At 5/31/2023 (date of the last annual report), the company appeared quite robust – $4.3-billion in assets against only a billion in liabilities. That’s a high net worth, plus current assets well exceed current liabilities so cash flow appears well planned and executed. The paid media says many analysts expect the losses to stop, as soon as one year.
Why then this sad stock performance graph?
The answer lies in a familiar pattern for startup public companies. In Feb 2018, three men (Brendan Kennedy, Christian Groh and Michael Blue) owned Privateer Holdings which ran some government-approved cannabis operations outside the United States (Europe and Canada). They “went public” by incorporating Tilray and having it “acquire” Privateer Holdings. They sold their company ownership for all of the stock in Tilray – 75-million shares.
They lined up some capital guys to invest a pile of capital over a series of transactions. They sold off about 20% of any future dividends and maybe 10% of the shareholder vote, and borrowed the rest:
- In February and March 2018, the Company issued stock for $55-million in cash from third-party institutional investors. After the planned IPO dust settled, this stock would convert into 7,794,042 shares of common stock.
- In July 2018, the Company sold 10,350,000 shares to third parties for about $225-million in cash in an IPO.
- In October 2018 the company borrowed from anonymous parties $475-million in cash. Tilray kept the option to pay the money back in newly issued stock certificates, and did pay off some with stock earlier but share value has fallen to the point where the number of shares to extinguish the rest of notes might transfer control of the company, and they are due. You will notice a significant recent reduction in Tilray’s cash on hand and current portion of long term liabilities in the quarter ending 11/30/23.
- In 2019 the Company issued a total of 5,396,501 shares of Class 2 common stock for gross proceeds of $113,543,000 about $20/share. Another 4.2-M shares were issued for acquisitions and insiders but not for cash.
The plan was to get its stock trading, then recruit other owners of operating Cannabis companies to sell out in exchange for newly issued stock certificates. The ex-owner can then sell the stock after a few months waiting period for cash, buy a sailboat, and sail off into the sunset. Tilrey could also recruit employees and sway suppliers by issuing them shares.
In the beginning, when people start trading a company’s shares, initial supply for sale is very low. This increases over time, as restrictions on early issuances expire, and as the company issues sometimes many new shares in exchange for acquisitions, assets, services, executive compensation, etc. Thus, supply increases. Management’s idea is to make the enterprise famous by making profits and paying shareholders dividends – increasing demand (hopefully) for shares faster than shares are issued.
Now, five years later, the company has “acquired” quite a few such targets, but it has not yet made a profit or positive cash flow, which means it hasn’t (and has no plans to) pay a dividend. The problem is “dilution.”
The Company has issued an immense number of shares of stock, going from 240-million shares at 5/31/2020 to 732-million shares on the latest financial statements, three and a half years later. Each share gets one vote for members of the board of directors and an equal share of dividends, should any ever be distributed. Each new share issued reduces the share of dividends for current owners.
As for Tilray’s book value, a closer look reveals only $1.2- billion dollars of tangible assets – stores, farms, inventory, bank accounts and infrastructure – and just under three billion dollars of “intangible” assets.
These “intangible” assets were “acquired” by Tilray issuing stock worth more in the stock market than the balance sheets of the acquired companies. Accounting rules require they be valued at the market value of Tilray stock at the time it issues it – which, as we have seen, has at times been ridiculously high. If Accounting rules instead required “intangible” assets to be revalued at the stock value when the underlying stock falls, Tilray’s assets and (less liabilities) net book equity would be much less.
Conclusion at 11/30/23 Second Quarter
If these intangible assets, which appear to require impairment since they produce neither earnings nor cash flow, are disregarded, then Tilray’s balance sheet looks much different: Tilray has $1.4 billion in assets against $1-billion in liabilities, and net equity of only $400-M (over 732-million shares now).