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Cannabis Watch

Tilray CEO says marijuana companies lied about how much pot they could grow

Kennedy says cannabis companies inflated a metric called ‘funded capacity’ and did not deliver, stressing the supply of legal pot in Canada

Tilray Inc. Chief Executive Brendan Kennedy said late Tuesday that the cannabis producer would have sold a lot more weed if growers in Canada hadn’t lied about how much pot they could actually grow.

Tilray TLRY+1.06% reported quarterly earnings Tuesday afternoon, and sales continued to ramp slower than many investors expected. Kennedy said that while there was a widespread prediction of a supply glut of cannabis in Canada, that has not turned out to be the case. In fact, Tilray continues to have difficulty sourcing an adequate amount of high-quality marijuana, and Kennedy expects supply issues to remain a problem in Canada for the next 18 to 24 months.

The reason: The suppliers Tilray expected to purchase from have not been able to produce the needed cannabis, despite promises before legalization that they used to pitch themselves to partners and investors.

“Some of them were lying about their funded capacity,” Kennedy said in a telephone interview with MarketWatch, adding that public companies inflated that metric because investors based their valuations on it.

As the cannabis industry was maturing, investors used an evolving set of metrics beyond revenue or profits to value the producers — in large part because recreational sales could not occur legally in Canada until Oct. 17 of last year. One popular measure used by analysts and companies alike was “funded capacity,” a number that referred to the amount of growing capacity a company had under its belt without requiring an additional capital raise.



In many cases, though, the capacity of the Canadian public companies was theoretical and they have still been not able to produce cannabis at that scale.

“If I can go back 18 months, 12 months ago, I would have invested another $100 million, $200 million in terms of Canadian cultivation,” Kennedy said on a conference call with investors late Tuesday. “That was a — that was a mistake. But we believed, we believed all the hype 18 months ago.”

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According to several sources in the cannabis industry, funded capacity came into widespread use because of Supreme Cannabis Co. Inc. CA:FIRE-10% SPRWF+1.3% executives. Though Supreme helped usher in the use of funded capacity, dozens of other public cannabis companies adopted it for their own purposes.

Supreme Cannabis CEO Nav Dhaliwal told MarketWatch last year that in 2016, pot companies were valued based on the number of medical patients they could claim. Prior to that, according to Kennedy, Canadian pot companies had valuations based on the secure vaults they had constructed.

For Supreme, relying on patients was a problem because it did not have any at the time, but needed a way to describe and value its business for investors. As a result, Dhaliwal said they worked out a new way of valuing cannabis companies: funded capacity.

“Talking to analysts, investors and bankers — we said we’re going to build out this capacity in terms of the financing,” he explained in a telephone interview in November.

However, Dhaliwal also said that the industry is evolving and that the number wasn’t meant to be relevant for investors or cannabis producers in the long term, and that it is over-used today.

“Funded capacity is too broadly accepted as a metric,” Dhaliwal said at the time. “It’s relevant to a point, it’s a foundational metric. But once you start scaling, it becomes less relevant.”

Tilray stock gained 4% in the extended session Tuesday after the company released its first-quarter earnings, but has fallen 37% in the past three months.

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