Will Any Of The 4 Largest Cannabis Companies Ever Earn A Profit?

by: James V. Baker

GW Pharmaceuticals has conducted pure medical marijuana research for 20 years.

Canada can claim three of the four largest cannabis companies.

Canada has a long and checkered history with investors.

Canopy Growth’s tab has been picked-up by Constellation Brands.

Tilray and Aurora deserve rapt attention from investors.

This article examines the four largest publicly-traded cannabis corporations in the world, as measured by market capitalization, to shed light on their financial performance or lack thereof. It reviews their income and cash flows since their inception and seriously questions whether these four companies will report profits and positve operating free cash flows in the foreseeable future. The article begins with GW Pharmaceuticals (GWPH), because it is by far the oldest of the four.

GW Pharmaceuticals (GWPH) – Market Capitalization $4.482 Billion

The first publicly-held cannabis company was GW Pharmaceuticals (GWPH), a British biopharmaceutical company started by Doctors Geoffrey Guy and Brian Whittle. In 1998 they obtained a cultivation license from the United Kingdom Home Office and the Medicines and Healthcare Regulatory Agency to grow cannabis from seeds and clones to conduct scientific research concerning the medicinal uses of the plant. It was initially listed on the AIM, the junior market of the London Stock Exchange, in 2001 and it became dual-listed on the NASDAQ in 2013.

GWPH’s first commercial product, Nabiximols (trade name Sativex) was approved in the UK in 2010 as a treatment for multiple sclerosis patients to alleviate neuropathic pain, spasticity, overactive bladder and other symptoms. In 2011 GWPH established a partnership with Bayer for the distribution of Sativex in the UK and has annually produced about 100 tons of it since 2012. Nabiximols is synthesized from two proprietary cannabis strains and is extracted with ethanol and carbon dioxide.

Sativex is currently used to treat spasticity (muscle spasms and stiffness) caused by multiple sclerosis. The drug, delivered through a vaporizer, is approved in 25 countries but isn't available in the United States. GW Pharmaceuticals is engaged in Phase 3 clinical trials that could soon lead to FDA approval of Sativex.

GW Pharma Breaks Through with Epidiolex

In 2015 GWPH initiated Phase 3 clinical trials of cannabidiol by mouth for treatment of two orphan conditions in children, Dravet and Lennox-Gastaut syndromes. GWPH also received fast track designation from the FDA for use of the drug candidate to treat newborns with epilepsy. The drug, under the brand name Epidiolex, was given FDA approval in June 2018 after pivotal Phase 3 trials with 516 patients were completed.

Dravet syndrome, also known as Severe Myoclonic Epilepsy of Infancy or SMEI is a progressive and serious genetic disorder characterized by a high risk of early mortality due to sudden unexplained death in epilepsy, SUDEP. Afflicted patients experience multiple seizures, often including life-threatening, prolonged states of continuous seizure activity. Dravet syndrome is a rare and catastrophic form of epilepsy and the only approved therapy has been Stiripentol in the EU. Epidiolex is, therefore, highly anticipated in the U.S. where it will be the only FDA approved drug available.

Lennox-Gastaut syndrome, LGS, is a severe form of epilepsy that typically becomes apparent during infancy or early childhood, most often between 3 to 5 years of age. Affected individuals generally experience multiple types of seizures, multiple times throughout the day. Epidiolex will compete with two other drugs that are prescribed in the U.S. to treat LGS: Banzel (Rufinamide) introduced by Eisai in 2008 and Onfi (Clobazam) introduced by Catalent Pharma Solutions in 2011.

While GWPH’s Epidiolex will not have a monopoly in the treatment of Lennox-Gastaut syndrome patients, it is expected to quickly capture significant market share because of its efficacy. GWPH is targeting approximately 35,000 Lennox-Gastaut syndrome patients and 8,000 Dravet syndrome patients in the United States. If they reach half of their target, GWPH will have Epidiolex sales of about $700 million per year.

On September 27, 2018 the Drug Enforcement Agency ruled Epidiolex would not face the same federal restrictions as other products made from marijuana. That made Epidiolex the first medication derived from marijuana that doctors could legally prescribe everywhere in the country.

The DEA decision applied only to Epidiolex; therefore, the flood gates were not opened for CBD based drugs from other pharmaceutical companies. To emphasize that point, the DEA stated in its Epidiolex announcement that it still considered CBD or cannabidiol in other forms to be a Schedule I drug just like heroin and LSD.

Epidiolex is manufactured in England and shipped to and distributed by Greenwich Biosciences a U.S. subsidiary of GWPH. It began being dispensed as a CBD-infused strawberry syrup in November 2018. Investors are anxiously awaiting the company’s quarter ended December 31, 2018 results, which will reflect initial sales.

GW Pharmaceuticals has submitted a Marketing Authorization Application for Epidiolex to the European Medicines Agency. In the wake of this application there were two high-profile cases in the UK concerning children with severe epilepsy who were denied access to cannabis oil causing the UK government to reconsider its laws governing medicinal cannabis. In fact, in July 2018, the Home Secretary announced that specialist doctors would soon be allowed to legally prescribe cannabis-derived medicinal products. GW Pharma expects to start selling Epidiolex in Europe in the first quarter of 2019.

GWPH Financial Results

An analysis of financial statements of GWPH highlights the difficulties that await those cannabis companies planning to get rich by establishing or acquiring pharmaceutical companies so they can develop cannabis based drugs. GWPH scientists had been engaged in pure research of cannabis for the sole purpose of discovering cannabis based drugs for 20+ years and during that time it never earned an operating profit or had positive operating free cash flow.

In the past 36 years there have only been five cannabis based drugs, including Epidiolex, introduced in the worldwide pharmaceutical market. Cesamet, a Valeant Pharmaceutical drug, was introduced in Canada in 1982 and in the US in 2006; Marinol, an Abbvie drug, was introduced in the US in 1986; Sativex, a GW Pharma drug, was introduced in Canada in 2005; and Syndros, an INSYS Therapeutics drug, was introduced in 2017. The four drugs introduced prior to Epidiolex are all synthetic products. It is significant that Epidiolex is the first plant-based cannabinoid to be approved by the FDA.

GW Pharma’s journey to cannabis based pharmaceutical riches is a rocky one and not yet complete. In fact, as of the end of its 2018 fiscal year GWPH showed an accumulated deficit of $757 million, meaning that GWPH lost that amount of money during the first 20 years of its existence!

In 2018 it only had $12.7 million in revenue and reported a net loss of $295 million or $10.61 per share. For its fiscal year ending September 30, 2018 its reported negative operating free cash flow of $232 million compared to a negative figure of $149 million in fiscal 2017. These horrible financial results strongly indicate that GW Pharma needed a miracle, and that miracle just might be Epidiolex.

Despite its poor performance investors did not abandon GW Pharma. In fact it has always been considered the leading medical marijuana, pharmaceutical company in the world. The public perception of GWPH as the leading company contributed to it always having a seemingly unjustifiable valuation.

At its current price of $146.37 per share, GWPH’s market capitalization is $4.734 billion, making it the fourth largest pure cannabis company in the world. GWPH has traded as high as $179.65 and as low as $90.14 during the past year.

GWPH Drug Pipeline

The successful introduction of Epidiolex is a tribute to management and investors who continued to believe in and fund GWPH. Epidiolex just might be the first of many cannabis based drugs from GWPH’s pipeline to reach market. GWPH has said it has a deep pipeline of additional cannabinoid product candidates focusing on orphan childhood-onset neurologic conditions, oncology, multiple sclerosis, schizophrenia, autism, Rett syndrome, and other conditions. In a recent television interview the CEO of GWPH indicated they might have discovered a neurological pathway for other diseases to be treated with cannabis based drugs.

SEC and $345 Million Offering

On October 5, 2018, a week after DEA approval of Epidiolex GWPH tapped the markets for $345 million. It issued 1.9 million American Depositary Receipts, ADSs, on the NASDAQ Global Market and issued another 285,000 under an option allotted to the underwriters. All shares were sold at $158 per share providing gross proceeds of $345.23 million before deducting underwriting discounts, commissions and offering expenses. GWPH management stated the funds were needed to cover expenses relating directly to ramping up the production and distribution of Epidolex.

GWPH set a list price of $1,235 for a 100 ml bottle of Epidiolex. That equates to a patient cost estimated at $32,500 per year, which is expected to be covered by most insurance programs. Importantly, from purely a financial point of view, Epidiolex is a treatment not a vaccine; therefore, the drug will have to be used by patients throughout their lives and provide GWPH with a steady stream of income.

In an SEC Form 8-K filing preceding its ADS offering GWPH stated it would immediately begin reporting as a domestic U.S. filer, including filing quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements under Section 14 of the Exchange Act. GWPH also said that commencing on October 1, 2018 it would prepare its financial statements in U.S. dollars in accordance with generally accepted accounting principles, GAAP, rather than International Financial Reporting Standards, IFRS.Interestingly, in its 8-K filing GWPH stated it had a tax loss carry forward of $270 million in the United Kingdom.

GWPH has an extensive portfolio of several hundred patents with many aimed at using cannabis to fight intractable neurological diseases. If it has truly discovered a pathway to treat patients with neurological problems, then the likelihood is GWPH will be acquired by a large pharmaceutical company in the near future. If GWPH is not acquired, then it should be able to start generating its own positive results by cashing in on Epidiolex and other drugs it plans to introduce. It seems as if GW Pharma has finally turned the corner.

Cannabis Replaces Mining in Canada

Despite being around for 20 years, GW Pharma is only the fourth largest, publicly-held cannabis company in the world when measured by market capitalization. The three publicly-held companies with larger market capitalizations are all Canadian corporations.

Canada became the unofficial worldwide home of the cannabis industry in April 2014 when Health Canada implemented Marijuana for Medical Purposes Regulations, MMPR. Its position was solidified on October 17, 2018 when Canada became the first developed nation to fully legalize marijuana. A less developed nation, Uruguay, had legalized it in 2013.

Like previous discoveries of uranium, gold, silver, oil and natural gas, the emergence of cannabis created a frenzy of speculative activity that is uniquely Canadian. Entrepreneurs seeking the latest wealth generating vehicle quickly followed the well trodden route made by prior generations and formed public companies by issuing stock on securities exchanges that were happy to get listing fees and capitalize on this newest sector of the Canadian economy. Cannabis fever swept the nation as thousands of applicants sought governmental approval to obtain licensed producer, LP, status. At the same time, hundreds of companies were formed to issue stock on the exchanges to obtain funds to execute the dreams of their organizers. The fact that most of these people knew nothing about cultivating, processing and distributing marijuana was not as important as getting in on the action.

Today’s publicly-held Cannabis companies owe their existence to that cauldron of human activity designed to capitalize on the latest, greatest way to make a fortune in Canada. The organizers just copied the game plan used by mining companies that have long since disappeared. In fact, a significant number of the today’s publicly-traded cannabis companies went public via a reverse takeover technique using the carcass of long dead mining companies.

There are now 129 cannabis companies listed on the Canadian Securities Exchange, CSE, which touts itself as “The Exchange for Entrepreneurs.” At the present time there are also 142 mining companies listed on the CSE.

Other than the game plan on how to incorporate a company and do an IPO on a Canadian stock exchange, most of the organizers of these public cannabis companies knew little or anything about growing and processing marijuana. Many early entrants are already gone, but some have so far been able to survive. The survivors have all been able to replenish lost early investor cash with cash from new investors in a legal Ponzi-like fashion where investors are looking to “strike it rich.”

The attributes that encourage people to get involved was patience and deeply held convictions that great wealth was within reach. The prevailing belief was that the Canadian marijuana industry was in its infancy as shown by the fact that the number medical marijuana users registered with Health Canada was 28,115 in 2012; 60,000 in 2014; 220,000 in 2017; and 331,000 in 2018.

The media fanned the cannabis movement by chronicling the fortunes being made in Canada’s newest industry. Reports of success lured people from all walks of life who believed they were getting in early. Just as a prior generation of Canadian investors had been lured by the glimmer of gold, cannabis investors saw marijuana as their ticket to vast riches. These investors were especially excited, since the conventional wisdom was that legalization of recreational marijuana would open up the money faucet.

There was and still is a generalized belief that the marijuana industry will at some time in the future rival the soft drink, candy, pharmaceutical, health food and other industries in sales. The fervor about marijuana’s future and Canada’s unique positioning made it easy for Canadian cannabis companies to raise money.

It would be a huge understatement to say that Canadian cannabis companies became proficient at raising money. It would be more accurate to say that Canadian cannabis companies are the Olympic Gold Medalists of raising money. The amount of money raised was C$148 million in 2014, C$908 million in 2015, C$1.299 billion in 2016, C$3.530 billion in 2017, and C$13.792 billion in 2018. A total of C$19.677 billion was, therefore raised in the span of five years.

Once the lure of great wealth becomes embedded in the human mind, it does not take much to separate people from their money. Billions of dollars have been raised by Canadian cannabis companies that continually lose money. The negative operating free cash flows that characterize the Canadian cannabis sector keep getting funded by issuance of additional stock and/or debt instruments to investors captivated by dreams of great wealth.

As publicly-held Canadian cannabis companies have evolved, their managements have concluded that Canada’s population of 36 million was insufficient to justify Cannabis company valuations even with the legalization of recreational marijuana. Once that insight dawned in Canadian cannabis company executive suites and board rooms, the bigger companies started gobbling up other domestic companies in a drive to capture market share and become vertically and horizontally integrated. The drive to continually add more and more square feet of cultivation was especially notable, because there was a strongly held belief that there would be a shortage once the ban on recreational marijuana consumption was lifted.

Company acquisitions of additional licensed producers is especially important, because International Financial Reporting Standards, IFRS, include the “Fair Value of Biological Assets” as a revenue item in determining gross profit. Accordingly, the more a Canadian cannabis company grows the more gross profit it will report on its income statement. IFRS accounting counts growing cannabis the same as selling it. All Canadian cannabis companies have adopted IFRS instead of GAAP because of such liberal recognition of income and the fact that IFRS allows a number of expenses to be capitalized instead of expensed. An accounting system that inflates revenues and lowers expenses on an income statement is a dream come true for those wanting to pitch a company’s stock.

Al Rosen, PhD, a well-known and highly respected Canadian author, forensic accountant and York University professor, has referred to Canadian cannabis companies’ use of IFRS as “hallucinogenic accounting.” His books $WINDLERS$ and EASY PREY INVESTORS note in great detail past schemes that have cost investors massive amounts of money and should be required reading for all investors. Rosen happens to believe that many of the people who promoted Canadian scams in the past are now actively involved in the cannabis sector.

Publicly-traded Canadian cannabis companies realize that vertical and horizontal mergers alone cannot possibly make them profitable; therefore, they have turned their attention to foreign countries. Accordingly, they are spending billions in Germany, Norway, Mexico, Jamaica, Argentina, Columbia, Uruguay, Australia, and elsewhere. Frankly, it is becoming apparent that the likelihood of these companies ever earning a profit, while generating positive operating free cash flow, is rapidly diminishing.

Canopy Growth Corporation (CGC) – Market Capitalization $16.626 Billion

The Canadian cannabis company with the largest market capitalization, $14.92 billion, is Canopy Growth Corporation (CGC). The company was originally founded by Bruce Linton and Chuck Rifici. In April 2014 CGC, then named Tweed Marijuana Inc., became the first of today’s big four Canadian cannabis companies to be publicly-traded when it listed 4,687,500 shares on the TSX Venture Exchange. GMP Securities, L.P. was the lead underwriter and brought it public at C$3.20 per share raising C$15 million.

It was one of the first 13 companies listed with Health Canada as a Licensed Producer, LP, under the Marijuana for Medical Purposes Regulations. Its sole cultivation facility was in Smith Falls, Ontario at an old Hershey plant.

Linton was chairman of the board and Rifici was president and CEO of Tweed at the time it was listed. Linton owned 10.27% or 3,621,712 shares and Rifici owned 22.09% or 7,789,610 shares. Rifici had served as a CFO for several companies prior to Tweed and was expected to run the business, while Linton was expected to provide oversight. Before the end of 2014, however, Rifici was gone and rumored to have been ousted by the board. Linton immediately became CEO and has continued to run the company. Interestingly, neither of the founders had any apparent employment history in agriculture or marketing. Rifici is rumored to have sold all his shares in the company shortly after his departure.

At the end of its first fiscal year on March 31, 2015, Tweed had C$47.7 million in total assets, nothing in goodwill, C$41.4 million in equity, C$2.4 million in revenue, a loss of C$0.29 per share, an operating loss of C$8.2 million and negative operating free cash flow of C$10.9 million. Despite these less than awesome financials Canopy was able to attract investors anxious to be put money into the cannabis sector, because they alone were publicly-traded on a Canadian stock exchange and on the U.S. OTC.

On August 28, 2015 Tweed completed the first of its many acquisitions when it acquired Bedrocan of Canada. A few weeks later Tweed officially changed it name to Canopy Growth Corporation and embarked on an expansion program that would do justice to its name.

On October 1, 2015 it acquired MedCann Access and from that point until today it has been on a shopping spree for domestic and foreign cannabis companies. It seems that at least once a week there is a press release about CGC acquiring another company or entering into some joint venture somewhere in the world where great opportunities await.

On a conference call accompanying a Canopy earnings release in August 2017, CEO Linton and his CFO were asked when they expected the company to earn a profit and generate positive operating free cash flow. After a notable period of silence, Linton commented that their primary concern was growing enough cannabis to meet the expected demand for marijuana. He then made a statement to the effect that Canopy was following in Amazon’s footsteps by focusing on growth and not thinking about profits and cash flow.

Constellation Brands

From its inception through the summer of 2017 Canopy incurred substantial losses on its income statement accompanied by negative operating free cash flow. It was able to fund itself during this period by issuing stock and debt. On November 2, 2017 Constellation Brands (STZ) acquired an equity interest in CGC sufficient enough to allow Canopy to continue its cash burn for about two years.

Initially, STZ invested $191.3 million in 18,876,901 shares of Canopy on November 2, 2017 at a price of $12.9783 per share. As a part of that investment STZ was also granted warrants with 30 month expirations that allowed it to buy an additional 9,438,450 shares at the same per share price on August 1, 2018 and another 9,438,450 shares on February 1, 2019. On June 20, 2018 SYZ then bought $200 million in 4.25% convertible senior notes due 2023 that can be converted into Canopy common shares at the rate of 23.742 common shares per $1,000 of face value.

While the abovementioned STZ investments helped alleviate some of Canopy’s immediate cash flow needs, STZs November 2, 2018 purchase of 104,500,000 CGC shares for $4 billion cured Canopy’s cash flow problem for the foreseeable future. Tapping into Constellation Brands (STZ) treasury was like hitting the Powerball Lottery for Canopy.

The STZ investments in Canopy gave CGC management a clear vote of confidence in their plan to become the dominant cannabis company in the world. Investors in STZ, however, questioned the wisdom of the Sands brothers making such a huge commitment to the unproven cannabis sector especially since they had to borrow the $4 billion to make the investment. STZ shareholders voted with their feet by selling shares. STZ shares traded at $200.58 on the day the Canopy investment was announced, but by January 18, 2019 STZ had fallen 18% to $164.15,

Constellation Brands shareholders have been well served by the Sands’ brothers leadership and Midas touch, but now they are reacting as if the party is over. Thus far, STZ has invested $4.4 million and its investors have reacted almost as if the money was washed down the drain. The market capitalization of STZ has fallen by $6.9 billion since its November 2018 announcement.

Investors ignore the fact that Constellation Brands cost basis on the 123,376,901 Canopy shares it has actually bought and paid for is $33.97, which is 21.9% below CGCs share price of $43.52. Furthermore, STZ has the right to acquire more than 50% of Canopy by investing about $4 billion more by November 1, 2021. If it did make that investment it would then have almost $8.1 billion invested in Canopy at an average price of about $35 per share.

On May 24, 2018 Canopy became the first Canadian cannabis corporation to trade on the New York Stock Exchange, NYSE. In the past year it has traded as high as $59.25 per share and as low as $16.74.

STZ is not required to make the additional investment and take control. Truth be told, STZ could liquidate its shares and likely recover its money even in a fire sale. Such a sale would, however, certainly cast a cloud over Canopy and negatively impact its share price.

Importantly, Canopy has Constellation’s $4,391,300 on its balance sheet and only $200,000,000 has to be returned in 2023, effectively Canopy hit the Powerball Lottery. CGC shareholders should be eternally grateful to the Sands brothers for giving the company the functional equivalent of a blank checkbook. CGC shareholders should also be happy that STZ will now be putting pressure on CEO Linton and his management team to start producing positive results.

Canopy Financial Results

Since its inception less than five years ago, Canopy has been led by people with a dream, but no meaningful business management expertise. This lack of experience running a business is evident in a balance sheet and income statement that reflect poor operating results.

Canopy management has proven adept at buying companies with other people’s money, but then again anyone can do that. CGC management has not demonstrated their purchases were good deals for CGC shareholders. The financial results strongly suggest that management is only interested in growth. Total assets have grown from C$47.7 million at the end of its 2015 fiscal year to C$3.0 billion as of September 30, 2018. In that 44 month period CGC added C$1.1 billion in goodwill, which can be thought of as a premium CGC paid to acquire other companies.

While CGCs balance sheet was ballooning with acquisitions, it did not enjoy comparable growth in revenue. In fact, revenue rose from C$2.4 million in fiscal 2015 to only C$77.9 million in 2018.

The net result of CGC management focusing on growth is income and cash flow statements that reek. CGC has had an operating loss in each of its first four years in business and the size of the loss has grown from C$8.2 million in 2015 to C$82.3 million in 2018. For the first six months of its 2019 fiscal year CGC reported an astounding operating loss of C$245 million. Horrible operating results are also illustrated by negative operating free cash flow soaring from C$10.9 million in 2015 to C$198 million for the six months ended September 30, 2018.

The financial performance of Canopy, the cannabis company with the largest market capitalization, has to cause concern and raise serious questions among all investors. Are Canadian cannabis companies viable economic enterprises? Are Canadian cannabis company acquisitions a fool’s errand? Have investors been lured to these companies by the hype just as previous investors have been lured to Canadian mining sites?

Four of the seven members of Canopy’s board of directors are now Constellation Brands appointees. Among the four are Constellation’s CEO Bill Newlands and its CFO David Klein who are under pressure from STZ shareholders to justify the Canopy investment. It will be critically important to all investors in the Canadian cannabis space to monitor the financial performance of Canopy in the immediate future.

Constellation is now required under GAAP to account for its Canopy investment by recognizing about 37% of any loss or income on its own income statement. If experienced hands like Newlands and Klein cannot bring forth profits and positive operating free cash flows at Canopy then the viability of the entire Canadian cannabis model will have to be seriously questioned.

Tilray Inc. (TLRY) – Market Capitalization $7.02 Billion

Tilray Inc. (TLRY) is the second largest publicly-traded cannabis companies with a market capitalization of $7.2 billion. Tilray (TLRY) was one the 13 original companies to be approved by Health Canada as a Licensed Producer, LP, under the Marijuana for Medical Purposes Regulations in 2014. Tilray’s operations are located in the Vancouver Island town of Nanaimo, Canada; however, it’s registered and records office is located in Seattle, Washington.

Tilray’s roots trace back to the founding of Privateer Holdings in 2010 in Seattle as a private equity firm focused exclusively on building a portfolio of global brands in the cannabis space. The three people who started Privateer, Brendan Kennedy, Michael Bluh and Christian Groh, had backgrounds in finance and high tech and no experience in agriculture or cannabis.

In 2011 Privateer was able to scrape together enough money to acquire Leafly, a cannabis website designed to help educate consumers and help them locate cannabis products. At the time of its acquisition Leafly’s website had about 100,000 visits per month.

In December 2013 Privateer completed its first round of funding, $7 million in Series A, which enabled it to form Tilray of Canada in April 2014 and enter into 30-year licensing deal with the estate of Bob Marley for Marley Natural products. In April 2015, Privateer raised $75 million in a Series B and among the investors was Founders Fund headed by Peter Thiel. In October 2016 Privateer raised $46 million via a convertible debt offering. In January 2018 it closed a $100 Series C funding round and at the same time incorporated Tilray in Delaware as a subsidiary of Privateer Holdings.

Privateer thus raised a total of $226 million from private equity investors by January 2018. Its own cash flow is entirely dependent on raising additional private equity funds, selling assets or receiving cash dividends and/or management fees from Tilray. It alone does not have the cash resources or borrowing capacity necessary to inject money into Tilray like Constellation Brands did with Canopy.

Tilray produces cannabis in Canada and Portugal. It supplies cannabis products to patients in 12 countries spanning five continents through subsidiaries in Australia, Canada and Germany. TLRY also has selling agreements with established pharmaceutical distributors in Argentina, Australia, Chile, Croatia, Cyprus, Czech Republic, New Zealand and South Africa. Additionally, it has agreements in place with distributors in Brazil, Peru, Poland and Denmark.

Tilray IPO

On July 19, 2018 Tilray went public with an IPO on the Canadian Securities Exchange, CSE, and simultaneously on NASDAQ, where it became the first marijuana-related company to IPO in the United States. It went public at $17 per share and by mid-August it was trading in the $30s.

Tilray offered 9,000,000 Subordinated Voting Shares (SUB) in its IPO. The offering in Canada was led by BMO Nesbitt Burns Inc. and Eight Capital; while the U.S. Offering was conducted by Cowen and Company LLC, Roth Capital Partners LLC and Northland Securities, Inc.

Following the offering there were 91,794,042 shares outstanding composed of 16,666,667 Multiple Voting Shares, MVS, entitled to 10 votes per share but convertible into only 1 SUB share; and, 75,127,375 SUB shares. Privateer owned all the MVS shares and 58,333,333 SUB shares following the offering, representing 81.7% of all the shares outstanding. The 9,000,000 shares issued meant that the float or tradable shares amounted to a paltry 9.8% of the total shares outstanding. This offering would serve as a template for other Canadian cannabis companies going public on the CSE.

The July 2018 Tilray IPO included a 180-day lock-up provision designed to prevent officers and directors from selling shares. On January 14, 2019, however, Privateer announced it would not be selling any of its 75 million shares when the lock-up expired. It said it believed in Tilray’s long-term global growth strategy and pioneering role in shaping the future of the legal cannabis industry, and had no plans to register, sell or distribute its Tilray shares during the first half of 2019. Tilray also said that when they decide to distribute shares they we will do so in an orderly and deliberate manner to maximize tax-efficiency considerations for Privateer investors, while also taking into consideration potential impacts on Tilray’s public float.

This news sent TLRY shares up, but then market participants realized there were still about 7.9 million non-Privateer shares that could be sold. On January 15, 2019, the day the original lock-up expired, TLRY shares closed down $17.27 or 17.3%. In the 30 days prior to its lock-up expiration the average daily trading volume of TLRY was 2.5 million shares, but on the day the lock-up expired volume was 15.2 million or 6x normal volume.

In the aftermath of the IPO and lock-up expiration a number of people in the Seattle area had realized or unrealized gains on their Tilray shares that made them so called “Tilionaires.”

The wild swings in TLRY stock serve as a reminder of what can happen to share prices when only a small fraction of a company’s shares trade. Additionally, the price action at time of lock-up expiration shows what can happen when lock-up shares represent a significant percentage of the float/tradable shares.

Tilray Signs Deals

Tilray first caught investors’ attention on September 18, 2018 when the U.S. Drug Enforcement Administration, DEA, approved its importation of marijuana from Canada for medical research at the University Of California San Diego Center for Medicinal Cannabis Research to study the safety, tolerability and efficacy of marijuana for treatment of essential tremor. Essential Tremor, ET, is a neurological movement disorder characterized by involuntary and rhythmic shaking. In making the announcement Tilray noted that ET affects about 1.3 million people in the U.S.

Tilray chose this occasion to mention that studies using Tilray cannabis were taking place at the University of British Columbia Okanagan on the impact of cannabis on post-traumatic stress disorder, while others were being conducted at the University of Sydney in Australia on chemotherapy nausea reduction and at The Hospital for Sick Children in Toronto on pediatric epilepsy. Amazingly, this news caught the imagination of investors and caused shares of TLRY to explode higher.

On September 18, 2018 TLRY closed at $154.98 on volume of 20 million shares. The next day TLRY traded from $151.40 to $300.00 on volume of 32 million shares and trading in it was halted five times. It closed at $214.06 up $59.08 or 38.1% on the day.

On Dec. 18, 2018, the Canadian cannabis company signed a partnership with Swiss drug maker Novartis AG (NVS) to research, develop, and distribute medical marijuana around the world. The two companies announced they were teaming up to commercialize Tilray's non-smokable medical marijuana products, develop new products under a partnership brand, and spread awareness about cannabis to pharmacists and physicians. News of this deal sent Tilray's share price soaring by as much as 12 percent

Two days later on December 20, Tilray announced it was teaming up with the world’s largest brewer, Anheuser-Busch InBev (BUD), to develop cannabis-infused non-alcoholic drinks for the Canadian market. As part of the deal, each company is investing $50 million in research. Market analysts have estimated that the cannabis-infused beverage industry could see annual U.S. sales of $500 million in the next five years. Shares of Tilray climbed 15.32% following this news.

The deals between Tilray, Novartis AG and Anheuser-Busch InBev came after a much-anticipated decision by Canada to legalize recreational marijuana edibles, beverages and smoking products. The fact that Tilray was selected by BUD and NVS lent some credibility to TLRY even though the commitments were miniscule compared to Constellations commitment with Canopy.

Tilray was one of the best performing IPOs in 2018. It came public at $17 and it closed the year at $70.54, so it more than quadrupled in less than six months.

Tilray Financials

Given such outsized stock performance, Tilray financials might be expected to reveal impressive numbers. In fact, nothing could be further from the truth.

For its 2015, 2016 and 2017 fiscal years Tilray reported total revenue of C$5.4 million, C$12.6 million and C$20.5 million, respectively; and, for the first nine months of 2018 it had total revenue of C$27.6 million. For the same fiscal years Tilray reported net operating losses of C$14.9 million in 2015, C$7.9 million in 2016 and C$7.8 million in 2017. For the nine months ended September 30, 2018 Tilray reported a net operating loss of C$34.7, which was greater than its total revenue for the same period. From its beginning through September 2018 Tilray rang up losses totaling C$77.2 million. Given these horrible numbers it is not shocking that Brendan Kennedy, the Executive Chairman of Privateer and CEO of Tilray, said he was overwhelmed by the positive reception Tilray received in its IPO.

Amazingly, the S-1 Registration Statement Tilray filed with the SEC showed that it had negative net worth as of the end of its 2017 fiscal year, which was its third complete year in business. It showed C$31.6 million in paid in capital, C$3.8 million in accumulated other comprehensive income and an accumulated deficit of C$40.5. Those equity accounts netted to a negative C$4.9 million!

The fact that Privateer Holdings allowed the equity account of Tilray to go negative on the last day of its 2017 fiscal year is not a good sign. It conveys a distinct impression that Privateer is not willing or able to fund its dream of making Tilray the leading worldwide brand. Without Privateer, Tilray will have to rely on issuing more debt and/or equity to fund continued operating losses and negative operating free cash flows. Reliance on such issuance will depend heavily on the blind faith of investors who think accounting conventions are parties where bathing beauties pop out of cakes.

Besides losing all its equity capital, Tilray also bled cash. It generated negative operating free cash flows of C$7.7 million in 2015, C$3.3 million in 2016, C$6.0 in 2017 and C$26.4 million in the first nine months of 2018.

Tilray has been totally dependant on Privateer Holdings as a source of funds from its inception until its IPO. In turn, Privateer has been totally reliant on raising cash from private equity investors to funnel into Tilray, which has proven proficient at flaring that cash. Privateer Holdings and its investors are awash in paper wealth, but cash poor. In fact, Privateer’s marshalling its precious cash is probably why Tilray’s equity account was allowed to go negative at the end of 2017.

Frankly, the IPO looks as if it saved Tilray from folding up its tent and taking its shareholders and Privateer down with it. All signs point to more operating losses and more negative operating free cash flows. Thanks to the IPO proceeds, a cash flow crisis is not likely to emerge in the first six months of 2019, so that it why Privateer could announce that it would not sell any of its 75 million unlocked shares during those six months.

After June 30th, however, Privateer will have to decide how to finance Tilray’s growth. One way is to have Tilray itself issue new shares of stock or debt instruments. A second way would be for Privateer to have another round of funding to raise money to inject into Tilray. A third way would be for Privateer to sell some of its 75,000,000 shares and inject the proceeds net of taxes into the business. Then again, maybe Tilray can find a “Daddy Warbucks” like Canopy did.

Tilray’s financials raise a number of serious questions. First, how could the SEC allow a four-year old company to register and go public with a negative equity account? Second, how could the NASDAQ allow such a company to list on its stock exchange? Third, why did Privateer Holdings allow Tilray to show negative equity? Four, will Tilray ever earn a profit and generate a positive operating free cash flow? Five, do investors really believe that Tilray is about to discover miracle cures for diseases that have escaped discovery by GW Pharma, which has been doing pure research on cannabis for 20 years and just finally made a breakthrough? Six, why did NVS and BUD decide to partner with Privateer?

Aurora Cannabis Inc. (ACB) – Market Capitalization $6.693 Billion

The third largest public-held cannabis company is Aurora Cannabis Inc., which was originally incorporated under the Business Corporations Act of British Columbia on December 21, 2006 using the name Milk Capital Corp. On September 3, 2010 Milk Capital changed its name to Prescient Mining Corp. On October 2, 2014 Prescient changed its name to Aurora Cannabis Inc.

In connection with the change in names, Prescient acquired all the issued and outstanding shares of Aurora Marijuana Inc. which was incorporated under the Alberta Business Corporations Act on September 11, 2013 as 1770415 Alberta Ltd. and renamed on April 16, 2014.

Aurora Marijuana was located in Edmonton, Alberta and had two wholly-owned subsidiaries, 1755517 Alberta Ltd and 1769474 Alberta Ltd. The principal owners of Aurora Marijuana were Terry Booth and Steve Dobler. In the share exchange, Aurora Marijuana shareholders received 60 million common shares of Prescient, 11.25 million warrants at C$0.02 per share expiring December 1, 2019; 10.2 million warrants at C$0.50 per share expiring December 9, 2017; 4 million options at C$0.01 expiring December 1, 2019; 20 million performance shares; and 3.75 million warrants at C$0.02 per share expiring December 9, 2019.

Aurora Cannabis Inc. officially came into being on December 9, 2014 when Aurora Marijuana Inc. shares were exchanged for Prescient shares and the later changed its name to Aurora Cannabis, Inc. Concurrent with these changes, Booth was named a director and CEO and Dobler was named director and President. They and the other owners of Aurora Marijuana owned 57.1% of all the issued and outstanding shares of Aurora Cannabis once the share exchange was completed.

In the year preceding their exchange of shares both Prescient and Aurora Marijuana were losing money and dissipating cash. Aurora Marijuana showed no income and a loss of C$1,823,535 for the period from September 11, 2013 (its date of incorporation) until June 30, 2014 and an additional loss of C$925,157 for the three months ended September 30, 2014. For the same time periods its operating free cash flows were a negative C$965,106 and a negative C$823,319. On September 30, 2014 Aurora Marijuana only has C$79,801 in cash and showed accumulated losses of C$2,748,106 on its balance sheet.

Prescient Mining Corp. was certainly not doing well financially prior to the share exchange. In the three months ended September 30, 2014 it had no revenue, an operating loss of C$542,732 and negative operating free cash flow of C$276,968. Its balance sheet showed it had accumulated losses of C$2,042,236. Prescient did, however, have C$1,622,430 in cash and cash equivalents.

Following formation of Aurora Cannabis Inc., Booth and Dobler immediately embarked on a campaign to raise capital to fund construction of a 54,000 square foot indoor growing, production and distribution facility in Cremona (population 457). Aurora became the first cannabis producer in its province to obtain a Health Canada license. Its original Production License from Health Canada limited Aurora production to 5,500 kilograms of marijuana per year.

For the first few years of its existence Aurora seemed to tread water as it focused on production at its Cremona facility and raising funds. It is interesting that Chuck Rifici, the co-founder of Canopy Growth, joined the board of Aurora in September 2015 shortly after his departure from Canopy. This appointment suggests Aurora might have wanted to take a look at Canopy’s playbook to help it develop a game plan. While Rifici stayed on Aurora’s board for only the 2016 fiscal year, it was long enough to create a lasting rivalry between Aurora and Canopy. In fact a number of people in Canadian cannabis sector consider Aurora the western version of Canopy.

Aurora Financial Results

Aurora had no revenue in its 2015 fiscal year ended June 30, 2015 and only C$1.4 million in 2016. Its operating losses were C$5.4 million in 2015 and C$4.6 million in 2016, and negative operating free cash flow amounted to C$3.3 and C$6.8 million in the respective years. These less than impressive financial results did not stop Aurora from raising funds.

Aurora’s financing ability got off to a rough start when it retracted an April 2, 2015 press release that it had secured a C$3.5 million bridge loan from Century Services, Inc. Somehow, that loan fell through and on April 10th Aurora issued a press release stating its April 2 announcement was issued prematurely. It subsequently secured C$1 million in bridge financing from other parties. A second financing took place on June 16, 2015 when it raised $2 million in unsecured debt from CEO Terry Booth and companies controlled by Booth and Steve Dobler, president of Aurora. A third financing was completed at the end of 2015 via a nonbrokered private placement for C$4.8 million. The Aurora fund raising machine really kicked into high gear with five completed transactions in calendar 2016, four in 2017 and three in 2018. Money from these financings was used to fund acquisitions, joint ventures and replace cash evaporating from negative operating free cash flow.

In fiscal 2017 it decided to implement a strategy focused on growth. Its goal was to become a leader in the Canadian and international cannabis space via vertical and horizontal integration. Aurora implemented that strategy through a steady stream of acquisitions that continue to this day. It now has either subsidiaries or investments in Germany, Denmark, Italy, Poland, Australia, Cayman Islands, Malta, Lithuania, South Africa, and South America.

Aurora Cannabis Inc., which is really a holding company, owns 100% of 10094595 Canada Inc., MedReleaf Corp., Hempco Food and Fiber Inc., Production Medicale Marinature Inc., Aurora Deutschland GmbH, Cannimed Therapeutics Inc., Aurora Larssen Projects Ltd., Canvas Rx Inc., Urban Cultivator Inc., UAB Agropro, UAB Borela, Hot House Consulting Inc., 1154292 BC Ltd., 1154355 BC Ltd., and Aurora Marijuana Inc. These companies, in turn, own other companies. For example, 10094595 Canada Inc. owns 100% of Peloton Pharmaceuticals Inc.; MedReleaf Corp owns 100% of MedReleaf Columbia SAS; Hempco Food and Fiber Inc. owns Hempco Canada Superfoods Inc.; Production Medicale Marinature Inc. owns H2 Biopharma Inc.; Aurora Deutschland owns Aurora Italia SRL; Cannimed Therapeutics Inc. owns Prairie Plant Systems Inc which owns Cannimed Ltd.; 1154292 BC Ltd. owns 0984816 BC Ltd. which owns 1154374 BC Ltd. which owns 14% of Anandia Laboratories Inc. which owns Anandia Genetics Inc. The remainder of Anandia Laboratories’ shares is owned by 1154376 British Columbia Inc. which has a 29% and Aurora Cannabis, which owns 57%. Numerous other companies are owned by Aurora Marijuana Inc.

Aurora also owns minority interests in a number of other companies. For example, it owns 23% of Cann Group Ltd., 20% of 106475 Canada, 8% of CIT Pharmaceutica, 20% of Capcium Inc. and 15% of TGOD. As of June 30, 2018 these five companies had combined revenues of C$225 million, cash and cash equivalents of C$390 million and operating losses of C$11.6 million.

The latest major acquisition by Aurora Cannabis was ICC Labs Inc., a company incorporated in British Columbia in 2010 under the name Shogun Capital Corp. Through its subsidiaries it is engaged in producing and selling cannabis and its derivatives in Uruguay for recreational, industrial and medicinal use. Interestingly, Uruguay fully legalized marijuana in 2013.

A review of ICC Labs’ June 30, 2018 financial statements showed it had an accumulated deficit of C$29.4 million, three month revenue of C$151,518 and an operating loss of C$1.3 million. For the three months ended June 30, 2018 it also had negative operating free cash flow of C$3.9 million. Aurora acquired all of ICC Labs’ issued and outstanding shares for a total of 31,904,668 common shares of Aurora.

The results of Aurora Cannabis implementing its global strategy are documented in its financial statements. Its balance sheet shows total assets of C$5.0 billion on September 30, 2018 versus only C$323 million on June 30, 2017. Aurora had C$2.9 billion in goodwill and C$618 million in intangible assets at the end of its 2019 Q1. Revenue amounted to C$29.7 million and it had an operating loss of C$112 million, along with a negative operating free cash flow of C$69 million.

On June 30, 2016, before embarking on its worldwide shopping spree, Aurora had 135.6 million shares issued and outstanding. At the end of its 2019 Q1, a mere 27 months later, Aurora had 961.8 million shares outstanding. Acquisitions accounted for 490 million or 59.3% of the increased issuance by Aurora. If shares were still printed, Aurora’s printer would have probably run out of ink or paper, perhaps both. Since the end of its Q1, Aurora has closed on the ICC Labs Inc. acquisition and issued 31.9 million shares, so they will be within an eyelash of having 1 billion shares issued and outstanding.

It is difficult to fathom a C$5 billion asset company with a worse record of earnings and cash flow. Despite its financial failings Aurora is still able to tap the pocketbooks of investors as evidenced by its January 24, 2019 closing on the issuance of C$345 million in convertible debt due in 2024 at a rate of 5.5%.

Aurora Cannabis (ACB) shares are now listed on the NYSE. Since inception, its shares have traded as low as $0.03 and as high as $12.52. Its average daily trading volume is now about 17 million shares per day.

In its most recent Management’s Discussion and Analysis (“MD&A”) report on the consolidated financial condition and operating results of Aurora Cannabis Inc. for the three and twelve-month periods ended June 30, 2018 filed with Canadian Securities Administrators Aurora management stated it may require additional financing to offset negative operating free cash flow. They also said that failure to raise such cash could result in the Company ceasing to carry on business. They added that there can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. Furthermore, they said if additional funds are raised through issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution.


The four publicly-traded cannabis companies with the largest market capitalizations have a combined valuation of $34.821 billion. They all share some common financial characteristics. First, they all have lost money since their inception and have significant accumulated deficits. Second, all have significant negative operating free cash flows. Third, all have been dependent on external financing via the issuance of stock and debt instruments to implement their corporate strategies. Fourth, virtually no funds have been directly provided by the commercial banks.

Among the four, GW Pharma stands out as the company with the highest likelihood of turning the corner and becoming profitable thanks to its Epidiolex shipments that began at the end of 2018. GWPH can be expected to generate profits and positive operating free cash flow in 2019 and is the safest bet to do so among the four largest companies.

The chance of other members of the top four cannabis companies generating profits and positive free cash flows in 2019 is remote. In fact, it is questionable whether these companies will ever become profitable and generate positive operating free cash flow.

The existence of losses and negative operating free cash flows going forward will force Tilray and Aurora to frequently raise funds through debt and equity offerings for the foreseeable future. If investors begin to question, as they should, the ability of these companies to ever generate positive returns, these companies could find themselves unable to raise funds and that would be fatal. Their very existence is totally dependent on investors’ willingness to provide funds, which in turn is dependent on investors continued desire to “strike it rich.”

The one company without any need for cash is Canopy thanks to the $4+ billion in actual cash it received from Constellation Brands. The pressure is now on Canopy to prove that it can generate profits along with a positive operating free cash flow. If Canopy cannot replace red ink with black ink on its income and cash flow statements in the near future, alarms will start to ring throughout the cannabis sector and investors will find the exit doors locked.

Disclosure: I am/we are long GWPH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I encourage readers to read excellent articles written by fellow SeekingAlpha contributors: Jonathan Cooper, Nick Cox and Cornerstone Investments about companies in the cannabis space. Their in-depth articles are excellent. Any investor who decides to invest in cannabis companies is well advised to read the articles by these contributors before bringing out their checkbooks.