Legal Action Against Tilray: Investor Alleges False Claims On Inventory

Benzinga report 6 March


An investor is publicly suing Tilray Brands Inc , the Canadian pharmaceutical and cannabis company and one of the most popular cannabis stocks out there.

The Lawsuit: Allegations

Michael Hudson, who filed the lawsuit on March 1 in the Southern District of New York, accusing Tilray of “breaches of fiduciary duties, unjust enrichment, and waste of corporate assets, and violations of the Securities Exchange Act of 1934,” per the suit, which states the first category of false statements relates to the value of Tilray’s inventory and its gross margins, and the second category of false statements relates to the entrance into, and the value of the Company’s agreement with Authentic Brands Group (ABG).

The plaintiff claimed the Authentic Brands deal was made to prop up the stock price and was actually not as good as Brendan Kennedy (founder of Privateer, the origin of Tilray, a privately-owned Canadian-based business) claimed it to be. Hudson said that in the two quarters after its IPO on NASDAQ, “Tilray’s gross margins had fallen from 55% to 31%.”

However, “to allay stockholders’ concerns, there is evidence that, under the direction of defendant Kennedy, Tilray recognized more than $40 million of unsellable marijuana plant waste as valuable inventory and subtracted the $40 million from Tilray’s cost of sales. This had the effect of improving Tilray’s margins and making it seem far more profitable and promising than it really was,” reads the legal document.

Furthermore, Tilray inflated its inventory’s value by $68 million per the lawsuit. The company’s reported inventory “grew from $16.2 million at the end of 2018, to $48.7 million after the first quarter of 2019, to $75.3 million halfway through 2019, and ultimately $111.5 million at the end of the third quarter of 2019,” according to the Green Market Report.
A spokesperson for Tilray told Law360 the complaint “is substantially similar to the other derivative complaints filed in the [Southern District of New York] and in the District of Delaware, which are stayed pending the outcome of the securities class action motion to dismiss process.” Moreover, the company believes that the underlying claims of these actions are without merit and plans to defend them.

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