Tilray Brands (TLRY 3.96%) has big plans for expansion into the U.S. market. That was a key piece of its strategy when it announced plans to hit $4 billion in annual sales by fiscal 2024. And although legalization in the U.S. is still nowhere in sight, the cannabis company has made efforts to be ready to go if and when that does happen.
One way it has given itself indirect exposure to the U.S. market has been by investing indirectly into a multi-state marijuana operator: MedMen (MMNFF). Unfortunately, that company isn't doing well at all.
Is MedMen running out of money?
In early February, MedMen reported its latest quarterly results (for the period ended Dec. 24, 2022), and they weren't good. The company's sales of $29.6 million were down 17% year over year and it was still deep into the red with a net loss of $17.3 million.
The situation remains perilous with the company reporting cash and cash equivalents of just $15.6 million. With MedMen burning through $8.3 million over the past six months through its operating activities, that suggests the cannabis business could soon run out of money if things don't improve quickly. And it may need to resort to issuing more shares just to keep its operations going.
The company's filings noted that its current conditions "raise substantial doubt with respect to the company's ability to meet its obligations for at least one year from the issuance of these condensed consolidated financial statements, and therefore, to continue as a going concern." In short, there's serious risk here and MedMen's business is in brutal shape.
What does this mean for Tilray Brands?
Tilray acquired convertible notes in MedMen in 2021, giving the company the ability to convert those notes into equity ownership of the business if the U.S. were to legalize marijuana and it would no longer be a problem for Tilray to own a stake in a U.S. multi-state marijuana operator.
Unless things turn around for MedMen, which Tilray CEO Irwin Simon previously referred to as a "great company," conversion of the notes is unlikely to happen, as MedMen may not even be around when marijuana legalization takes place (assuming legalization ever happens). There's also the risk that the notes aren't paid back, which would mean a loss for Tilray. It and other investors acquired the majority of MedMen's notes and outstanding warrants for $165.8 million.
Investors are better off avoiding Tilray
Tilray's decision to partner with MedMen was concerning back when the deal to acquire the convertible notes was first announced, as the MSO's struggles were already apparent at the time. If MedMen doesn't end up being a subsidiary of Tilray, that could be a blessing in disguise for Tilray shareholders. But the bigger concern I have is that management picked MedMen as a partner to begin with. Simon's aggressive pursuit of growth at all costs gives me significant doubts about the path that Tilray is on right now.
The company has virtually no hope of reaching its $4 billion sales target and things may end up going from bad to worse for the stock (it's down 53% in just the past 12 months). This is a company that's still full of risk.
