Canadian cannabis producer Tilray (NASDAQ:TLRY) reported a first-quarter loss of $184.1 million. TLRY stock has taken a 5% dive into the red since then. Before you decide to buy or sell the stock and move on to another cannabis play, at least take the time to consider three numbers from its quarterly report.
I won’t say which way I’m leaning toward Tilray until the end — the last time I wrote about TLRY stock in November, I cautioned investors to wait for a catalyst before buying — but I can say that Tilray’s business isn’t nearly as bad as the headlines suggest.
Foreign Exchange Loss
In the first quarter, Tilray reported a $28.1 million foreign exchange loss, up from a loss of $179,000 in Q1 2019. In the past year, the Canadian dollar has depreciated against the U.S. greenback, with one U.S. dollar being worth 1.3418 CAD on May 10, 2019, and 1.4012 CAD on May 11, 2020.
So, for every CAD dollar, the company had to exchange into U.S. dollars over the past year to cover operating expenses, etc.; those dollars bought 3 cents less south of the 49th parallel. Multiply that by millions of dollars and it adds up.
It goes the other way too. By reporting in U.S. dollars, it has to convert its Canadian revenue into U.S. dollars, which means the numbers aren’t quite as high as they would be in local currency.
However, the important number here is $28.1 million.
Impairment of Assets
The second number on Q1 2020’s income statement to pay attention to is the $29.8 million impairment of assets, which accounted for 57% of the company’s sales in the quarter, and 36% of its operating expenses.
Rather than explain each of the aspects of the impairment, I’ll let Tilray’s 10-Q tell the story:
“Due to the lack of clarity from the FDA regarding CBD products in the United States, COVID-19 related negative impacts on retail shopping, and a commensurate decrease in demand projections for CBD products, we incurred non-cash impairment charges of $16.8 million and $6.1 million representing the full net book values of the intangible assets relating to the ABG Profit Participation Agreement and ABG Prince Agreement, respectively. In addition, we derecognized the ABG finance receivable of $7.0 million.”
So, the first thing to recognize is that ABG stands for Authentic Brands Group. In January 2019, Tilray signed a global revenue sharing agreement with the brand development company. As part of the development agreement, Tilray paid Authentic Brands $100 million initially with the potential for ABG to earn as much as $250 million in cash and stock over the 10-year agreement. In return, Tilray would be entitled to 49% of the net revenue from cannabis products bearing utilizing any of ABG’s more than 50 brands.
In fiscal 2019, Tilray took a $112.1 million impairment against the ABG profit participation agreement. The $29.8 million in the first quarter was more of the same. The impairments are now up to $141.9 million. Class action lawsuits were filed against Tilray in March and April.
While there was talk in the Q3 2019 conference call in November that ABG’s Nine West brand would be launching some cannabis products in the U.S. in the near future, all the company would say in the Q1 2020 conference call is that uncertainty in the U.S. around the Food and Drug Administration’s stance on the sale of CBD products has set back considerably the timeline for these launches.
Despite the lawsuits, all has not been lost, but these revenues aren’t something investors can count on in the near term.
Change in Fair Value of Warrant Liability
This is the biggest number that added to Tilray’s quarterly loss of $184.1 million. It was $71.98 million.
It came about when Tilray sold 7.25 million shares of its stock in March and 11.75 million pre-funded warrants, raising $85.1 million in net proceeds. The pre-funded warrants allowed the warrant holder to exercise the stock immediately after the issuance for $0.0001 per share. This way, the issuer (Tilray) got $55.9 million now as opposed to later when and if warrants were exercised. All 19 million warrants offered have a term of five years and an exercise price of $5.95 a share. If exercised, the gross proceeds over the next five years would be a maximum of $203.5 million.
So, the fair value of the warrants increased between mid-March when issued and the March 31 quarter-end, thus creating an $72 million addition to the quarterly loss.
On March 12, Tilray stock closed at $5.95 a share. It’s now trading above $7. However, warrant holders must wait until mid-September before they can exercise the warrants. A lot can happen between now and then.
The Bottom Line on TLRY Stock
When you add everything together in the first quarter, on a non-GAAP basis, Tilray had adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $19.7 million. That was 28.8% higher than in the same period a year earlier.
While it’s a big increase, in the grand scheme of things, it’s not the end of the world. Tilray finished the quarter with $174 million in cash. It should have plenty to carry on growing its cannabis sales in fiscal 2020.
Considering all the negative press about the Canadian cannabis industry, Tilray is actually doing alright.
In my opinion, if you’re an aggressive investor, TLRY stock is worth considering despite the significant GAAP loss in the first quarter. However, don’t be putting it in a tax-advantaged account. This is for your fun money.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.