Company Quick10K Filing
Quick10K
Tilray
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$46.40 97 $4,490
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
8-K 2019-06-10 Other Events, Exhibits
8-K 2019-05-30 Shareholder Vote
8-K 2019-05-14 Earnings, Exhibits
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-02-19 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-01-21 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-01-21 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-01-14 Enter Agreement, Sale of Shares, Exhibits
8-K 2018-12-18 Other Events, Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-10-22 Off-BS Arrangement, Sale of Shares
8-K 2018-10-04 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-10-03 Earnings, Regulation FD, Exhibits
8-K 2018-08-28 Earnings, Exhibits
8-K 2018-07-23 Amend Bylaw, Exhibits
BHGE Baker Hughes A Ge 23,450
KSU Kansas City Southern 12,290
FCNCA First Citizens Bancshares 5,100
COMM Commscope Holding Company 3,650
CHRS Coherus Biosciences 1,120
CYBF Cyberfort Software 0
ARS Aleris 0
AVDX Avant Diagnostics 0
DBS Invesco DB Silver Fund 0
BXNG Bang Holdings 0
TLRY 2019-03-31
Part I-Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 tlry-ex311_9.htm
EX-31.2 tlry-ex312_8.htm
EX-32.1 tlry-ex321_7.htm
EX-32.2 tlry-ex322_6.htm

Tilray Earnings 2019-03-31

TLRY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tlry-10q_20190331.htm 10-Q tlry-10q_20190331.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 March 31, 2019

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class 2 Common Stock, $0.0001 par value per share

 

TLRY

 

The Nasdaq Global Select Market

 

As of May 15, 2019, the registrant had 16,666,667 shares of Class 1 Common Stock, $0.0001 par value per share, and 80,564,387 shares of Class 2 Common Stock, $0.0001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

 

2

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

Item 2.

 

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

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

 

Controls and Procedures

 

28

PART II.

 

OTHER INFORMATION

 

29

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

Item 6.

 

Exhibits

 

52

Signatures

 

53

 

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TILRAY, INC.

Condensed Consolidated Balance Sheets

(in thousands of U.S. dollars, except for share and par value data, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

294,205

 

 

$

487,255

 

Short-term investments

 

 

31,229

 

 

 

30,335

 

Accounts receivable, net of allowance for doubtful accounts of $972 and $292,

  respectively

 

 

19,708

 

 

 

16,525

 

Other receivables

 

 

378

 

 

 

969

 

Inventory

 

 

48,712

 

 

 

16,211

 

Prepaid expenses and other current assets

 

 

5,357

 

 

 

3,007

 

Total current assets

 

 

399,589

 

 

 

554,302

 

Property and equipment, net

 

 

128,963

 

 

 

80,214

 

Intangible assets, net

 

 

364,060

 

 

 

4,486

 

Goodwill

 

 

156,364

 

 

 

 

Investments

 

 

19,650

 

 

 

16,911

 

Deposits and other assets

 

 

7,970

 

 

 

754

 

Total assets

 

$

1,076,596

 

 

$

656,667

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,179

 

 

$

10,649

 

Accrued expenses and other current liabilities

 

 

152,819

 

 

 

14,818

 

Accrued obligations under capital lease

 

 

366

 

 

 

470

 

Total current liabilities

 

 

170,364

 

 

 

25,937

 

Accrued obligations under capital lease

 

 

8,661

 

 

 

8,286

 

Deferred tax liability

 

 

92,220

 

 

 

4,424

 

Convertible Notes, net of issuance cost

 

 

422,868

 

 

 

420,367

 

Other liabilities

 

 

563

 

 

 

 

Total liabilities

 

$

694,676

 

 

$

459,014

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

  16,666,667 shares issued and outstanding)

 

 

2

 

 

 

2

 

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

  80,131,560 and 76,504,200 shares issued and outstanding, respectively)

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

515,692

 

 

 

302,057

 

Accumulated other comprehensive income

 

 

4,696

 

 

 

3,763

 

Accumulated deficit

 

 

(138,478

)

 

 

(108,177

)

Total stockholders’ equity

 

 

381,920

 

 

 

197,653

 

Total liabilities and stockholders’ equity

 

$

1,076,596

 

 

$

656,667

 

 

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 share and per share data, unaudited)

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Revenue

 

$

23,038

 

 

$

7,808

 

Cost of sales

 

 

17,653

 

 

 

3,912

 

Gross margin

 

 

5,385

 

 

 

3,896

 

General and administrative expenses

 

 

12,797

 

 

 

4,145

 

Sales and marketing expenses

 

 

7,821

 

 

 

2,263

 

Depreciation and amortization expense

 

 

1,863

 

 

 

222

 

Stock-based compensation expense

 

 

5,306

 

 

 

31

 

Research and development expenses

 

 

1,048

 

 

 

975

 

Acquisition and integration expenses

 

 

4,424

 

 

 

 

Operating loss

 

 

(27,874

)

 

 

(3,740

)

Foreign exchange loss, net

 

 

179

 

 

 

1,146

 

Interest expense, net

 

 

8,745

 

 

 

416

 

Finance income from ABG Profit Participation Arrangement

 

 

(135

)

 

 

 

Other income, net

 

 

(2,345

)

 

 

(121

)

Loss before income taxes

 

 

(34,318

)

 

 

(5,181

)

Deferred income tax recovery

 

 

(3,777

)

 

 

 

Current income tax recovery

 

 

(240

)

 

 

 

Net loss

 

$

(30,301

)

 

$

(5,181

)

Net loss per share - basic and diluted

 

 

(0.32

)

 

 

(0.07

)

Weighted average shares used in computation of net loss per share

   - basic and diluted

 

 

94,875,351

 

 

 

75,000,000

 

Net loss

 

$

(30,301

)

 

$

(5,181

)

Foreign currency translation loss

 

 

(475

)

 

 

(1

)

Unrealized gain on cash equivalents and investments

 

 

1,408

 

 

 

 

Other comprehensive income (loss)

 

 

933

 

 

 

(1

)

Comprehensive loss

 

$

(29,368

)

 

$

(5,182

)

 

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

 

 

2


TILRAY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

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

 

 

 

Convertible preferred

shares

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

shares

 

 

Amount

 

 

Number of

shares

 

 

Amount

 

 

Additional

paid-in

capital

 

 

Accumulated

other

comprehensive

income

 

 

Accumulated

deficit

 

 

Total

equity

(deficit)

 

Balance at December 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

 

$

31,736

 

 

$

3,866

 

 

$

(40,454

)

 

$

(4,852

)

Convertible preferred stock issued, net of

  issuance costs

 

 

7,794,042

 

 

 

1

 

 

 

 

 

 

 

 

 

52,639

 

 

 

 

 

 

 

 

 

52,640

 

Common stock issued

 

 

 

 

 

 

 

 

75,000,000

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,181

)

 

 

(5,181

)

Balance at March 31, 2018

 

 

7,794,042

 

 

$

1

 

 

 

75,000,000

 

 

$

8

 

 

$

84,406

 

 

$

3,865

 

 

$

(45,635

)

 

$

42,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

 

 

$

 

 

 

93,170,867

 

 

$

10

 

 

$

302,057

 

 

$

3,763

 

 

$

(108,177

)

 

$

197,653

 

Shares issued for Natura acquisition

 

 

 

 

 

 

 

 

180,332

 

 

 

 

 

 

15,100

 

 

 

 

 

 

 

 

 

15,100

 

Shares issued for Manitoba Harvest

  acquisition

 

 

 

 

 

 

 

 

1,209,946

 

 

 

 

 

 

96,844

 

 

 

 

 

 

 

 

 

96,844

 

Shares issued for ABG Profit Participation

  Arrangement

 

 

 

 

 

 

 

 

1,680,214

 

 

 

 

 

 

125,097

 

 

 

 

 

 

 

 

 

125,097

 

Receivable for ABG Profit Participation

  Arrangement, net of finance income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,292

)

 

 

 

 

 

 

 

 

(30,292

)

Shares issued under stock option plans

 

 

 

 

 

 

 

 

545,000

 

 

 

 

 

 

931

 

 

 

 

 

 

 

 

 

931

 

Shares issued for employee compensation

 

 

 

 

 

 

 

 

 

 

11,868

 

 

 

 

 

 

649

 

 

 

 

 

 

 

 

 

649

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,306

 

 

 

 

 

 

 

 

 

5,306

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

933

 

 

 

 

 

 

933

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,301

)

 

 

(30,301

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

96,798,227

 

 

$

10

 

 

$

515,692

 

 

$

4,696

 

 

$

(138,478

)

 

$

381,920

 

 

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


3


TILRAY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands of U.S. dollars, unaudited)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(30,301

)

 

$

(5,181

)

Adjusted for the following items:

 

 

 

 

 

 

 

 

Foreign currency (gain) loss

 

 

(214

)

 

 

1,099

 

Provision for doubtful accounts

 

 

536

 

 

 

 

Depreciation and amortization expense

 

 

2,770

 

 

 

479

 

Stock-based compensation expense

 

 

5,306

 

 

 

31

 

Non-cash interest (income) expense

 

 

(322

)

 

 

276

 

Loss on disposal of property and equipment, net

 

 

111

 

 

 

 

Deferred taxes

 

 

(3,777

)

 

 

 

Amortization of discount on Convertible Notes

 

 

2,501

 

 

 

 

Changes in non-cash working capital:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,030

 

 

 

(118

)

Other receivables

 

 

 

 

 

(360

)

Inventory

 

 

(12,983

)

 

 

(1,259

)

Prepaid expenses and other current assets

 

 

(2,143

)

 

 

(387

)

Accounts payable

 

 

(235

)

 

 

3,547

 

Due to related parties

 

 

(780

)

 

 

 

Accrued expenses and other current liabilities

 

 

11,660

 

 

 

148

 

Net cash used in operating activities

 

 

(24,841

)

 

 

(1,725

)

Investing activities

 

 

 

 

 

 

 

 

Acquisition of Manitoba Harvest, net of cash acquired

 

 

(109,057

)

 

 

 

Acquisition of Natura, net of cash acquired

 

 

(15,083

)

 

 

 

Investment in ABG Profit Participation Arrangement

 

 

(33,333

)

 

 

 

Increase in deposits and other assets

 

 

 

 

 

(195

)

Purchases of short-term and non-current investments

 

 

(2,914

)

 

 

(29,624

)

Proceeds from maturities of short-term investments

 

 

 

 

 

118

 

Purchases of property and equipment

 

 

(9,017

)

 

 

(12,856

)

Purchases of intangible assets

 

 

(92

)

 

 

(227

)

Net cash used in investing activities

 

 

(169,496

)

 

 

(42,784

)

Financing activities

 

 

 

 

 

 

 

 

Repayment under Privateer Holdings debt facilities

 

 

 

 

 

(95

)

Advances under Privateer Holdings construction facilities

 

 

 

 

 

1,536

 

Minimum lease payments under capital lease

 

 

(187

)

 

 

(171

)

Proceeds from exercise of stock options

 

 

931

 

 

 

 

Proceeds from issuance of convertible preferred stock, net

 

 

 

 

 

52,640

 

Net cash provided by financing activities

 

 

744

 

 

 

53,910

 

Effect of foreign currency translation on cash and cash equivalents

 

 

543

 

 

 

416

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(193,050

)

 

 

9,817

 

Cash and cash equivalents, beginning of period

 

 

487,255

 

 

 

2,323

 

Cash and cash equivalents, end of period

 

$

294,205

 

 

$

12,140

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

73

 

 

$

242

 

Non-cash investing activities

 

 

 

 

 

 

 

 

Acquisition of Manitoba Harvest

 

$

195,407

 

 

$

 

Acquisition of Natura

 

$

38,980

 

 

$

 

Investment in ABG Profit Participation Arrangement, net of receivable

 

$

94,805

 

 

$

 

Non-cash financing activities

 

 

 

 

 

 

 

 

Shares issued for employee compensation

 

$

649

 

 

$

 

 

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

4


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 audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018 (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 months ended March 31, 2019 and 2018 are not necessarily indicative of results that can be expected for the full year.

The Condensed Consolidated Statement of Net Loss and Comprehensive Loss for the three months ended March 31, 2018 were reclassified to conform to the current period’s presentation. Specifically, depreciation and amortization expense as well as acquisition and integration expenses, which were formerly presented as part of general and administrative expenses, are now presented separately.

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

Business combinations and goodwill

The Company accounts for business combinations using the acquisition method in accordance with ASC 805 “Business Combinations,” which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition. Any excess of the purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions, including fees for accounting, legal, professional consulting and valuation specialists, are expensed as incurred. Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

For business combinations achieved in stages, the Company’s previously held interest in the acquiree is remeasured at its acquisition date fair value, with the resulting gain or loss recorded in the Consolidated Statements of Net Loss and Comprehensive Loss. For a pre-existing relationship between the Company and acquiree that is not extinguished on the business combination, such a relationship is considered effectively settled as part of the business combination even if it is not legally cancelled. At the acquisition date, it becomes an intercompany relationship and is eliminated upon consolidation.

The estimated fair value of acquired assets and assumed liabilities are determined primarily by using a discounted cash flow approach, with estimated cash flows discounted at a rate that the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. Contingent consideration in a business combination is remeasured at fair value each reporting period until the contingency is resolved and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in the Consolidated Statements of Net Loss and Comprehensive Loss.

Intangible assets

The Company records intangible assets acquired at cost, net of accumulated amortization and accumulated impairment losses, if any. Cost is measured based on the fair values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired in a business combination is its acquisition date fair value.

5


Amortization of definite life intangible assets is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

 

Customer relationships

 

14 to 16 years

Developed technology

 

10 years

Website

 

3 years

Supply contract

 

3 years

Licenses

 

2 years

 

 

The Company has rights under the ABG Profit Participation Arrangement and trademarks with indefinite life. Intangible assets that are determined to have an indefinite life are not amortized, but tested for impairment annually or more frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-life intangible asset is impaired by the amount of the excess.

Stock-based payments

Fully vested, non-forfeitable equity instruments issued to parties other than employees are measured on the date they are issued where there is no specific performance required by the grantee to retain those equity instruments. Share-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Where fully vested, non-forfeitable equity instruments are granted to parties other than employees in exchange for notes or financing receivable, the note or receivable is presented in additional paid-in capital on the Consolidated Balance Sheets.

Impairment of goodwill and indefinite life intangible assets

Goodwill and indefinite life intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value is conducted.

Significant estimates and judgments

The preparation of the Company’s financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of revenue, expenses, assets, liabilities, accompanying disclosures and the disclosure of contingent liabilities. These estimates and judgments are subject to change based on experience and new information. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. Estimates and judgments are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. Financial statement areas that require significant estimates and judgments are as follows:

Business combinations – The Company uses judgment in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value is typically estimated using the present value of future discounted cash flows, an income approach. Significant estimates in the discounted cash flow model primarily include the discount rate, rates of future revenue growth and profitability of the acquired business, and working capital effects. The discount rate considers the relevant risk associated with business-specific characteristics and the uncertainty related to the ability to achieve the projected cash flows. These estimates and the resulting valuations require significant judgment.

Contingent consideration – Contingent consideration is subject to measurement uncertainty as the financial impact will only be confirmed by the outcome of a future event. The assessment of contingent consideration involves a significant amount of judgment, including determining a reliable estimate of the amount of cash outflow required to settle the obligation based on significant unobservable inputs as well as estimates around the probability and timing of satisfying the future events on which the contingent consideration is based.

Asset impairment – Asset impairment tests require the allocation of assets to asset groups, which requires significant judgment and interpretation with respect to the integration between the assets and shared resources. Asset impairment tests require the determination of whether there is an indication of impairment. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information.

6


Stock-based payments – Stock-based payment transactions are measured and recognized based on estimated fair value, which requires judgment in determining the appropriate valuation model and assumptions, including discount for shares not registered with the Securities Exchange Commission (“SEC”) subject to transfer restrictions.

Imputed interest for loans receivable – In connection with the loans obtained as part of the ABG Profit Participation Arrangement, judgment is required to estimate the prevailing market interest rate at each time a loan is issued.

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 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, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2014-09 for the annual financial statements for the year ended December 31, 2019.

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. For public companies, the new standard is effective for annual periods beginning after December 15, 2017, including interim periods within the fiscal year. For all other entities, including emerging growth companies, ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-01 for the annual financial statements for the year ended December 31, 2019.

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. For all other entities, including emerging growth companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 2020. Earlier application is permitted. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-02 for the annual financial statements for the year ended December 31, 2019.

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 is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-13 for the annual financial statements for the year ended December 31, 2021.

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 Company is currently evaluating the impact on the financial statements and expects to implement the provisions of ASU 2018-13 as of January 1, 2020.

2.

Investments

The classification of investment in equities reported in long-term investments on the Condensed Consolidated Balance Sheets is summarized as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Investment in equities under available-for-sale method

 

$

3,268

 

 

$

1,845

 

Investment in equities under the cost method

 

 

16,382

 

 

 

15,066

 

Total investment in equities

 

$

19,650

 

 

$

16,911

 

7


 

Total unrealized gain recognized in other comprehensive income related to long-term available-for-sale equity securities from initial recognition until March 31, 2019 was $1,396 (2018 - nil).

3.

Fair Value Measurement

The Company complies with 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. 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.

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

identical

 

 

observable

 

 

unobservable

 

 

 

 

 

 

 

assets

 

 

inputs

 

 

inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

197,011

 

 

$

 

 

$

 

 

$

197,011

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

 

30,559

 

 

 

 

 

 

 

 

 

30,559

 

Money market fund

 

 

670

 

 

 

 

 

 

 

 

 

670

 

Investment in equities under available-for-sale method

 

 

2,420

 

 

 

848

 

 

 

 

 

 

3,268

 

Total investments

 

 

33,649

 

 

 

848

 

 

 

 

 

 

34,497

 

Contingent consideration

 

 

 

 

 

 

 

 

(49,214

)

 

 

(49,214

)

Total

 

$

230,660

 

 

$

848

 

 

$

(49,214

)

 

$

182,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

203,761

 

 

$

 

 

$

 

 

$

203,761

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

 

30,335

 

 

 

 

 

 

 

 

 

30,335

 

Investment in equities under available-for-sale method

 

 

1,163

 

 

 

682

 

 

 

 

 

 

1,845

 

Total investments

 

 

31,498

 

 

 

682

 

 

 

 

 

 

32,180

 

Total

 

$

235,259

 

 

$

682

 

 

$

 

 

$

235,941

 

 

At March 31, 2019, the carrying amount of cash equivalents, which include money market fund, corporate bonds, commercial paper and treasury bills, includes an unrealized loss of $12 (March 31, 2018 – nil), recorded in comprehensive loss. Contingent consideration is recorded within accrued expenses and other current liabilities and reflects the consideration for: (i) the acquisition of Manitoba Harvest payable in Class 2 common stock contingent on revenues earned in 2019, and (ii) the acquisition of Natura payable in Class 2 common stock contingent on production levels. Refer to Note 13 for details. There were no transfers between fair value measurement hierarchy levels during the three months ended March 31, 2019.  

4.

Inventory

Inventory is comprised of the following items:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials

 

$

11,114

 

 

$

2,132

 

Work-in-process

 

 

31,152

 

 

 

12,812

 

Finished goods

 

 

6,446

 

 

 

1,267

 

Total

 

$

48,712

 

 

$

16,211

 

 

8


Inventory is written down for any obsolescence or when the net realizable value of inventory is less than the carrying value. For the three months ended March 31, 2019, the Company recorded write-downs within work-in-process of $1,626 in cost of sales. There were no write-downs in cost of sales for the comparable period in 2018.

5.

Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Land

 

$

5,715

 

 

$

4,498

 

Buildings and leasehold improvements

 

 

75,502

 

 

 

51,111

 

Laboratory and manufacturing equipment

 

 

20,164

 

 

 

6,131

 

Office and computer equipment

 

 

3,754

 

 

 

970

 

Assets under capital lease

 

 

9,981

 

 

 

9,661

 

Construction in process

 

 

23,011

 

 

 

15,343

 

 

 

 

138,127

 

 

 

87,714

 

Less: accumulated depreciation and amortization

 

 

(9,164

)

 

 

(7,500

)

Total

 

$

128,963

 

 

$

80,214

 

 

For the three months ended March 31, 2019, $305 depreciation expense related to general office space and equipment (March 31, 2018 – $29). In addition, $999 of depreciation expense was included in cost of sales relating to manufacturing equipment and production facilities (March 31, 2018 – $ 372) with the remaining depreciation included in inventory.

No capitalized interest was included in construction-in-progress for the three months ended March 31, 2019 (2018 – $134).

The Company had $46,333 in property and equipment additions related to building and leasehold improvements, laboratory and manufacturing equipment, office and computer equipment and construction during the three months ended March 31, 2019 (2018 – $11,248). Additions to building and leasehold improvements primarily related to the Company’s acquisitions of Manitoba Harvest and Natura. Refer to Note 13 for details. Additions to construction in process primarily relate to the ongoing construction of the Company’s London, Ontario and Portugal facilities.

6.

Intangible Assets

Intangible assets are comprised of the following items:

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Weighted

Average

Amortization

Period

(in years)

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

16

 

$

133,834

 

 

$

692

 

 

$

133,142

 

 

$

 

 

$

 

 

$

 

Developed technology

 

10