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spk02: Greetings and welcome to Tilray's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. You may begin, sir.
spk05: Good afternoon, and thank you for joining us on Tilray's 2020 Full Fiscal Year and Fourth Quarter Earnings Conference Call and Webcast. On 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 discussions, 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 that may prove to be incorrect and involve known and unknown risks and uncertainties. Actual results could differ materially from 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 securities 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 December 16, 2020, Tilray and AFRIA announced their plans to combine the two companies and create the world's largest global cannabis company by revenue. In connection with the proposed transaction, Tilray will file a proxy statement on Schedule 14A containing important information about the proposed transaction and related matters, and AFRIA will file a management information circular. Additionally, Tilray and AFRIA will file other relevant materials in connection with the proposed transaction with the appropriate securities regulatory authorities. Because the proxy and information circular contain important information about the proposed transaction, the parties to the transaction and security holders of Tilray and AFRIA are urged to carefully read these entire documents, including any amendments or supplements to such documents, before making any voting decisions with respect to the proposed transaction. The Tilray proxy statement and AFRIA management information circular will be mailed to Tilray and AFRIA shareholders, respectively, and will be available on the EDGAR and CEDAR profiles of the respective companies. Finally, on today's call, management will also refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustments and stock-based compensation, which are non-GAAP financial measures. While the company believes that these non-GAAP measures provide useful information for 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. Now, I would like to turn the call over to Brendan.
spk08: Hello, everyone, and thank you for joining us. The headline as we enter today's call on Investor Update is that our outstanding team was able to deliver solid revenue growth for the year and the quarter and positive adjusted EBITDA in the quarter in an environment that was anything but normal. Our ability to achieve these results is a tribute to Tilray's relentless focus on revenue growth, operational excellence, profitability, and shareholder value. Specifically, on the revenue side, we successfully pursued profitable sales growth by focusing our three core businesses, Canadian Adult Use, International Medical, and Manitoba Harvest Hemp Foods, while significantly reducing bulk B2B sales in Canada. These efforts yielded 50% year-over-year growth in our adult use business in Canada, excluding bulk from 2019. as we worked aggressively to introduce a variety of cannabis 2.0 products while expanding our presence across the retail landscape. We also generated over 150% growth in our international medical business as we grew market share in key markets and leveraged our international presence and infrastructure. On the operational front, we significantly reduced our cost structure to better align with market conditions. This process began before the onset of COVID-19, and consisted of right-sizing resources, significantly reducing SG&A expenses, closing high park gardens, and increasing our operating efficiencies. While the pandemic presented unanticipated challenges, it did not hinder our progress. Through Q4 2020, we were able to achieve approximately $57 million in annualized savings compared to our Q4 2019 run rate, surpassing our original goal of approximately $40 million Notably, however, we did not allow our cost-cutting efforts to distract us from our revenue growth goals. Turning now to the details about performance. For the full year 2020, we generated a 26% increase in total revenue to $210.5 million. As noted, this growth was driven by international medical revenue, which more than doubled to $33.9 million. and growth of more than 50% in our Canadian adult use business to $83.8 million. Along with impressive sales results, we achieved the adjusted EBITDA goal we set earlier in the year and delivered $2.2 million of adjusted EBITDA in Q4. These types of results require dedication, commitment, and focus. I'm proud to say that the Tilray team demonstrated all of this and more. Our team successfully navigated changing industry dynamics, changes in our organization, and the ever-present challenges presented by COVID-19 to accomplish outstanding results during 2020. Now, let's discuss each of our business segments in greater detail. Our Canadian adult use business continues to grow and evolve. While many LPs have grown revenues by focusing on the deep value segment of the market, we continue to take a more balanced approach as we manage our product offerings with the goal of maintaining rational pricing and sensible margins. Full-year 2020 revenue grew 50% to $83.8 million, while our Q4 2020 revenues grew to $25.4 million, or 27% sequentially from Q3 2020. our solid performance can be attributed to several factors. First, enlisting Kindred partners as our exclusive sales agent has significantly expanded our distribution profile. Notably, Kindred has roughly 45 people in the marketplace focused on expanding the depth and breadth of our product offerings compared to the 18 internal salespeople we previously had working at Tilray. Second, taking advantage of the increased SOAR count At the beginning of 2020, we estimated an end-of-year store count between 800 and 1,200. During the year, and despite COVID, we were encouraged by the opening of 653 net new stores for a total retail count of 1,319, including 240 stores in Ontario. We view new store openings as a positive for ToeRid's growth, as well as the growth and evolution of the broader adult-use market in Canada. We have thoughtfully and proactively managed our product mix to ensure we effectively compete for our fair share of the consumer wallet. Throughout the year, we improved our process of evaluating our portfolio to ensure our product offerings are priced appropriately across all category segments. As previously discussed, we also made some competitive price adjustments starting in Q3. primarily to bring some of our higher-potency premium products more in line with the competitive set, which we believe paid dividends in Q4. More generally, our product mix for the Canadian adult-use market has been focused on growing our existing portfolio of 2.0 products, introducing new, innovative products that delight consumers, and maintaining a stronger presence in the high-potency and premium price categories. We continue to prioritize the premium sector of the market, During Q4, approximately 75% of our products were in the mid- to high-potency range, while 60% were in the mainstream and premium offerings. While we focus and grow our premium, high-potency, and mainstream offerings, we continue to maintain a presence in the value segment with the batch, and the Oak Drills brand focused on delivering quality cannabis flower and pre-rolls at competitive prices. In Q3, we launched our best-selling Chowdhury Wally gummies with two flavor offerings, THC watermelon, and balanced THC CBD pineapple mango. In Q4, we introduced a third flavor, THC sour cherry. During Q4, we also brought several new form factors to market, including a hash product, a new beverage offering every mint tea. Looking ahead, we will continue to be at the forefront of innovation in the marketplace and have plans to launch new offerings of vapes, topicals, and chocolates. It merits emphasis that the success in our Canadian adult use business also reflected meaningful operational improvements that are resulting in increased yields and potency. In 2020, our yields increased roughly 42% at our MS Bill in Ontario facility relative to 2019, and virtually all of our harvests in Canada during 2020 were above 20% THC potency. We view the ingredients driving success in our Canadian used business as the power of partnerships, smart, disciplined retail growth, a dynamic and appealing product mix, and operational excellence. Based on Q4 results, we remain cautiously bullish on the adult use market and believe we are prepared to address any potential significant unknown challenges resulting from the continually evolving and changing COVID-19 related restrictions on retail activity. In our opinion, any temporary hurdles we face will not impede the longer term inevitable growth of this market. The conversion from the illicit market to the legal market is supported by the expansion of more value added and legal cannabis products, greater accessibility and affordability through increased points of distribution, as well as heightened interest in quality and safety. Consumers are becoming more informed, more discerning, and more accepting of cannabis products. Tilray, and the new Tilray we will be part of, is incredibly well positioned to take advantage of these trends. In international medical, we are excited about our enviable track record of growth and our position as a leading provider of GMP-certified medical cannabis in the European Union and other international medical cannabis markets. As I already mentioned, for the full year, our international medical sales revenue increased 153%. Sequentially in QCOR, revenue increased 44%. We attribute most of our international medical growth to Germany and Australia. More broadly, we remain focused on the opening of other EU markets, which in aggregate represent nearly 450 million people across the EU's 27 member states. Tilray is well positioned, if not better positioned, than other global cannabis companies to win this market. We continue to see opportunities for growth in Germany, as both the number of patients and prescribing doctors continue to increase. We also expect we will continue to gain market share as the overall market continues to grow. As you know, we entered Germany at a very early stage, and we are building our business based on our market knowledge, our customer relationships, and our brand awareness. All these elements position Tilray to generate ongoing revenue growth as the market expands, similar to what occurred in Canada some six to seven years ago. We are further encouraged by the early performance of our relationship with Harmosun, In early December, we announced the signing of the cooperation agreement with Hermosyn for the promotion of medical cannabis extracts in Germany. Hermosyn is primarily focused on pain therapy and neurology and is part of the Lupin Group, an international corporation that sells innovative drugs and generics. The Hermosyn team canvases doctors' and prescribers' offices to familiarize them with Tilray products. our GMP quality standards in our reliable supply. We believe this strategic partnership will continue to expand Tilray's presence in Germany. At the end of 2020, our phase two expansion at our GMP certified Portugal facility is substantially complete. Over the next 90 to 120 days, we will finish work on the small outstanding items and start commissioning the new growing area. As we have discussed for some time, our facility in Portugal is a cornerstone of our long-term commitment to expanding our presence and leadership as inspired GMP-certified medical cannabis throughout Europe. As you know, our EU campus and cultivation site in Portugal consists of a fully GMP-certified facility and includes an outdoor cultivation plot, a state-of-the-art glasshouse growing area, and a manufacturing facility. This facility serves as our international hub for R&D. and primary source of supply for EU medical markets and select other international markets. In France, we recently announced that Tilray has been selected by the French National Agency for the Safety of Medicines and Health Products to supply GMP certified medical cannabis products for a prescription experiment. Beginning in Q1, we will be supplying GMP produced medical cannabis products from Portugal to serve French patients in need for the duration of the French experiment, which is expected to last 18 to 24 months. We expect patient counts to expand quickly during initial study and even more rapidly once there's broader approval of the program. Obviously, we are very pleased and optimistic about the prospects for the French program, and our well-established European team gets all the credit for making this happen. This outcome is another example of how our commitment to and experience in the European market continues to accelerate our business interests. Our European milestones also include the following important events. We received the first and only market authorization to offer medical cannabis products in Portugal. We announced a partnership with World Pharma Biotech in the first export of medical cannabis from Portugal to Spain. World Pharma will produce the first medical cannabis products for clinical trials in Spain with Tilray GMP-certified medical cannabis. And just last week, we announced a new agreement with Grow Pharma to import and distribute Tilray medical cannabis products in the United Kingdom. This new agreement gives doctors and patients access to a sustainable supply of Tilray's full range of pharmaceutical-grade medical cannabis flower and oil products. With these exciting new developments, Tilray Medical cannabis products will now be available to patients in 17 countries around the world. We have many reasons to remain bullish about our existing competitive position and ongoing business potential in the EU's medical cannabis market. Our recent market entries in France, Portugal, Spain, and the UK provide powerful validation for our EU market approach, and we believe these countries will be models for other European and international markets. While the coming quarters may be volatile due to always changing COVID restrictions, we are committed to long-term profitable growth in Europe and are well positioned to take advantage of future opportunities. Following Germany, France, Portugal, and Spain, we believe other EU countries will begin implementing medical cannabis programs as doctors, patients, and pharmacists embrace medical cannabis. Our success across the EU market gives us confidence that we have built a foundation that positions Tilray to benefit from these ongoing opportunities. In 2020, Manitoba harvest revenue increased 28% to $76.9 million, partly due to a full 12 months of operations in 2020 versus 10 months from our acquisition date in 2019. In Q4, however, we did not achieve our goals. Q4 2020 hemp revenue decreased 18% to $15.3 million, compared to the year-ago period to 23% from Q3 2020. While there are several factors that contributed to these results, we were disappointed by this outcome and found it necessary to make changes to the management team. We continue to have high expectations for the Manitoba Harvest business and look to leverage the operations and commercial platform to expand our hemp food products business. and more aggressively establish a solid presence in the CBD products arena. We are confident our management changes will start to deliver results more in line with our expectations, but also remain cautious about COVID-related impacts to consumer behavior and the effects on retailers that carry our products. 2020 was a year in which the Tilbury team delivered outstanding results despite challenging conditions. With a solid year behind us, I'd like to briefly discuss the next chapter in Tilray's journey, specifically the transformative transaction with the PREA that we anticipate completing during the second calendar quarter of this year. There are many strategic and financial benefits to the combination that I would like to highlight before I turn the call over to Michael. First, scale matters in both Canada and beyond. The combined company will be the largest global cannabis company based on pro forma revenue with scale and breadth across major geographies and a complete portfolio of market-leading brands in all major cannabis product categories. We are in the earliest stages of the continued development and expansion of the global cannabis market. It is clear that scale, massive market footprint, broad product range, and brand expertise will be characteristics of companies that win. Additionally, AFRIA has generated positive adjusted EBITDA over the last seven quarters, and we just finished our first quarter of positive adjusted EBITDA. As a combined business, the new Tilray will be positioned to deliver market-leading profitability. Given the EBITDA profile of the two companies and the $100 million Canadian dollars of pre-tax synergies to be realized, the combined business will have a robust platform for future revenue growth, profitability, and cash flow. The combined company will also benefit from the strength of our combined balance sheets and the resulting additional access to capital that will help accelerate the company's global growth opportunities and stockholder value. Second, product leadership. The combined company will have a portfolio of carefully curated and complementary brands in every major cannabis category, including flour, free roll, oils, capsules, vapes, edibles, and beverages. and across all consumer segments, economy, value, core, mainstream, and premium. We will also have a leading Canada adult use retail market share of approximately 17%, which is roughly 700 basis points higher than the next closest competitor. Third, we will have an unrivaled European platform and be able to pursue international growth opportunities with an end-to-end EU GMP supply and distribution chain. This includes our European EU GMP cannabis cultivation and production facility in Portugal and a free German medical cannabis distribution footprint that reaches more than 13,000 pharmacies. Fourth, we will be able to enhance our presence and infrastructure in the United States by leveraging the Sweetwater and Manitoba Harvest businesses. The presence of these two leading brands position the combined company to establish a commanding presence in THC products when THC is federally legalized. The combined company will be able to leverage Sweetwater's craft beer manufacturing and distribution network to build brand awareness via craft beers, hard seltzers, and other beverages, as well as Manitoba Harvest brand presence and distribution in hemp and wellness products to capture market opportunities in the CBD and THC spaces as market regulations permit. Given these positive dynamics, we are thrilled to bring together two leading cannabis companies, and leverage the enhanced scale, geographic footprint, product offerings, developed distribution, brand expertise, and low-cost production of the combined entity to deliver sustainable, attractive returns for shareholders. The entire TILRAY team looks forward to working with AFRIA to leverage our combined strength and capabilities to meet the needs of patients, and consumers around the world while also delivering best-in-class financial results. Finally, when I envision the future landscape of the cannabis industry and when both financial investors and strategic partners are evaluating who is likely to be a global winner and exploit positive political changes that may occur in the U.S., I believe they will look at the Tilraya Freya combined business and all its positive attributes is a clear favorite. With that, I will turn the call over to our CFO, Michael Krutek, to review our financials.
spk06: Michael Krutek Thank you, Brendan, and thank you to everyone joining us on the call this afternoon. As a reminder, all the financial information provided today was prepared in accordance with U.S. GAAP and is in U.S. dollars unless otherwise indicated. Before we get started, I'd like to take care of one housekeeping item. Previously, we have broken out stock-based compensation and acquisition-related expenses on our income statement. In the case of stock-based compensation expense, this is now distributed among cost of sales, general and administrative, sales and marketing, and R&D expenses. As a non-cash item, you will still find the total amount on the cash flow statement. In the case of acquisition-related expenses, these are now included in general and administrative expenses. Now, to our financial performance. As our financial performance demonstrates, we made significant progress during 2020 to transform and strengthen our business, drive solid revenue growth, and deliver against our adjusted EBITDA goal. Our team around the globe has done an incredible job executing on ambitious initiatives, while also prudently managing the business through pandemic-related challenges. In doing so, the entire organization came together to meaningfully grow our top line, substantially reduce our costs, and noticeably improve our gross margins. Our team has also prepared us for the next phase of Tilray's evolution as we look to combine the Tilray business with AFRIA to create the world's largest cannabis company by revenue. Now to our year-end results. Q4 2020 total revenue of $56.6 million was up 21% compared to the same quarter last year. This consisted of robust growth in our international medical, adult use, and Canadian medical channels, which was partially offset by declines in our bulk and hemp product channels. Excluding bulk cannabis sales, segment revenue mix in Q4 2020 was 73% cannabis and 27% hemp, compared to 57% cannabis and 43% hemp in Q4 last year, and 60% cannabis and 40% hemp in Q3 2020. Excluding bulk sales, Canada segment revenue increased 69% to 41.2M compared to 24.3M dollars in the same period last year. The increase was driven by a 191% increase in international medical sales to 11.7M dollars. A 49% increase in adult use sales to 25.4M dollars. And a 27, 20% increase in Canadian medical sales to 4M dollars. Bulk sales were essentially reduced to zero as we plan to sell through this channel on an opportunistic basis, primarily to help manage inventory levels in certain products. As previously indicated, we will continue to focus our efforts on higher margin opportunities. The growth in adult use is attributable to several factors, including improved presence in retail outlets, partly due to the relationship we established with Kindred starting in Q3 2020, the launch of our cannabis 2.0 products starting in December 2019, and more active management of our pricing strategies across brands, product lines, and locations. In Q4, 2.0 products accounted for approximately 20% of adult use sales and has contributed to our growth in the adult use channel, in part due to the introduction of new form factors, including the launch of our hash product in Q4, and exciting new flavors in the case of our gummy lineup. The growth in Canadian medical is mostly attributable to growth of renewal prescriptions, the launch of vapes as a medical form factor early in the year, and some increased pricing due to mixed shifts in the back half of the year. As Brendan mentioned earlier, our growth in international medical was generally attributable to solid performance in our German business, but was also complemented by strong results in our Australian market. Our cannabis segment mix continues to evolve and Q4 2020 was made up of 62% adult use versus 60% in Q4 2019 and 63% in Q3 2020. 28% international medical compared to 14% in the year-ago period and 26% in Q3 2020. 10% Canada medical versus 12% in the year-ago period and 11% in Q3 2020. and essentially no bulk sales during 2020, while they represented 14% in Q4 2019 and 24% for all of 2019. Q4 hemp segment revenue decreased 18% to $15.3 million compared to $18.7 million for the same period last year and $20 million in the prior quarter. The decrease was mostly due to a major customer working down their inventory of Manitoba Harvest branded product as they moved to a private label strategy, compounded in part by shifting consumer behavior due to COVID-19 and the lack of clear strategic direction of the business that led to our decision to make management changes. The results of this quarter notwithstanding, we believe the Manitoba harvest business will regain its footing in the coming quarters and will provide a solid platform from which to further expand and grow hemp food products and also establish and grow our presence in the CBD category. On a sequential basis, excluding bulk sales, revenue increased 10% in Q4 2020 to $56.6 million from $51.4 million in Q3. Below the surface is a good news story in all Canada segments. International medical grew 44% to $11.7M. Canada adult use improved 27% to $25.4M. And Canada medical increased 24% to $4.2M. These robust increases in sales were partially offset by a 23% decline in hemp product sales. Total kilogram equivalent sold decreased 54% to 6,830 in Q4 2020 from 15,039 in the prior year's Q4. The decrease was primarily due to the conscious lack of bulk sales in 2020. Our average net selling price per gram of cannabis in Q4 2020 was $5.97, a 118% increase, or $4.09, from the $1.88 during the same period in 2019, and a slight 2.9% decrease from our reported selling price of 6.15 in Q3 of this year. The increase versus 2019 was due to a continued shift in distribution channels and product mix, including growth in international medical sales, a shift in sales to higher potency and higher price products in the adult use market, and the continued growth of cannabis 2.0 products in Canada. The decrease from Q3 was due to the accelerated sales growth of cannabis flower and products in the Canadian adult use channel during Q4. Going forward, we expect our average selling price per gram to remain stable or increase over time as sales of international medical cannabis and 2.0 products in the Canadian adult use market continue to make up a larger percentage of our sales mix. As Brendan indicated, we expect to see additional European countries permit the use of medical cannabis in a reasonably near term, and we are positioned well to capitalize on these opportunities. Our average cannabis cost per gram increased to $3.72 compared to $1.53 in the fourth quarter of 2019 and decreased from $4.23 in the third quarter of 2020. The year-over-year increase was the result of lower kilograms sold due to the discontinuation of bulk sales and partly due to increased sales of cannabis 2.0 products, which have higher costs than dried flower. The decrease in Q4 is attributable to additional realization of cost-cutting measures and better absorption rates in Portugal. Recall that we stopped attributing any cost to byproduct at our Hyde Park and Portugal facilities, which in turn reduces our need to make future inventory adjustments. However, this also increases our cost per gram on the flour and derivative products that do have value. As we have previously discussed, a portion of our cost-cutting efforts directly impacted production costs at our Canadian facilities. In addition to closing high park gardens, we have reduced head counts, improved processes, and enhanced our cultivation methods, which has resulted in reduced overall production costs, but also improved yields by approximately 40% at our growing facilities. With the continued expansion of 2.0 offerings in Canada adult use, we expect to see ongoing improved throughput and cost absorption at our high park farms and high park holdings processing facilities. in Portugal, we also expect to see ongoing improvements in our production costs as our international medical sales grow and our cultivation assets come fully online during 2021. The gross margin for Q4 2020, including inventory valuation adjustments, increased to 29% from negative 121% in the same period last year and 7% during Q3 2020. Excluding inventory valuation adjustments and stock-based compensation, gross margin for Q4 2020 was 36.4%, which represented a 1,400 basis point increase from 23.1% in the year-ago period and a roughly 400 basis point increase from 33.4% in Q3 2020. Gross margin for cannabis, excluding inventory valuation adjustments and stock-based compensation, increased to 36.9% in Q4 2020, from 15.5% in the year-ago period, and from 27.4% in Q3 2020. The sequential increase in gross margin was partly due to increased international medical sales and lower costs at our production facilities resulting from our cost-cutting measures. Looking ahead, We expect to see continued margin expansion due to the full realization of our cost-cutting measures, additional process improvements, more throughput at our facilities, and better fixed cost absorption, complemented by a rational pricing strategy on the front end of our business. Gross margins for hemp, excluding inventory valuations and adjustments, remain flat at 35% in Q4 2020 compared to 35% in the year-ago quarter and 43% in Q3 2020. As previously indicated, these reductions are largely due to a major customer shift to private label products. Going forward, we expect hemp margins to fluctuate between the mid-30s to mid-40s as we work to offset the negative margin impacts with new distribution of higher market products. Moving to expenses, Excluding impairment charges, acquisition-related expenses, net loss from equity method investments, and stock-based compensation, Q4 total operating expenses were $23.8 million, a $31.4 million decrease compared to the prior year quarter, and slightly below the $24.8 million in Q3 2020. These favorable expense comparisons reflect the significant progress we made over the past few quarters in aligning our cost structure with the current business environment and strengthening our position as a leaner and more efficient leader in the cannabis and hemp industries. Over the course of 2020, we eliminated close to 500 positions and achieved an annualized savings impact net of severance costs of $40.3 million. These headcount reductions combined with our already implemented efforts to achieve operating efficiencies resulted in approximately $58 million annualized cost savings versus our Q4 2019 run rate cost structure. As Brendan noted, our cost savings measure began before the pandemic and we're not in direct response to its subsequent impacts. Net loss for Q4 2020 was negative $2.9 million, or negative 2 cents per share, compared to net loss of $219.2 million, or negative $2.14 per share in Q4 2019, and a net loss of $2.3 million, or negative 2 cents per share in the third quarter of 2020. Adjusted EBITDA for Q4 2020 was positive $2.2 million, compared to the adjusted EBITDA loss of $35.6 million in Q4 last year. This was a significant achievement and, as you know, was a goal we established late last year. The improvement in the year-over-year adjusted EBITDA is due to our significant efforts to reduce costs, improve our operating efficiencies, improve revenue mix, and our ability to accelerate sales in key segments. On a sequential basis, our adjusted EBITDA was a $3.7 million improvement from the negative $1.5 million loss in Q3 2020. the delta is attributable to improve gross margins and reduce costs. Regarding some balance sheet activities, in November, we exchanged approximately $197.2 million in aggregate principal amount of our 5% convertible senior notes due 2023 for approximately 17.3 million shares of our Class II common stock. Following the exchange transactions, approximately $277.9 million in aggregate principal amount of the notes remains outstanding. The purpose of the transaction was to opportunistically reduce our debt and eliminate approximately $9.2 million in annual cash interest costs. We ended Q4 2020 with cash and cash equivalents of approximately $189.7 million, representing an increase of $34.5 million from $155.2 million at the end of Q3 2020. Since December 31, holders of our warrants have exercised 12.1 million shares for proceeds of $75.4 million. As of February 16, our cash and cash equivalents stood at $261.3 million. Turning to the future, as you know, we are working to complete our business combination with AFRIA and expect the transaction to close during Q2 of this year. We view this transaction as a win-win. It brings together two leaders in the cannabis industry that share a culture of innovation, brand development, and quality cultivation that are positioned to strategically exploit current and future international acceptance of cannabis products. As a combined company, we intend to pursue opportunities for accelerated growth with a leading portfolio of branded products designed to help patients and delight consumers. We will have the balance sheet strength and flexibility to access capital on favorable terms. We will focus on delivering the identified approximately Canadian 100 million pre-tax synergies during the first two years after the transaction closes. And we will focus on achieving attractive returns for stockholders. I'll now pass it back to Brendan.
spk08: Thank you, Michael. Before we turn over the call for questions, I want to take this opportunity to thank you for supporting Tilray's success since our company came to life in 2013. The list of firsts from that point on are numerous. We were the first GMP-certified medical cannabis producer in North America, one of the first producers to be licensed by Health Canada for medical and adult use production and distribution, the first licensed producer to legally export medical cannabis from North America to Africa, Australia, Europe, and South America, and the first producer to receive cultivation licenses from the national governments of two countries, Canada, and Portugal. We also established a world-class medical advisory board, which helped to guide our research and ensure that not only was our medical product efficacious, but that we were able to help patients in real time. We built a global production and distribution footprint, including our state-of-the-art low-cost GMP-certified production facility in Portugal, and we entered into industry-disrupted partnerships and alliances with iconic global brands. giving us critical competitive strengths. Based on our success, we were the first cannabis company to complete an initial public offering on a U.S. stock exchange, which further supported and accelerated our growth. Throughout that time, the industry has evolved and advanced, and the new Tilray will be ideally positioned to continue to drive forward the global cannabis market and create value for all our stakeholders. and serve all of you, and I look forward to continuing to do so after the closing of the transaction as the director of the new Tilray. Thank you. We will now turn the call over to questions. Operator?
spk02: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation sign will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. In the interest of time, please limit yourself to one question. One moment while we poll for questions. Our first question comes from the line of Tammy Chen with BMO Capital Markets. You may proceed with your question. Hi, thanks. Good afternoon. I just wanted to focus a bit on the recreational business. So I just wanted to understand, it looks like from my math, and correct me if I'm wrong, but it seems like the REC 2.0 sales as a percentage kind of declined a bit sequentially. So it seemed like more of the strength was in the flower size. So just was hoping for a bit more color there in addition to the expanded distribution that you mentioned. Was there some form of significant load in of new flower products in the quarter and how should we think about the trajectory as we look into January, February with the impacts of the Ontario lockdown? Thank you.
spk06: Sure. Thanks, Tammy. So on the growth in terms of the product set or the distribution of products within the category, We actually saw good growth in the quarter-over-quarter Q3 among all of our products, but it was led by flour. So we saw solid growth in vapes, edibles, and oils across the board. So I would say that, you know, we didn't necessarily see decline, just that the flour grew faster. So that was the first part of your question. In terms of the added distribution, what we've seen is that, You know, and this is, I guess it's a little bit hard because it's somewhat self-reported. But on a self-reported basis, you know, what we're seeing is that we probably have increased our reach in the marketplace listings by about 100 plus, 120 listings or so. And in terms of points of distribution, we're probably talking about something in excess of 1,000 to 1,250. So I think that that's a combination of a bunch of things. It's new products in new markets. It's existing products in or new products in existing markets. So it's a combination. And, you know, we think that a good portion of that is both our own team working internally and maintaining the relationships that we've got with the provincial boards, as well as the relationship that we've got with Kindred, where they've got more breadth and depth in terms of the reach that they've got compared to the number of people that we had out in the marketplace. And then, you know, I think for us relative to where things are in the first quarter here is that, you know, it's kind of real time. And I don't know that we've got true visibility quite yet. What we're seeing is that, you know, the provincial boards are getting more, I guess, sophisticated in their approach to carrying products and what they have on the shelf. And we're actively working with them to try and figure out for products that they want to considered discontinuing is how we replace it with something else that might be more attractive to consumers. So I don't know that we've got specific visibility quite yet in terms of what it overall means to the business, but we're actively managing it and doing what we can to go ahead and replace products that are being considered for discontinuation.
spk02: Our next question comes from the line of Aaron Gregg with Alliance Global Partners. You may proceed with your questions.
spk01: Hi, good evening and thanks for the question. So for me, you know, I want to just ask a quick question on mantle of harvest. So just to get some more color in terms of kind of the reasoning for some of the management changes. So I realize that down pretty good amount sequentially, you talk about a shift to private label for a large customer, which seemed to avoid not only on sales, but also on margin. So just want to kind of talk about maybe the overall trend that you think you're seeing there on the hemp side. Do you think that's a trend that other customers you know, might do going forward in terms of switching to private label that further kind of impacts the margin profile or kind of what are the changes you're hoping, you know, the new management team will bring to hopefully turn around that segment for you guys? Thanks.
spk08: So, looking at Manitoba Harvest historically, the company and its products have been extremely successful historically in Costco. We've seen a lot of success in Amazon and Whole Foods as well. Those are clearly our three largest customers. You know, looking at the move to private label at Costco, you know, the company has always had a small private label business for a few other customers, we produce private label products. But the shift at Costco is something that certainly we've been aware of over the last two years. And really, the long-term objective at Manitoba Harvest is to make the other points of distribution in the United States as successful as uh costco has been historically uh for for the company and for the the products and so that's the real uh that's the real opportunity so you know to rephrase that um customers at costco uh historically have purchased a lot of mantova harvest uh hemp food products and the the objective uh and the opportunity that's out there is to get uh consumers, customers at other U.S. retailers, whether it's Walmart or Target, you know, Kroger, to get those customers to purchase Manitoba Harvest products just like they purchased them at Costco. Michael, anything to add there?
spk06: I would just say that our goal is with that additional distribution is to recapture the margin. I don't believe that we think a significant portion of our customers will be looking to switch to the private label based upon the visibility that we've got right now. So we would certainly hope that that's a branded product play. And the other piece of it is that I do believe that we are going to focus on building out the CBD portion of our business in a more aggressive fashion than we have. We've got a brand that we acquired with a business that we owned previously by the name of Pollen. And we plan to leverage the Pollen brand in the CBD space as a go-forward product for us. All right, great. Thank you.
spk02: Our next question comes from the line of Rupesh Parikh with Oppenheimer. If you may proceed with your question.
spk07: Good afternoon. Thanks for taking my question. So I guess just going towards... the current quarter, Q1. Are you guys providing any forward commentary in terms of how you think about sales or EBITDA for the current quarter?
spk06: You know, Rupesh, I think if this were not, I mean, but let me start out. So, I think we're really pleased with the results that we delivered for 2020 in its entirety, and specifically in Q4. On the commercial side of the business, the cost side of the business, and obviously down through the line, there are obviously a lot of moving parts due to covid and absent a covid environment. I think that we would probably be in a place to provide a bit more guidance, but. Just given all the moving parts that we've got and the unusual circumstances that we're facing, I just don't know that we can give real solid guidance at this point to say that here's how we feel things are going to turn out over the coming quarter or quarters. You know, we're relatively bullish on where the business sits right now, and we feel good about the progress that we've made. We feel good about the progress that we continue to make and the opportunities that are in front of us. But I just don't know that we're in a position to be given specific guidance.
spk07: Okay, great. I'll pass it along. Thank you.
spk02: Our next question comes from the line of Vivian Asser with Cowan & Company. You may proceed with your question.
spk04: Hi, this is Steve Schneiderman, pinch hitting for Vivian tonight. On the adult use side of the business, which you indicated was primarily driven by flour, as well as the other product lines. But within Flower, at what price point did you see the most market traction given the reset that you guys did in the third quarter? Thank you.
spk06: Yeah. Well, I mean, I'd say, Steve, and let me just pull up some information here. You know, so we continue to see our sales predominantly in the mid and high potency as we indicated. And our sales continue to be in the premium, the mainstream and premium segments. So, as we indicated, we had 60%. We did have some additional value segment sales compared to the Q3. And so, we did see, and that was primarily driven by some products on the Dubon side, just the way that we kind of characterize it. And I think that's partially driven by the fact that we rolled out the hash product in Q4. which was very well received in Quebec. In fact, I think it's considered the number one hash product in the marketplace right now. So, you know, I'd say that those were some of the driving forces behind that. But we continue to stay focused on the mainstream and premium and the higher-potency products. And that's been consistent, I think, now from the last quarter.
spk04: All right, great. Thank you, guys.
spk02: Our next question comes from the line of
spk00: Thank you, Brenda. If I can ask two questions here. The first one maybe comes across as a stupid question, but given the great quarter you had, the very good news you had on the export markets in the last month, the big gap in the valuation between Afri and Tilray, is there room to renegotiate the exchange ratio? It would seem that, you know, that would be part of fiduciary duty here. or that just doesn't make sense at all. And then the second question related to your export markets, and by the way, congratulations on all the progress you're making. Can you talk about stickiness in those markets? I get that you have Portugal shipments and Canada, but a lot of other companies are trying to enter those markets also, right? So talk about stickiness in terms of repeat business and why do they go back to a brand or the salesperson or the service you're providing. Thank you.
spk08: Great. Thanks, Pablo. You know, I I can't speak to short-term individual shareholder sentiment. Obviously, I can only speak to my perspective. And when I look across every metric, financial, operational, product, geographic reach, the new Tilray, the combined Tilray, I think offers shareholders the greatest return. I've been in this industry for 11 years, and And when I look out over the next decade, I can't identify another industry that's going to see continual growth on a year-over-year basis. So, you know, we're working to close the transaction on the terms proposed and announced on December 16th. And that's our focus, and I can't really speculate beyond that. In terms of the second question, We're finding that extremely sticky. We're seeing, you know, despite sort of new entrants into the market, we're seeing, you know, our market share grow in Germany. We've seen it grow, you know, on a quarter-by-quarter basis really throughout the last two years. and it grows because the purchase process is just different, right? The patient goes to a doctor, the doctor prescribes the product, the patient then goes into the pharmacy and the pharmacist distributes the product. And so we're seeing, I would say we're seeing more stickiness and more brand loyalty in international pharmaceutical markets than you see certainly on the adult use side in Canada. And we see that stickiness not only in Germany, but we see it in Australia and New Zealand. And I think that's part of the rationale behind some of the announcements that we've made over the last six to eight weeks in terms of, you know, Hermosum in Germany and product registration, market optimization Portugal, the export to Spain, the agreement in the UK, and the announcements regarding France. It's important to establish a relationship with the regulators in each country. It's important to establish and educate physicians in each country, as well as pharmacists and patients. I guess the short answer would have been yes, we are seeing sickness, but we expect to continue to take market share in countries such as Germany.
spk00: Great. Thank you.
spk02: Our next question comes from the line of Michael Lavery with Piper Sandler. You may proceed with your question.
spk03: Thank you. Good evening. I just wanted to come back to the U.S. Certainly, I believe you're well positioned for that, and I think referred to yourselves as a clear favorite for succeeding. And I think you touched on some of the reasons why, but I'd love to understand maybe a little bit of your thinking on timing, you know, in part maybe what you expect from regulatory reform, and then a little bit related to just in terms of the timing piece of it, You know, as far as some of the advantages you point to are things like the AFRIA brands. Do you have any ability to be working with them at all now to do any planning? How actively are you, you know, trying to prepare for a U.S. entry?
spk08: So on the medical side, we're very active. You know, we have – we're one of the few companies that has performed – you know, multiple imports into the U.S. with DEA and FDA approval. And when I say multiple, I think it's around half a dozen so far for clinical trials. And when I look at the agreements we have around the world, you know, we have, I think we've announced 18 countries. I think we shipped to 17 countries around the world. And, you know, when I look at the U.S., I think that there's going to be an opportunity to import medical cannabis just like we import medical cannabis to 17 other countries around the world. I think there's going to be an opportunity to import a pharmaceutical-grade GMP-certified medical cannabis product for distribution in the U.S. through a more pharmaceutical supply chain, so really outside of the the MSO model. And so I think that's a huge opportunity, and I think it's something that relatively few, you know, international companies are prepared to do. And there's, you know, almost no GMP product available inside of the U.S. And so that's – I think that's a huge opportunity. It's something we are, you know, aggressively pursuing. You know, when it comes to the adult use market in the U.S., you know, we continue to pay very close attention to regulatory changes, you know, new states legalizing for adult use. I think this year is going to be unique in that you will see more states legalized through, you know, the legislative branch rather than, you know, through ballot measures and ballot initiatives. Although I think that in November, it's a possibility that you'll see a state like Ohio legalized through a ballot measure. And then two years out, a year from this November, I think you'll see another four or five really Republican states legalize adult use cannabis and medical cannabis. The key thing we're paying close attention to in the U.S. is really the distribution model. We're seeing a battle take place right now between the existing MSOs and the tobacco companies. There's been lots of press recently about some of the lobbying that Altria has been doing in the U.S. And then thirdly, the U.S. alcohol companies. The big question we have is which model is it going to be in? I have a pretty strong opinion that the existing MSO adult use model is not going to be the model of the future. I think it looks more like tobacco. I think it looks more like alcohol. And I also think that adult use cannabis products will cross state lines. You will see interstate commerce. And I think that's going to be extremely disruptive to entrenched players, extremely costly to entrenched players. And so that's that's what we look at. And that's what you know, that's what I imagine the combined company will look at when it comes time to to deploy capital in the US.
spk03: And can you touch on the timing piece of when you think that might come?
spk08: I I mean, you're asking the right question. I still think, you know, I still think sort of that next 12 to 18 month timeline. And I think it's incremental. I think you'll see a couple of steps along the way rather than one giant shift, although it's completely unpredictable right now. You know, looking at, 95% of Americans believe medical cannabis should be legal, 68% believe adult use should be. And so it's one of the few issues that have bipartisan support, certainly amongst the voters, but also in Congress. And so it could be two months from now, but I'm sort of still looking at that 12-month timeline, 12 to 18 months from now.
spk03: Okay, great. Thank you very much.
spk02: Ladies and gentlemen, we have reached the end of today's Q&A session. I would like to turn this call back over to Mr. Brendan Kennedy for closing remarks.
spk08: Great. Thank you, operator. You know, to conclude, we're proud of our Q4 results and are ready to take our business to the next phase by bringing together two cannabis industry leaders, Till, Randall, Freya. The combined company will have an unmatched geographic scale, broad and deep product and brand portfolio, and we'll be able to leverage the combined strengths and capabilities of both our companies to meet consumer needs and advance patient care around the world. With a strong financial profile, low-cost production, leading brands, distribution network, and unique partnerships, we believe the combined company will be well-positioned to deliver sustainable, attractive returns for shareholders. I'd like to thank the Tilray team for their commitment to our mission of improving people's lives through the power of cannabis and hemp. I'd like to thank all of you for your interest in Tilray and your participation on our quarterly call. Have a pleasant evening. Thank you.
spk02: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
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