Is Tilray too dangerous? – Cannabis | weed | marijuana

“Tilray is too dangerous,” said Jim Cramer, host of CNBC’s “Mad Money.” “It’s a specialty stock that loses money, and we don’t recommend stocks that lose money.”

Cramer isn’t the only one shying away from the Canadian cannabis producer. Kerrisdale Capital called the company a “failing cannabis player” in a recent report.

We’re short shares of Tilray Brands, a failing $2.4 billion Canadian cannabis company that follows a familiar pattern for failing companies trading in the public markets: Given its structurally unprofitable operations, the company has closed resorting to continuous, shameless and massive dilution to stay afloat. Management is generously compensating itself while operating metrics continue to deteriorate.

But is that true? Is Tilray a Failing Cannabis Player? Is Tilray too dangerous for investors?

CNBC is not a legitimate news organization

Of course, CNBC is not a legitimate news organization. It is the corporate press, the entertainment arm of the military-industrial complex.

Likewise, Jim Cramer has been wrong so many times that it’s surprising people still take him seriously.

But Kerrisdale Capital doesn’t share Cramer’s reputation. Following its report, Tilray shares fell 12% to about $2.75 per share.

Of course, it’s not all Kerrisdale’s fault. Recently, Tilray asked shareholders to approve an increase in common shares from 980 million to 1.208 billion.

Tilray argues that the dilution is necessary in order to be able to react flexibly to market uncertainties. But as the falling share prices showed, shareholders were not satisfied.

But is Tilray too dangerous for investors?

Among Canadian cannabis producers, Tilray is the dominant player, having succeeded where others have failed. Its global presence in the pharmaceutical and craft beer industries bodes well for future cannabis distribution.

But if Tilray is diluting its stake to hide its financial health, is the company too dangerous to invest in?

Is Tilray too dangerous?

Kerrisdale Capital’s report is not a one-page newsletter. It’s a broad impact on Tilray’s financial and operational health. But is it correct? Is Tilray too dangerous for investors?

“Tilray has a dilution problem,” the report said. It refers to Tilray’s cash payments to a partner called Double Diamond Holdings. These are “recurring cash obligations” that Tilray is increasingly using its shares to pay.

This means that Tilray is giving up its ownership to meet its financial obligations.

Likewise, the report highlights that these payments increased from $24 million in cash to $100 million in stock. The report suggests that Tilray is undervaluing its shares when it makes these payments to Double Diamond Holdings.

The report also criticizes Tilray for not being transparent about these payments in its quarterly calls.

Kerrisdale Capital calls Tilray’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and free cash flow figures “materially misleading.”

They criticize that these stock payments are missing from Tilray’s definition of free cash flow. The report says that if you strip out “accounting shenanigans” and “other one-time benefits,” Tilray’s underlying financial performance is not improving, but is steadily (and significantly) deteriorating.

What about craft beer and legalization in the US?

Kerrisdale Capital’s report is critical of how Tilray could benefit from restructuring cannabis use in the United States. It’s less a question of “Is Tilray too dangerous” and more a question of “Is this relevant to Tilray’s success?”

Or even harmful to it?

The report suggests that adding cannabis to Schedule III will benefit pharmaceutical companies seeking to patent FDA-approved cannabis-based medicines. There are also tax benefits for operators at the state level.

But since Tilray has no significant cannabis operations in the U.S., what advantage does it offer? Keep in mind that debt restructuring favors U.S.-based companies. For a Canadian cannabis company like Tilray, this is a net disadvantage as it empowers its competitors without providing any tangible benefits to them (e.g. cross-border trade).

The report also criticizes Tilray’s acquisition of brands from beer giant Anheuser-Busch InBev (ABI). Kerrisdale Capital said the acquisition lacked strategic clarity and the lack of financial details about the purchase was a major red flag.

And it’s getting worse.

Retail sales of these acquired brands are declining, according to Nielsen data. Looking at the numbers, it seems that ABI has been happy to sell off its lackluster brands.

Do investors think Tilray is too dangerous?

Is Tilray too dangerous? Is the company diluting its stock to disguise its financial health and maintain operations? If you’re a Tilray fan, you might want to take a second look, suggests Kerrisdale Capital’s report.

While Tilray’s reason for acquiring ABI brands was future distribution in the THC-containing beverage market, Kerrisdale Capital’s report questions that logic.

They argue that the brands require significant investment, marketing and sales. Without ABI’s support, Tilray has created more work for itself. Taking advantage of distribution opportunities is not as easy as Tilray made it out to be.

Likewise, the report raises concerns about Tilray’s valuation even before cannabis debt restructuring news sent its shares soaring.

The report notes that Tilray shares traded at 36 times its EBITDA and three times its revenue upon news of a potential debt restructuring.

Ultimately, however, the report is concerned about the near-term dilution risk associated with refinancing. It mentions the payment patterns towards Double Diamond. It shows that more than $40 million worth of shares will be paid out to the supplier before $127 million worth of convertible notes mature on October 1.

Not exactly what you want to hear as a Tilray shareholder. This brings us back to our central question: Is Jim Cramer right? Has Kerrisdale Capital hit the nail on the head?

Is Tilray too dangerous?