We are short shares of Tilray Brands, a $2.4bn failing Canadian cannabis player running a familiar playbook for unsuccessful businesses trading in the public markets: given structurally unprofitable operations, the company has resorted to ongoing, shameless and massive dilution to stay alive, even as management compensates itself generously while operating metrics further deteriorate. Tilray touts itself as being different from other Canadian cannabis companies which lack positive EBITDA and free cash flow. But the truth is that Tilray is just obscuring losses by issuing shares, instead of recording cash expenses, to one of its largest suppliers. Furthermore, the company’s “cannabis adjacent” diversification strategy essentially entails incinerating shareholder capital by overpaying for doomed businesses that will ultimately only deepen the company’s losses. Valuation made little sense even before retail investors raced to chase recent buzzy headlines on potential marijuana rescheduling, which may be a boon for U.S. weed companies but does next to nothing for Tilray. Now shares are even more poorly positioned ahead of seemingly endless dilution required to fund operations and refinance convertible debt due to mature in a few weeks.

Tilray is caught in a nonstop dilution cycle. It doesn’t generate cash internally, and what cash it has on the balance sheet is largely thanks to dilutive equity offerings. To fund operations and maintain a currency for acquisitions, Tilray must keep its share price from joining the penny stock ranks of many of its cannabis peers. Consequently, in late 2021, as Canadian cannabis industry fundamentals continued to implode, rather than pay amounts owed to a key cannabis operating partner in cash Tilray opted to directly issue the supplier increasing amounts of stock. What began as $24m paid in cash in 2021 morphed into $100m in stock paid over the last two years, even as Tilray’s stock price fell to new lows. We believe these payments are poorly disclosed and allow Tilray to materially inflate reported EBITDA and free cash flow. We believe shareholders are being intentionally misled; without these convoluted stock payments, last year Tilray’s EBITDA would have been zero and its free cash flow would have been deeply negative (again).

Tilray’s recent participation in a broad rally for U.S. cannabis stocks based on hopes that the DEA will quickly reschedule marijuana ignores crucial differences among weed companies and reflects a misunderstanding of the issue. Cannabis is only 30% of Tilray’s total revenue and none is generated from US plant-touching operations. Rescheduling would not legalize the sale of marijuana for anything except FDA-approved drugs in specific forms that have been tested and approved. None of the touted financial benefits of rescheduling marijuana to Schedule III – potential tax savings, major stock exchange uplisting, implied progress toward SAFE Banking Act – help Tilray. Contrary to the sharp spike in share price, we are convinced that rescheduling Schedule III would actually be terrible for Tilray. Politicians will now focus on various policy changes that would still not allow Tilray to sell recreational cannabis products in the U.S., much less advance Tilray’s goal of using craft beer infrastructure to create THC-infused non-alcoholic beverages, all while lifting the prospects of potential competitors.

To distract investors from the stench of its cannabis business, Tilray has pursued craft beer acquisitions, recently agreeing to buy 8 brands from Anheuser-Busch. Investors cheered the move, but they might not have if management had disclosed that retail sales for key brands have declined over 20% YTD and the portfolio has only 10-15% EBITDA margins.

Once the buzz over declining craft beers, inflated earnings, and misunderstood rescheduling benefits wears off, investors will realize Tilray shares are worth only a fraction of the current price. Our sum-of-parts derived price target is $0.89 (-70%).

Read our full report here.