Tilray Brands, Inc.

Greetings, and welcome to Tillray's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Rafael Gross, Investor Relations. Thank you, sir. You may begin.

Good afternoon, and thank you for joining us on Tilray's third quarter 2020 earnings conference call. With me today are Brendan Kennedy, Chief Executive Officer, and Michael Krutek, Chief Financial Officer. Before we begin, please remember that during the course of our discussion, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Tilray's reports filed from time to time with the United States Securities and Exchange Commission and Canadian security regulators along with the earnings press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements. On today's call, management will also refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustments, which are non-GAAP financial measures. While the company believes that these non-GAAP financial measures are useful information to investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Today's earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. And now I'd like to turn the call over to Brendan.

Hello, everyone, and thank you for joining us. I would like to cover three items today. First, I will review highlights from Q3, including how we have continued to significantly improve our financial performance by optimizing our cost structure. Next, I will provide an update on our strategic priorities and the current state of our business. And finally, I will discuss what's next for Tilray as we look ahead to 2021 and beyond. As I've discussed on prior earnings calls, 2020 has been a transitional year at Tilray, a year during which we have realized significant accomplishments by focusing on profitable growth in our three core businesses, International Medical, Canada Adult Use, and Manitoba Harvest Hemp Foods. At the same time, I'm proud of the challenging work that our team has done to optimize our cost structure and mitigate the impacts of COVID-19. In doing so, we have strengthened our financial position against the challenging industry backdrop, better aligned ourselves with market demand, and established a foundation which we can leverage to generate enhanced shareholder returns. We are encouraged by our progress in Q3 as we substantially narrowed our adjusted EBITDA lot compared to both Q2 and Q1. Based on our Q3 results, we believe our current momentum positions us to achieve our goal of breakeven or positive adjusted EBITDA in Q4. As we have stated throughout 2020, this has been our objective and is now clearly within reach. Sequentially, adjusted EBITDA in Q3 improved to a loss of $1.5 million from a loss of $12.3 million in Q2. or 87 percent improvement. And when compared to Q1, adjusted EBITDA loss improved by 17.2 million, or 92 percent, from a loss of 18.7 million. These results demonstrate the significant impact we have achieved with our broad-based cost-cutting measures. Notably, and as I will explain in more detail, this was accomplished with Q3 revenues of 51.4 million which is moderately better than Q2. We remain focused on growing our top-line sales despite our cost-cutting efforts and continue to invest in our business where we see opportunities for reasonable returns. Importantly, our new cost structure and improved balance sheet will allow us to leverage future sales growth without adding significant SG&A. For reference, we have reduced our quarterly SG&A including R&D, from approximately 48 million in Q4 2019 to roughly 26 million over the past two quarters, a remarkable improvement over a short period of time. Although we will continuously evaluate opportunities to optimize spending, the heavy lifting is now behind us. As I indicated, we have refocused our business on three key areas of growth, international medical, where we have built an enviable track record and are a leading provider. Canadian adult use, which is making tremendous inroads in converting the illicit market to the legal market, but still has a long way to go. This transformation provides a catalyst for expansion as more value-added and illegal cannabis products come to market and become more accessible and affordable through increased points of distribution, including the number of brick and mortar retail stores. I should add that the transition to e-commerce ordering curbside pickup and delivery in the current COVID environment, coupled with a heightened concern for quality and safety, appears to be accelerating the migration from the illicit market. Manitoba Harvest Hemp Foods, which provides us with a hemp and CBD products platform in the United States and 19 other countries around the world. Now let's discuss each of these segments in greater detail. International medical sales were flat compared to Q2. Although there was good demand in the marketplace, the market experienced two unexpected setbacks. First, there was an approximately four-week period in early Q3 when cannabis imports to Germany were curtailed market-wide due to International Narcotics Control Board, or INCB, quotas. Second, we were subject to COVID-related administrative delays for import permits on products entering Germany. While we were able to recognize some of these sales later in the quarter, some activities shifted to Q4. We remain bullish on our competitive position and business potential in the EU and Germany in particular. However, the EU market may remain volatile in the coming quarters due to recently reimposed COVID restrictions. We are continuing to see increases in both the number of patients in Germany with cannabis prescriptions, as well as the number of doctors who are writing prescriptions for these patients. While these increases are off of a relatively small base, we believe that we are effectively building brand awareness, similar to the way that we did in Canada four years ago, and expect to see continued patient and revenue growth given Germany's large population base. In fact, we believe that the adoption curve in Germany is occurring at a faster pace compared to Canada during 2014 and 2015. Recently, we have seen a number of competitors either cease European operations or significantly reduce their presence there. We believe this will become a long-term strategic advantage for Tilray. The commitment we have made to the EU market with our Portugal GMP campus and regional leadership team based in Germany position us well to continue to capture market share in Germany and more broadly in Europe. In Portugal, our phase two construction is all but complete. Given its warmer climate that is amenable to year-round cultivation and a lower cost of labor, our facility in Portugal has an annual capacity of roughly 40 metric tons of dried cannabis that can be shipped to other countries around the world. With full GMP certification, it is our international hub for medical cannabis exports and R&D. Looking ahead, we are optimistic about our opportunity in France. We will be submitting our application and will wait to hear if we have been selected as one of the suppliers for the country's medical cannabis trial. The French government recently published their decree that provides details on how the medical cannabis experiment will be administered. The French authorities have indicated that approximately 3,000 patients will be able to participate and that the selected companies will supply medical cannabis that complies with pharmaceutical standards, including GMP. The first prescriptions are expected to occur in early 2021. Given our experience with GMP practices and the reputation we have established in Germany, we believe Tilray is well positioned to be selected as a supplier for the program. This will allow us to establish the foundation for future business in France. We're also encouraged by the possibility of participating in the Dutch coffee shop experiment. The Dutch government is currently determining whether and how controlled cannabis can be legally supplied to coffee shops. The program is called the Controlled Cannabis Supply Chain Experiment. We recently applied for one of the 10 licenses that will be awarded, which would be another international revenue opportunity for Tilray. Our medical cannabis sales in Australia and New Zealand continue to benefit from patient growth, broader distribution, and stable pricing, all of which have resulted in solid gains for the business. On September 28, we announced that Australian researchers published preliminary results indicating that one of our GMP-produced products may reduce nausea and vomiting for cancer patients undergoing chemotherapy. The pilot phase of the study ran for two and a half years with 81 participants enrolled. The trial will now move to a phase three clinical trial to determine with much more certainty the effectiveness of medical cannabis to combat nausea and vomiting and determine if it should be considered for use in routine cancer care. In summary, we are committed to long-term profitable growth in Europe, as regulations continue to change and country markets develop. Our early partnership approach with government agencies, our emphasis on clinical data, and our ability to produce high-quality GMP manufactured cannabis products at scale in the EU for the EU puts us in a leading position. As new international market opportunities are presented, we will leverage the knowledge and experience of our medical advisory board to determine what is best for the company. Turning now to Canadian adult use, our Q3 revenues increased 13.1% compared to Q2. This demonstrates how we can grow this business without focusing on the deep value segment of the market. We attribute our success to several strategic decisions, including partnering with Kindred as our exclusive sales agent, evaluating our portfolio pricing, introducing new 2.0 products, and improving our operations. Relative to operations, we have made significant improvements, which have resulted in increased yields and potency. In 2020, our yields are up approximately 42% at our NSGO and Ontario facility relative to 2019, and all of the harvests have been above 20% THC potency. Our Kindred partnership has established us to leverage the breadth and depth of their sales force to grow distribution with both existing and new provincial buyers and retail partners. While we continue to focus on higher premium categories, we evaluated our pricing strategy to ensure our product offerings are priced appropriately in all category segments. Our combined mainstream and premium product offerings now make up over 70 percent of our adult use business, compared to mid-50 percent in Q1. as we continue to deprioritize value product offerings. In late September, our wholly-owned subsidiary, High Park, announced the newest addition to its cannabis-infused edible product line, Chally Wally gummies. Chally Wally gummies are handcrafted using clean and simple ingredients, are vegan and gluten-free. THC watermelon gummies and balanced THC CBD pineapple mango gummies are currently available in six provinces across Canada. A THC sour cherry gummy will be available in Q4. The gummies complement our already existing impressive array of 2.0 offerings, including vapes under our Kanaka and Marley Natural brands, chocolates under our Good Chip and Chowdhury-Wowie brands, CBD beverages, every, sold by Fluent Beverage Company, our JV with Anheuser-Busch InViv, We continue to work on additional form factors and plan to introduce additional innovative products to Canadian consumers that meet the needs of this growing industry. As indicated, our adult use strategy is focused on profitable, long-term growth. Consequently, while we introduce the value segment product offering, we are not aggressively fighting for market share gains in a segment that offers little or no profit potential. Instead, We continue to manage our product offerings and margin with the goal of maintaining rational pricing and sensible margins. During Q3, we were pleased to have grown our share of the market and were encouraged by the fact that we did so, while selling approximately 90 percent of our products in the mid- to high-potency categories. At the beginning of the year, we were estimating an end-of-year store count between 800 and 1,200. We have been pleasantly surprised that the count has exceeded the high end of our range, with approximately 1,250 stores currently open. This is a positive for both fill-raise growth and the growth and evolution of the broader adult-use market in Canada. We are also hopeful any potential COVID-related restrictions will not negatively impact store count growth going forward. Coming off of a solid Q3, we are bullish on our prospects for continued growth in the adult use market in Q4 and beyond. Q3 revenue for Manitoba Harvest was slightly below Q2. As we had said before, we view this business as a relatively predictable revenue and profit engine to help fund other growth initiatives. We continue to drive for additional distribution and sales but are cautious about COVID-related impacts to our consumer behavior and the effects they may have on retailers that carry our products. Our team is working hard to broaden distribution and grow the direct consumer business to offset any negative impacts we may see from reduced retail traffic. As we head into the final quarter of 2020 and look forward to 2021, we see opportunities in our business that will enable us to deliver revenue growth improved gross margins and break even or positive adjusted EBITDA in Q4. We were disappointed with the results of the recent adult use legalization vote in New Zealand. However, we remain optimistic. Over the next three years, we see the possibility of 40 additional countries legalizing medical cannabis and four additional countries taking serious steps towards legalizing adult use cannabis. The acceptance of cannabis will provide opportunities for us to expand the reach of Tilray brands around the world. In the United States, we saw several state measures pass with a strong majority of the vote in Arizona, Montana, New Jersey, South Dakota, and Mississippi. The number of states with a legal medical market now increases from 34 plus Washington, D.C. to 36. The number of states with adult use now increases from 11, plus Washington, D.C., to 15. The case for federal legalization and cannabis reform emerges stronger from this election. We now believe that it is only a matter of time. An additional five Republican senators now represent a state whose constituents have legalized cannabis. Adult use legalization in New Jersey is likely to have a domino effect upon the states of New York, Pennsylvania, and Connecticut, as elected officials are worried that their residents will go to New Jersey to purchase product and thereby not generate tax dollars in their home state. For now, we will build and strengthen our portfolio of trusted CBD brands in states where legally permitted CBDs we will address the federal CBD market upon further clarity from the FDA. To conclude, we are operating in an efficient manner across our entire business, global medical cannabis, Canadian adult use cannabis, and global hemp. With the completion of our significant cost reductions, we are now poised to leverage our cost structure and ensure we are one of the global winners in this industry. We have ample cash availability on our ATM to execute our strategy. With our infrastructure in place, we will continue to focus on building brands and developing products that resonate with consumers and establish Tilray as the most trusted cannabis and hemp company in the world. With that, I will turn the call over to our CFO, Michael Krutek, to review our financials.