The sands of the hourglass are beginning to thin out. After years of promises from Prime Minister Justin Trudeau, and months of debate in Parliament, recreational marijuana will become legal and go on sale in Canada in just 44 days.
What will legalization look like in Canada? Though it's really anyone's guess at this point, it'll likely add billions of dollars in annual revenue, atop what the industry is already generating from domestic medical patients and via exports. In many ways, this legalization is being viewed as the next-greatest thing since sliced bread -- and investors are hoping to take advantage of it.
Tilray dishes on its very first quarterly report as a public company
In particular, one newly public marijuana stock has been the apple of investors' eyes over the past two-plus weeks: Tilray (NASDAQ:TLRY). Since closing at $24.25 on Aug. 14, Tilray, which became the first Canadian-based pot stock to go the initial public offering route on a reputable U.S. exchange, has gained more than 155% (through Aug. 29). In fact, Tilray is rapidly closing in on Aurora Cannabis for the No. 2 spot in total market cap.
Though there are numerous catalysts that have lit a fire under Tilray in recent weeks, the company's release of its second-quarter operating results after the market close on Tuesday, Aug. 28, has certainly played a role. Since Tilray only went public in mid-July, this is its first quarterly release as a publicly traded company.
With this in mind, here are the 10 things you absolutely must know about Tilray's Q2 report.
1. A major focus on high-margin oils
While most folks were likely focused on the 95% increase in year-over-year sales to $9.74 million in Q2 2018, it was the composition of those sales that's much more impressive. According to the company's 10-Q filing with the Securities and Exchange Commission, $4.44 million of the $9.74 million in sales was the result of cannabis oils. With the exception of CannTrust Holdings, this is the highest percentage of oil sales as a percentage of total quarterly sales from oils that I've personally seen. Ultimately, this is a good thing, given the higher margins often associated with oils.
2. Per-gram cannabis prices remain strong
Another bright spot in Tilray's quarterly report was the announcement that the average per-gram selling price for cannabis rose modestly to $6.38 in the recently ended quarter from $6.20 in the year-ago period. Some of this can likely be attributed to an expected shortage of cannabis, and thus a bump-up in the price of dried cannabis. But don't discount its large percentage of cannabis oil sales as having lifted its per-gram average selling price this past quarter.
3. Domestic cannabis supply deals are ramping up
One of the most important steps for domestic Canadian producers is to lock up as many supply deals as possible. The more supply deals, the less running around growers will have to do to find a buyer for their product. According to Tilray's Q2 report, it's secured supply deals with seven of Canada's 13 provinces and territories, including British Columbia, Ontario, and Quebec.
4. International expansion is on track, too
Aside from focusing just on domestic supply, Tilray is also looking to expand its presence overseas. After completing exports to Argentina, South Africa, and the U.K., it now has access to 11 overseas markets, spanning five continents. These foreign markets are expected to play a big role in gobbling up Canadian oversupply in the years that lie ahead.
5. Tilray is well capitalized
Like many of its counterparts, Tilray is now swimming in cash. However, unlike many of its peers, which diluted investors with one bought-deal offering after another, Tilray raised most of its capital by selling shares of common stock during its initial public offering. After underwriting costs, Tilray cleared $163.6 million from its IPO, and raised $55 million from a Series A funding prior to its IPO. In other words, it's well capitalized and primed for capacity expansion.
6. An inventory decline?
One of the more surprising figures within the company's 10-Q filing was a noted decline in inventory levels since the end of fiscal 2017. With inventory levels denoted in dollar value, Tilray's inventory stood at $6.75 million as of June 30, 2018, down from $7.42 million as of Dec. 31, 2017. Though a lot of this decline can simply be traced to harvesting and sale patterns, it's an odd finding with legalization right around the corner in Canada and its peers ramping up their respective inventories.
7. More strategic investment expected
One of the more interesting developments came during CEO Brendan Kennedy's conference call with analysts. Kennedy commented that, courtesy of TheStreet.com, "I expect more strategic investors to enter this industry in coming months." This is noteworthy following Constellation Brands' whopper equity stake of $3.8 billion in Canopy Growth Corp, as well as Big Tobacco taking its first small stab in the cannabis space. Right now, deal-based speculation is very high.
8. U.S. legalization is closer than you realize
Additionally, Kennedy turned heads when noting that the United States is potentially on Tilray's medical cannabis radar. Said Kennedy during the conference call, "We're a lot closer to federal legalization in the U.S. than most people realize. Whenever it happens, Tilray will be ready." While I personally disagree with Kennedy on this point for a variety of reasons, it's still an eye-opener when heard from a leading Canadian grower.
9. Significantly wider operating loss
However, Tilray was missing a key figure in its second-quarter operating results: a profit. Despite a near-doubling in year-over-year sales, gross margin declined as cost of sales rose. Meanwhile, sale and marketing expenses more than doubled, and stock-based compensation skyrocketed. Ultimately, Tilray produced an operating loss of almost $11 million -- close to five times what it lost in Q2 2017 -- and a net loss of $12.8 million, or $0.17 per share. Yuck!
10. Dilution could become a problem in the future
Last, but not least, understand that while Tilray avoided becoming a chronic diluter since it didn't have to turn to bought-deal offerings, share-based dilution is still a possibility. As noted in the 10-Q, share-based compensation exploded to $5.6 million in Q2 following its IPO. Furthermore, close to 5.5 million stock options have been granted, which, if exercised, can increase the number of outstanding shares of stock. Though Tilray's shareholders won't be hurt by dilution nearly as much as its peers, it's not immune, either.
In the end, Tilray has given investors a lot to be excited about... down the road. In the meantime, its bloated valuation is more than enough reason for investors to keep their distance in the interim.