March 8, 2023 - Updated March 8, 2023
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Tilray Brands is being sued by an investor who alleges the company’s former leadership led investors astray.
The shareholder specifically alleges that ex-CEO Brendan Kennedy and other former Tilray board members misled investors and that the current board failed to take appropriate action in response.
The shareholder’s derivative complaint against the Canada-based cannabis, alcohol and pharmaceutical distribution company was filed March 1 in the U.S. District Court for the Southern District of New York.
The plaintiff – Michael Hudson, a Tilray shareholder since 2018 – seeks a trial by jury.
Tilray did not immediately respond to an MJBizDaily request for comment.
According to the statement of claim, Tilray’s gross margin declined from 55% in the first quarter of 2018 to 31% in the third quarter.
To mollify shareholders, “the former directors deceived stockholders by both overstating inventory and understating labor costs (both inputs to cost of sales) – thus overstating gross margins,” according to the complaint.
The complaint, citing allegations in the pending lawsuit Kasilingam v. Tilray, alleges that Tilray misclassified unsellable trim – an industrial byproduct from processing cannabis – by wrongly valuing it at more than $40 million.
“Worthless” cannabis oil inventory was also allegedly overvalued.
“All told, defendant Kennedy (with the apparent acquiescence of the board) allegedly inflated the value of Tilray’s inventory by over $68 million … until March 2, 2020, when the company accurately wrote down 44% of its total inventory,” according to the complaint.
Co-branding deal key to suit
The complaint also alleges Tilray’s early 2019 co-branding deal with Authentic Brands Group (ABG) was meant “to prop up Tilray’s stock price,” again citing allegations in Kasilingam v. Tilray.
During negotiations for Tilray’s eventual merger with Aphria, the complaint charges, Kennedy – confronted with the prospect of Aphria’s due diligence – “disclosed the truth in January 2020 and announced that Tilray had renegotiated the ABG agreement,” subsequently writing down 86% of the deal’s value.
The complaint alleges that the ABG-related impairment, along with a major inventory write-down, caused an 18% decline in Tilray’s stock price over two days in early March 2020.
However, the complaint goes on to claim that Kennedy had earned more than $28 million selling Tilray shares and “timed his sales very well: he made most of his sales either within two weeks after he began making false statements or within about two months before the corrective disclosures.”
In February 2023, plaintiff Hudson issued a pre-lawsuit litigation demand to Tilray’s current board, seeking “an independent, reasonable, good faith investigation regarding the allegations.”
Hudson also asked the current board to take action against the former board and Kennedy “in order to protect the company’s interests and recover the serious damages caused to Tilray by their misconduct,” particularly as a statute of limitations for breach of fiduciary duty was due to expire in early March.
Specifically, Hudson asked the board to secure tolling agreements with the former directors, a move that would have temporarily suspended the statute of limitations.
However, the complaint claims that Tilray’s current board, now chaired by CEO Irwin Simon, “simply sat on its hands” and failed to make those agreements in time.
Board ‘acted recklessly’
The board “has either acted recklessly by failing to promptly take the reasonable, basic steps necessary to ensure that Tilray can timely assert its valuable claims, or worse … has deliberately (chosen) to ‘run out the clock’ and protect the company’s former directors from the consequences of their misconduct,” according to the complaint.
The complaint specifically alleges “breaches of fiduciary duties, unjust enrichment, and waste of corporate assets, and violations of the Securities Exchange Act of 1934.”
Another stockholder derivative suit against Tilray management regarding the ABG deal was filed in 2020.
The company reported a net loss of $61.6 million in its most recent quarter and recently dropped its 2024 sales target.
Tilray shares trade as TLRY on the Nasdaq and the Toronto Stock Exchange.
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