted to the Company. Business development and research and development services are charged at cost plus a 9% markup. In February 2018, the Company entered into an agreement with Privateer Holdings, pursuant to which Privateer Holdings provides the Company with certain general administrative and corporate services on an as-requested basis. Pursuant to this agreement, the Company pays Privateer Holdings a monthly services fee that is based on the proportional share of the actual costs incurred by Privateer Holdings in performing the requested services. Personnel compensation is charged at cost plus a 3.0% markup and other services provided are charged at cost. The interest on the management services fee accrues at a floating rate of 2.54%, reset annually based on the mid-term applicable federal U.S. rate.

 

9.

Capital Stock

Capital Stock

As of December 31, 2017, the Company had authorized, issued and outstanding one share of capital stock with a one dollar par value. Each share of capital stock was entitled to one vote.  As of September 30, 2018, no shares were authorized, issued or outstanding.  

Common and Convertible Preferred Stock

The Company’s certificate of incorporation authorized the Company to issue the following classes of shares with the following par value and voting rights as of September 30, 2018.

 

 

 

Par Value

 

 

Authorized

 

 

Voting Rights

Class 1 common stock

 

$

0.0001

 

 

 

250,000,000

 

 

10 votes for each share

Class 2 common stock

 

$

0.0001

 

 

 

500,000,000

 

 

1 vote for each share

Convertible preferred stock

 

$

0.0001

 

 

 

10,000,000

 

 

N/A

 

In February 2018, the Company completed a recapitalization in which the Company issued 75,000,000 shares of Class 1 common stock to Privateer Holdings in exchange for the net assets of Decatur Holdings, BV.

 

In connection with the IPO, Privateer Holdings voluntarily converted 58,333,333 shares if its Class 1 common stock into shares of Class 2 common stock.

 

9


In February and March 2018, the Company issued an aggregate of 7,794,042 shares of Series A preferred stock at an issue price of $7.10 ($8.90 CAD) per share.

 

In July 2018, the Company completed its IPO, whereby 10,350,000 shares of our Class 2 common stock were sold at a price of $17.00 ($22.45 CAD) per share, which included 1,350,000 shares pursuant to the underwriters’ option to purchase additional shares. Upon the closing of the IPO, all shares of the outstanding Series A preferred stock automatically converted into 7,794,042 shares of Class 2 common stock on a one-for-one basis.

The liquidation and dividend rights are identical among Class 1 common stock and Class 2 common stock, and all classes of common stock share equally in our earnings and losses.

 

10.

Stock-based Compensation

Original Stock Option Plan

Certain of the Company’s employees participate in the Equity Incentive Plan of Privateer Holdings, the Original Plan. For the three and nine months ended September 30, 2018, the total stock-based compensation expense associated with the Original Plan was $76 and $276, respectively (September 30, 2017 – $34 and $104, respectively).

The fair value of each award to employees granted under the Original Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions as of December 31, 2017: expected life of 5.53 years, risk-free interest rates of 2.01%; expected volatility of 56.32% and no dividends during the expected life. Expected volatility is based on historical volatilities of public companies operating in a similar industry to Privateer Holdings. The expected life of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees’ historical exercise and post-vesting employment termination behavior. 25% of the options cliff vest on the first anniversary of the grant date and the remainder vest ratably thereafter over a total of four years from the date of grant. The vested options expire, if not exercised, 10 years from the date of grant. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

New Stock Option Plan

In February 2018, the Company adopted the 2018 Equity Incentive Plan, the New Plan. In May 2018, the Company amended the New Plan to reserve an additional 2,487,717 shares thereunder, such that an aggregate of 9,199,338 shares of common stock were authorized for issuance under the Plan. Under the New Plan, common shares reserved for issuance automatically increases 4% at the end of December of each year.

For the three and nine months ended September 30, 2018, the total stock-based compensation expense associated with the New Plan was $11,245 and $16,877, respectively (September 30, 2017 – $0).

The fair value of each award granted to employees under the New Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions as of September 30, 2018: expected life of 5.85 years, risk-free interest rates of 2.94%; expected volatility of 58.64% and no dividends during the expected life. Expected volatility is based on historical volatilities of public companies operating in a similar industry to the Company. The expected life of the awards represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees’ historical exercise and post-vesting employment termination behavior. A forfeiture rate is estimated at the time of grant to reflect the amount of awards that are granted but are expected to be forfeited by the award holder prior to vesting. The estimated forfeiture rate applied to these amounts is derived from management’ estimate of the future stock award forfeiture behavior over the expected life of the awards. 25% of the awards cliff vest on the first anniversary of the grant date and the remainder vest ratably thereafter over a total of four years from the date of grant. The vested awards expire, if not exercised, 10 years from the date of grant. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock option activity for the Company under the Original Plan is as follows:

 

 

 

Shares

 

 

Weighted-

average

exercise price

 

 

Aggregate

intrinsic value

 

Balance December 31, 2017

 

 

364,571

 

 

$

2.41

 

 

$

1,185

 

Granted

 

 

301,442

 

 

 

5.66

 

 

 

 

 

Exercised

 

 

(45,493

)

 

 

1.80

 

 

 

 

 

Forfeited

 

 

(23,438

)

 

 

5.54

 

 

 

 

 

Cancelled

 

 

(4,521

)

 

 

3.28

 

 

 

 

 

Balance September 30, 2018

 

 

592,561

 

 

$

3.89

 

 

$

989

 

 

10


The weighted-average remaining contractual life for options outstanding and options expected to vest as at September 30, 2018 is 8.37 years and 8.43 years, respectively. Substantially, all outstanding options are expected to vest.

As of September 30, 2018, there were 250,241 options exercisable under the Original Plan with a weighted-average exercise price of $2.58, aggregate intrinsic value of $771 and a weighted-average remaining contractual life of 7.30 years. The aggregate intrinsic value of the options exercised during the nine months ended September 30, 2018 were $176.

Stock option and RSU activity for the Company under the New Plan is as follows:

Time-based stock option activity

 

 

 

Shares

 

 

Weighted-

average

exercise price

 

 

Aggregate

intrinsic value

 

Balance December 31, 2017

 

 

 

 

$

 

 

$

 

Granted

 

 

6,106,011

 

 

 

13.66

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(56,178

)

 

 

8.53

 

 

 

 

 

Cancelled

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2018

 

 

6,049,833

 

 

$

13.70

 

 

$

785,969

 

 

The weighted-average remaining contractual life for time-based options outstanding and time-based options expected to vest as at September 30, 2018 is 9.67 years and 9.66 years, respectively. Substantially, all outstanding time-based options are expected to vest.

As of September 30, 2018, there were 1,125,000 time-based options exercisable under the New Plan with a weighted-average exercise price of $7.76, aggregate intrinsic value of $152,843 and a weighted-average remaining contractual life of 9.64 years. The aggregate intrinsic value of the time-based options exercised during the nine months ended September 30, 2018 were $0.

Performance-based stock option activity

 

 

 

Shares

 

 

Weighted-

average

exercise price

 

 

Aggregate

intrinsic value

 

Balance December 31, 2017

 

 

 

 

$

 

 

$

 

Granted

 

 

600,000

 

 

 

7.76

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2018

 

 

600,000

 

 

$

7.76

 

 

$

81,516

 

 

The weighted-average remaining contractual life for performance-based stock options outstanding and performance-based options expected to vest as at September 30, 2018 is 9.64 years, respectively. Substantially, all outstanding performance-based stock options are expected to vest.

As of September 30, 2018, there were 300,000 performance-based stock options exercisable under the New Plan with a weighted-average exercise price of $7.76, aggregate intrinsic value of $40,758 and a weighted-average remaining contractual life of 9.64 years. The aggregate intrinsic value of the performance-based stock options exercised during the nine months ended September 30, 2018 were $0.

11


Time-based RSU activity

 

 

 

Share

equivalent

 

 

Weighted-

average

grant date

fair value

 

Non-vested December 31, 2017

 

 

 

 

$

 

Granted

 

 

140,000

 

 

 

7.76

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

Non-vested September 30, 2018

 

 

140,000

 

 

$

7.76

 

 

As of September 30, 2018, there was approximately $894 of total unrecognized compensation cost related to non-vested time-based RSU awards that will be recognized as expense over a weighted-average period of 3.63 years. No time-based RSUs vested during the period.

 

Performance-based RSUs

 

 

 

Share

equivalent

 

 

Weighted-

average

grant date

fair value

 

Non-vested December 31, 2017

 

 

 

 

$

 

Granted

 

 

1,050,000

 

 

 

7.76

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

Non-vested September 30, 2018

 

 

1,050,000

 

 

$

7.76

 

 

As of September 30, 2018, there was approximately $2,846 of total unrecognized compensation cost related to non-vested performance-based RSU awards that will be recognized as expense over a weighted-average period of 1.98 years. No performance-based RSUs vested during the period.

11.

Income Taxes

The effective tax rates for the three and nine months ended September 30, 2018 and 2017 were lower than the US federal statutory rates of 21% and 35%, respectively, due to tax losses for which no benefit has previously been recognized being available to offset otherwise taxable earnings in each tax jurisdiction.

Consolidated income tax expense for the three and nine months ended September 30, 2018 was $24 and $87, respectively (September 30, 2017 - $0).

The Tax Cuts and Jobs Act was enacted on December 22, 2017, which reduces the U.S. Federal corporate tax rate from 35% to 21% beginning 2018. There is no financial statement impact to the Company related to the Tax Cuts and Jobs Act because the Company utilizes the “separate return” method for calculating the provision of income taxes and there is no recognition of deferred tax assets in the nine months ended September 30, 2018.

12.

Commitments and Contingencies

Lease commitments

The Company leases various facilities, under non-cancelable capital and operating leases, which expire at various dates through December 2027.

Under the terms of the operating lease agreements, the Company is responsible for property taxes, certain insurance and maintenance expenses. The Company records rent expense on a straight-line basis over the terms of the underlying leases. Rent expense for the three and nine months ended September 30, 2018 was $217 and $410, respectively, (September 30, 2017 – $40 and $81, respectively).

12


In August 2017, High Park Farms, Ltd. entered into a capital lease to finance its expansion of production operations in Enniskillen, Ontario, Canada.

In February 2018, High Park Holdings, Ltd. entered into an operating lease to finance its expansion of production operations in London, Ontario, Canada.

Aggregate future minimum rental payments under all non-cancelable capital and operating leases are as follows:

 

 

 

Operating Leases

 

 

Capital Leases

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

September 30,

2018

 

 

December 31,

2017

 

2018 *

 

$

204

 

 

$

481

 

 

$

195

 

 

$

772

 

2019

 

 

816

 

 

 

841

 

 

 

779

 

 

 

772

 

2020

 

 

792

 

 

 

694

 

 

 

779

 

 

 

772

 

2021

 

 

746

 

 

 

231

 

 

 

779

 

 

 

772

 

2022

 

 

777

 

 

 

 

 

 

779

 

 

 

772

 

Thereafter

 

 

 

 

 

 

 

 

584

 

 

 

579

 

 

 

$

3,335

 

 

$

2,247

 

 

$

3,895

 

 

$

4,439

 

 

*

For the three months ending December 31, 2018

13.

Financial Instruments

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s accounts receivable. Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and accounts receivable.

The Company’s cash is deposited with Canadian credit union and major financial institutions in Australia, Portugal, Germany, Netherlands and the United States. To date, the Company has not experienced any losses on its cash deposits. Accounts receivable are unsecured and the Company does not require collateral from its customers.

The Company is also exposed to credit risk from the potential default by any of its counterparties on its financial assets.

The Company evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses as necessary. As at September 30, 2018 and December 31, 2017, the Company is not exposed to any significant credit risk related to counterparty performance of outstanding accounts receivable.

Foreign currency risk

As the Company conducts its business in many areas of the world involving transactions denominated in a variety of currencies, the Company is exposed to foreign currency risk. A significant portion of the Company’s assets, revenue, and expenses are denominated in the Canadian dollar. A 10% change in the exchange rates for the Canadian dollar would affect the carrying value of net assets by approximately $1,257 as of September 30, 2018, with a corresponding impact to accumulated other comprehensive income.

Liquidity risk

The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash flows generated from operations to meet its requirements. As at September 30, 2018 and December 31, 2017, the most significant financial liabilities are the current liabilities due to related parties, current portion of long-term debt and accounts payable and accrued liabilities.

14.

Segment information

Segment reporting is prepared on the same basis that the Company’s Chief Executive Officer, who is the Company’s chief operating decision maker, manages the business, makes operating decisions and assesses performance. Management has determined that the Company operates in one segment: the development and sale of cannabis products.

13


Sources of revenues were as follows:

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Dried cannabis

 

$

4,831

 

 

$

4,398

 

 

$

14,701

 

 

$

12,422

 

Cannabis oils

 

 

5,181

 

 

 

907

 

 

 

12,725

 

 

 

2,778

 

Accessories

 

 

35

 

 

 

101

 

 

 

173

 

 

 

225

 

 

 

$

10,047

 

 

$

5,406

 

 

$

27,599

 

 

$

15,425

 

 

Revenues attributed to a geographic region based on the location of the customer were as follows:

 

 

 

Three months ended