For cannabis consumers, 2018 was a transformational year and investors excited about a recreational sales explosion in Canada sent shares of Tilray (TLRY) into the stratosphere.

Immediately after Canada began allowing adult-use cannabis sales, though, the volatile marijuana stock started sliding. Since Oct. 17, it's lost around 58% of its value, and investors are worried there could be further losses.

Tilray's cannabis sales jumped 110% in 2018, but they'll have to continue rising at this pace for a long time before Tilray can make ends meet. Investors worried this licensed producer can't stop operations from bleeding money before it has to ask them for more have been hammering the stock, and it doesn't look like they'll have a reason to stop anytime soon.

Marijuana buds sitting next to a big pile of hundred-dollar bills.

Image source: Getty Images.

Clock's ticking

During the last three months of 2018, Tilray reported total revenue 55% higher than the previous quarter. Once you factor in the cost of cannabis products sold, though, the company's gross profit rose just 2% to a measly $3.1 million.

Sales, general, and administrative expenses grew 82% over the same period to $20.1 million, and the recent acquisition of a 662,000-square-foot greenhouse cultivation facility in Ontario will raise that figure.

More debt means more interest expenses, which rose to $7.7 million during the fourth quarter. That brought Tilray's net loss to $31.0 million during the last three months of 2018, or around $124 million annualized. 

Tilray finished the year with $487 million in cash and cash equivalents, which means the company only has a few years, at best, to reach positive cash flows before it has to ask investors for another handout.

Two pairs of hands exchanging money and marijuana inside a small plastic bag.

Image source: Getty Images.

What happened to that sales explosion?

Tilray spent heavily to gain a larger share of the new Canadian adult-use market and earning a return on those investments will be tough. Despite the rollout of legal adult-use sales partway through the fourth quarter, 79% of spending went to unlicensed dispensaries and mail-order services.

In Canada, Tilray and 22 other producers are licensed to sell oil and flower, plus there are at least 100 more that are licensed to sell some form of cannabis. All of them are operating in a legal market that reached an annualized $1.2 billion during the last three months of 2018.

Sadly, the next quarter probably won't be any better, and Tilray will lose money even if it maintains a large share of Canada's market for legal cannabis. 

Health Canada recently reported that legal sales of dry flower in January was 3.7% lower than in December by weight, while legal oil sales rose 4.3% by volume to 7,856 liters. Since it takes around 5 grams of dry cannabis to make each gram of concentrated oil, overall sales of legal cannabis are technically rising, but just barely.

It turns out most people just don't care for cannabis in any form, and legality wasn't holding them back. During the fourth quarter, 15.4% of Canadians used marijuana at least once, and just 19% think they'll consume some over the next three months. 

Check out the latest earnings call transcript for Tilray.

Canadian Maple Leaf surrounded by marijuana.

Image source: Getty Images.

Why international sales won't be a whole lot better

Trying to gain market share from tax-free businesses that operate in legal gray zones isn't just a Canadian problem. Most Europeans live where possession and consumption were decriminalized long ago. Germany's one of the strictest member states in the European Union, but cannabis consumers there use the same sort of unlicensed dispensaries and mail-order services that exist in Canada. 

Since the 1990s, adults in Spain and Belgium have been allowed to produce and sell cannabis in nonprofit, closed loops of a few hundred people called cannabis social clubs without breaking any laws. Clubs that operate just like for-profit businesses draw attention from local authorities, but consumers have hardly anything to worry about.

Now that Germany's legalized medical cannabis, new patients that don't know any better will probably pay through the nose for a small number of totally legal products. Heavy users, who drive a majority of sales, might try licensed cannabis, but they probably won't stick around for long. That's why medical marijuana sales in Germany have already begun leveling off despite surging prescriptions.

A U.S. flag framed by marijuana leaves.

Image source: Getty Images.

Looking ahead 

Heavy users in Canada can save $1,000 per month by avoiding licensed cannabis, plus they can buy powerful concentrates that licensed producers will probably never be allowed to sell. Without any daily users, around a fifth of the total cannabis market outside the U.S. is probably as good as it's going to get for licensed producers. 

Tilray's acquisition of Manitoba Harvest gives the company access to 30,000 acres of hemp and 16,000 retail locations in North America. The new U.S. farm bill makes hemp-derived CBD legal at the federal level, but it probably won't help Tilray make ends meet. 

While sales of CBD in the U.S. are expected to rise from $890 million in 2017 to $1.9 billion in 2022, selling all its hemp at a profit won't be easy. The Food and Drug Administration made it clear that Tilray and its peers can't tell anyone their CBD products offer any therapeutic benefits, and there are already plenty of established players. 

Altogether, it looks like Tilray and dozens of other licensed producers in Canada and the EU will have to fight over total licensed sales that probably won't rise above $4 billion annually before the company runs out of money. With this in mind, it's a miracle Tilray hasn't fallen much farther.