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The cannabis sector has seen an unusual pattern of executives agreeing to extended share lock-up extensions due presumably that insiders are looking to dump shares. Tilray (TLRY) is the latest company to finalize a lock-up agreement that adds more confusion than safety for the stock now trading all the way down at $30.
The biggest question for Tilray investors is why the executives even need to make an agreement, so the top shareholder won’t sell shares. What does Privateer matter considering the initial investors hold 75 million Tilray shares or 77% of Tilray’s total shares.
Privateer can’t unload shares without cratering the stock so a lock-up that extends the holding period a couple of more years doesn’t delay the ultimate risk in the stock. If anything, this move adds confusion for an IPO completed over a year ago where any lock-up would have already been over and the market would have more confidence that the leading shareholders aren’t looking to unload shares.
The deal includes limits on any share sales during the first year arranged at the sole discretion of Tilray. At the end of the first year, 50% of the 75 million shares subject to the lockup will be released. Over the course of the second year, the remaining shares will be subject to a staggered release in equal quarterly increments.
The Privateer ownership is controlled by equal 16.7 million shares by CEO Brendan Kennedy, Christian Groh and Michael Blue. The remaining 24.9 million shares are held by other Privateer shareholders.
Such a complicated lock-up release covering over three years from the IPO suggests that one of the large investors wants to exit their position. The move causes the overhang on the stock to linger.
Doesn’t Add Value
The stock initially popped on the news, but this final agreement was only an extension of an agreement from back in June. Tilray ended down over 6% following the news.
Ultimately, one has to see limited risk that Privateer shareholders that include CEO Brendan Kennedy would attempt to sell stock with the market value down to $3 billion. The cannabis company supposedly has big global plans so any move to dump shares here at the all-time lows would crater the stock.
What the market needs is for all of these Privateer shareholders to actually resist from selling shares. Anybody buying shares now has to face a lockup overhang of 37.5 million shares next September. The following lockup during year two won’t matter as long as insiders aren’t dumping Tilray shares after the first share release.
The key investor takeaway is that Tilray shareholders don’t need lockup extension deals that only push a big risk factor out a year or two. What they need is insiders buying shares after the stock has been beaten down or these insiders refusing to sell shares when freely permissible to dump shares.
The bigger issue remains the $3 billion market cap and the 2020 sales target below $350 million. Maybe this valuation discrepancy is why the company is so concerned that insiders will start unloading shares without a lock-up extension for another year.
Unsurprisingly, investor sentiment is negative, with individual portfolios in the TipRanks database showing a net pullback from TLRY.
Disclosure: No position.