Although earnings season never really ends, this has been a bigger week than most regarding earnings reports from top-tier cannabis stocks. Yesterday, the largest marijuana stock in the world, Canopy Growth, reported its first-quarter operating results, while on Wednesday, we heard from Charlotte's Web, the leader in hemp-derived cannabidiol (CBD) market share in the United States.
Yet it might be Tilray's (TLRY) second-quarter operating results, released after the closing bell on Tuesday, Aug. 13, that's hogged all of Wall Street's attention. And for good reason.
At this time last year, Tilray became Wall Street's darling. In a two-month period between its mid-July initial public offering and mid-September, its share price would climb from a list price of $17 to as high as $300 on an intraday basis. It was 1999 all over again, and short-term traders couldn't get enough of it.
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But that move has long since been put in the rearview mirror. Tilray's share price has come crashing back to Earth as Wall Street and investors have turned their attention to cannabis stock operating results. And suffice to say, Tilray has failed to impress.
Here are five figures that clearly demonstrate Tilray, once viewed as an industry leader in the cannabis space, is a mess and should probably be avoided by investors.
1. Anemic gross margin
The first figure that shows Tilray is in big trouble is the company's gross margin, which came in at 27%, inclusive of a non-cash charge associated with its Manitoba Harvest food-products operations. Although this is up sequentially from the 23% gross margin reported in the first quarter and the 20% gross margin generated in the fourth quarter, it's still pretty abysmal.
Tilray is going to have a really hard time expanding its gross margin for two reasons. First, while its acquisition of Manitoba Harvest gives the company access to more than 16,000 retail doors throughout North America, some of which will be used for CBD sales, the hemp-based food products business is generally lower margin than cannabis sales.
The other problem is that Tilray has been late to the game in expanding dried flower and derivative production. As a result, it's been forced to purchase dried flower at wholesale prices to meet supply agreements of its own. The margins on wholesale-bought weed simply aren't that good.
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2. Expanding net loss
Secondly, Tilray continues to lose a lot of money. Even though the company's $45.9 million in gross revenue handily surpassed Wall Street's consensus by over $5 million -- Tilray is one of the few pot stocks that reports in U.S. dollars -- the company's net loss came in wider than expected for the fourth consecutive quarter.
After $33.6 million in sales costs, which includes excise taxes, are removed from gross revenue, Tilray managed a gross profit of $12.3 million. That was almost triple what it generated in the prior-year quarter, albeit gross margin was a more robust 43% in Q2 2018. The problem is that general and administrative expenses more than tripled, sales and marketing expenses grew fourfold, and other expenses soared. All told, the company reported an operating loss of $32.5 million and a net loss of $35.1 million, or $0.32 per share on an adjusted basis.
Whereas many of Tilray's peers are expected to push toward recurring profitability between the second half of 2019 and the second half of 2020, it's looking increasingly likely that Tilray won't even have a shot at recurring positive earnings before interest, taxes, depreciation and amortization (EBITDA), let alone profits, until 2021.
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3. Rising share-based compensation
Building on Tilray's losses is the fact that the company's share-based compensation is on the rise. Tilray recorded $7.6 million in stock-based compensation in the second quarter, which accounted for 17% of its operating expenses.
On one hand, I can understand that an expanding employee base needs incentives to stay loyal. This is the story that the now-former co-CEO of Canopy Growth, Bruce Linton, ascribed to. Then again, it also played a big role in his firing as co-CEO in early July.
The problem is that keeping employees loyal by offering stock (even long-vesting stock) can have tangibly bad impacts on a company's bottom line. Through the first six months of the year, Tilray's share-based compensation has more than doubled, which isn't good news considering that losses keep widening.
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4. Dwindling cash pile
A fourth figure that should raise investor concerns is Tilray's cash and cash equivalents, which has dwindled to $220.9 million as of June 30, 2019 from $517.5 million at the end of 2018.
Tilray has been a busy bee of late in terms of expanding production, acquiring Manitoba Harvest, and making arrangements to push into other foreign markets, including the United States, so it does have a valid reason for its decline in accessible capital. However, the company's current liabilities are also growing as the business expands, and Tilray already has $425.4 million in convertible notes on its balance sheet.
As net losses continue to widen, it becomes more likely that Tilray will need a dilutive capital raise to execute its long-term strategy. With the company's share price already depressed from peak levels, a dilutive stock offering is the last thing shareholders want.
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5. Post-Privateer merger share sale
Lastly, even though it's a figure that wasn't noted in the company's second-quarter operating results, Tilray's announced downstream merger with private equity firm Privateer Holdings, the largest shareholder of Tilray stock, is still a concern. Privateer owns about 75 million shares of Tilray stock, or roughly 77% of the company's outstanding shares. The worry has long been that once Privateer begins to sell its stake to lock in gains, Tilray's share price will be clobbered.
The complicated merger with Privateer, announced in June, will see Tilray sell Privateer's stake in an orderly fashion over a two-year period, thereby allowing early investors to cash in on their investments. While an orderly sale is better than an unexpected sale, it should still be noted that this means up to 75 million shares of insider-held stock will be sold down over the coming two-year period. That's going to place a lot of pressure on a stock that's already being hit by poor production, anemic margins, a dwindling cash pile, and widening losses.
Tilray is a mess -- and it should be avoided by investors.
