Another quarter, another mixed picture from Tilray (TLRY). The Canadian cannabis company continues to shuffle the deck chairs, only to end up in the same position as the prior quarters. My investment thesis remains Neutral on the stock until the company can get costs under control and fund expansion without an ATM that will constantly dilute shareholders.

Image Source: Company website

Too Hard To Manage

My biggest warning about Tilray has always been the grand plan to chase the Canadian cannabis market, a global hemp foods market and an International medical cannabis market. It reported Q2’20 revenues of $50.4 million, generally in line with revenues going back to the Q2’19 levels when the company bought Manitoba Harvest.

Source: Tilray June 2020 presentation

The catch in the quarter is that bulk revenues declined by $6.3 million from last Q2. In a similar matter, Tilray saw Q1’20 revenues from bulk decline, only to be offset by International medical revenue growth of $4.0 million.

The company is now shifting aggressively to International medical cannabis markets, with its Portugal facility serving as a production hub. The positive here is the Portugal facility offers the opportunity for both indoor production space and outdoor grow space of at least 2.4 million square feet each. Tilray can cover market shifts from premium indoor cannabis or cheap outdoor flower.

Source: Tilray June 2020 presentation

My big concern is whether the predicted ramp in International revenues this year ends up costing the company with lost focus on either Canadian cannabis revenue or the global hemp products. On the Q2 earnings call, CEO Brendan Kennedy already predicted the International revenues to top Canadian sales that were over $31 million in Q2:

First, International Medical, a segment in which we have a proven track record and a potential to be one of the winners. We expect meaningful growth to continue on a quarter-over-quarter basis. In fact, we anticipate it will exceed our revenue in Canada over the course of the next several years.

The company has a lot of promises, but the lack of execution in the past leaves a lot of unanswered questions as the market shifts constantly catch the Canadian cannabis companies off guard when trying to chase very diverse markets.

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Weak Financials Persist

The big issue with Tilray is the company still burning so much cash, requiring a $250 million at-the-market offering. The stock only has a market cap of $1 billion, so full utilization of the ATM amounts to 25% share dilution.

Tilray already has a cash balance of $137 million, so it could need up to $400 million in order to get the business to cash flow breakeven, if fully utilizing the ATM. The company predicts 2H cash burn of $45 million to $55 million with only $16 million for capex to complete the Phase 2 of the Portugal facility.

Tilray hitting these cash burn targets would help satisfy the market that the company has finally plugged the hole in its business. In addition, it already has $435 million in convertible debt, so the balance sheet is rather weak already.

Compared to Aurora Cannabis (OTC:ACB) and Canopy Growth Corp. (OTC:CGC), the stock trades more in line with Aurora due to the net debt position on the balance sheet. Tilray is actually slightly more expensive than Aurora Cannabis at 3.8x forward sales.

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The key investor takeaway is that Tilray has made some interesting turns in the business. The company hasn’t been able to move revenues beyond the $50 million quarterly rate, while still generating EBITDA losses. If the Canadian cannabis company can actually cut the cash burn rate and grow International medical cannabis revenues, the stock becomes interesting on dips. At this point, Tilray needs too much to go right to make the stock appealing at a $1 billion market cap.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.