Q4 2020 Tilray Inc Earnings Call

Greetings and welcome to kill rate fourth quarter, 'twenty and 'twenty 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 and on.

And once you 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. Raphael Gross Investor Relations. Thank you you may begin sir.

Good afternoon, and thank you for joining us until raised 2020 full fiscal year and fourth quarter earnings conference call and webcast on with me today are Brendan Kennedy, Chief Executive Officer, and Michael <unk>, 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 that may prove to be incorrect and involve known and unknown risks and.

And Ts actual results could differ materially from those described and these forward looking statements. Please refer to <unk> 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 and any forward looking statements on December 16, 2020, tailoring and after you announced their plans to combine the two companies and create the world's largest global cannabis company by revenue and.

Connection with the proposed transaction <unk> will file a proxy statement on schedule 14 day containing important information about the proposed transaction and related matters and after that we'll file our management information circular.

Additionally, Hillary and actually I wont file and other relevant and materials and connection with repos transaction with the appropriate securities regulatory authorities, because the proxy and information circular contain important information about the proposed transaction the parties since the transaction and security holders of tailoring and after you are urged to care.

Fully read these entire documents, including any amendments or supplements to such documents before making any voting decisions with respect to the proposed transaction.

Delray proxy statement and Africa, and management information circular was emailed to tolerate and Africa shareholders, respectively and will be available on the Edgar and SEDAR profiles on the respective companies.

Finally on today's call Man General also refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustments and stock based compensation, which are non-GAAP financial measures on.

The company believes that these non-GAAP measures provide useful information for investors. The presentation of this information is not intended to be considered and 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.

Hello, everyone and thank you for joining us.

And as we enter today's call on the Investor update is that our outstanding team was able to deliver solid revenue growth for the year and the quarter and positive adjusted EBITDA and the quarter and an environment that was anything but normal.

Our ability to achieve these results is attribute to fill rates and a relentless focus on revenue growth operational and 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 food, while significantly reducing bulk BW sales in Canada.

And these efforts yielded 50% year over year growth and our adult use business and Canada, excluding bulk from 2019 as we work aggressively to introduce a variety of candidates to the adult products, while expanding our presence across the retail landscape.

We also generated over 150% growth and our international medical business as we grew market share and 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 and consisted of right sizing resources significantly significantly, reducing SG&A expenses and closing high Park gardens, and increasing our operating efficiencies.

While the pandemic presented and anticipated challenges it does not hinder our progress.

Through Q4, 'twenty and 'twenty, you were able to achieve approximately $57 million and annualized savings compared to our Q4 2019 run rate, surpassing our original goal of approximately $40 million by 42%.

Notably however, we did not allow our cost cutting efforts to distract us from our revenue growth goals.

Turning now to the detailed Bart performance.

For the full year 2020, we generated a 26% increase and total revenue to $210 $5 million and.

As noted this growth was driven by international medical revenue, which more than doubled to $33 $9 million and growth and 150% and 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 and adjusted EBITDA in Q4.

These types of results required dedication commitment and focus.

Proud to say that told me that deteriorate team demonstrated all of this and more.

Team successfully navigated changing industry dynamics and changes in our organization and the ever present challenges presented by COVID-19.

<unk> outstanding results during 2020.

Now, let's discuss each of our each of our business segments and greater detail.

Our Canadian adult use business continues to grow and the ball, while many mlps have grown revenue by focus.

And on the deep value segment and the market, we continue to take a more balanced approach.

And we manage our product offerings with the goal of maintaining rational pricing and sensible margins.

Full year, 'twenty and 'twenty revenue grew 50% to $83 8 million.

Our Q4, 'twenty and 'twenty revenues grew by grew to $25 $4 million or 27% sequentially from Q3 'twenty 'twenty on.

Solid performance can be attributed to several factors.

First and most and kindred partners as our exclusive sales agent has significantly expanded our distribution profile.

And notably Kindred has roughly 45 people and the marketplace focused on expanding the depth and breadth of our product offering.

Paired to the 18 internal salespeople. We've previously had worked at El Rey.

Second taking advantage of the increased store count at the beginning of 'twenty and 'twenty, we estimated and end of your store count between 812 hundred.

During the year and despite Covid, we were encouraged by the opening of 653 net new stores for a total retail cap 1000, and 319, including 240 stores in Ontario.

We view, new store openings and positive towards growth as well as the growth and evolution and the broader adult use market in Canada.

Third we have thoughtfully and proactively manage our product mix to ensure we effectively compete for our fair share and the consumer wallet.

Throughout the year, we improve their process and evaluating our portfolio to ensure our product offerings are priced appropriately across all categories and segments as.

As previously discussed we also made some competitive price adjustment starting in Q3, primarily to bring some of our higher potency premium products more in line with the competitive set which we believed paid dividends in Q4.

More generally our product mix for the Canadian adult use market has been focused on growing our existing portfolio to that old products, introducing new innovative products that delight consumers and maintaining a stronger presence and a high potency and premium price categories.

We continue to prioritize the premium sector of the market during Q4, approximately 75% of our products and the mid to high potency range, while 60% where and the mainstream and premium offerings.

While we focus and grow our premium high potency and mainstream offerings. We continue to maintain a presence and the value segment was the batch and no frills brands focused on delivering quality cannabis flower and pre rolls and competitive pricing.

And Q3, we launched our best on child, who all companies with two flavor offering THC water them on balanced THC and CBD pineapple mango and.

And Q4, we introduced a third whoever THC sour cherry.

During Q4, we also brought several new form factors to market, including hashed products and new beverage offerings every meant T.

Looking ahead, we will continue to be at the forefront of innovation and the marketplace and have plans to launch new offerings and <unk>.

Topical and chocolates.

And merits emphasis.

This success and our Canadian adult use business also reflects a meaningful operational improvements that are resulting in increased yields and potency and.

2020, our yields increased roughly 42% and and its dawn, Ontario, so relative to 2019 and virtually all of our harvests and Kim that during 'twenty and 'twenty were above 20% THC potency.

We view the ingredient driving success and our Canadian adult use business as the power of partnerships and smart disciplined retail growth and <unk>.

NAMIC and appealing products 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 and known challenges, resulting from the continually evolving and changing COVID-19 related restrictions on retail activity.

And 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 and quality and safety.

Consumers are becoming more informed more discerning and more accepting of cannabis products.

Hillary and the new till right, we won't be part of it is incredibly well positioned to take advantage of these trends.

And international Medical and we're excited about our enviable track record of growth and our position as a leading provider GMP certified medical cannabis and the European Union and other international medical cannabis markets.

And I already mentioned for the full year, our international medical sales revenue increased 153%.

Sequentially in Q4 revenue increased 44%.

We attribute most of our international medical growth to Germany and Australia.

More broadly we remain focused on the opening and other EU markets, which in aggregate represent nearly 450 million people across the EU use 27 member state.

Kill raised well positioned if not better positioned and other global cannabis companies to win this market, we continue to see opportunities for growth and 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, a very early stage and we are.

Our business based on our market knowledge, and our customer relationships and our brand awareness.

All of these elements physician until rates to generate ongoing revenue growth as the market expense similar to what occurred and Canada, some six or seven years ago.

We're further encouraged by the early performance of our relationship with her Molson and early December we announced the signing and the cooperation agreement with the most and for the promotion of medical cannabis extracts and Germany.

For most of and is primarily focused on pain therapy, and urology and as part of the loop and group and International Corporation that adult innovative drugs and generics.

So her motion team and canvas as doctors and prescribers offices to familiarize them with two great products, our GMP quality standards and a reliable supply. We believe this strategic partnership will continue to expand until rates presence and Germany.

At the end of 2020, our phase two expansion and our GMP certified Portugal facility is substantially complete.

Over the next 90 to 120 days, we will finished work on the small outstanding items and start commissioning a new growing area as we've discussed for some time on facility in Portugal, and the cornerstone of our long term commitment to expanding our presence and leadership.

And by our GMP certified medical cannabis throughout Europe.

As you know our EU campus and cultivation site and Portugal consists of a fully GMP certified facility and includes and outdoor cultivation part of state of the art glass house growing area and and manufacturing facility.

This facility serves as our international hub for R&D.

And the primary source of supply for EU medical markets and select other international markets.

And France, we recently announced the tour has been selected by the French National Agency for the safety and medicines and health products. Despite GMP certified medical cannabis products from a prescription and experiment.

Beginning in Q1 will be supply and GMP produce medical cannabis products from Portugal to serve French patients in need for the duration and the French experiment, which is expense expected. The last 18 to 24 months.

We expect patient counts to expand quickly during the initial study and even more rapidly once there is broader approval of the program.

Obviously, we are very pleased and optimistic about the prospects for the French program and a well established European team gets all the credit for making this happen.

This outcome, but another example of how our commitment to and experience in the European market continues to accelerate our business interests.

Our European Mark milestone also include the following important events.

We received the first and only mark a disorder authorization to offer medical cannabis products and Portugal.

We announced the partnership with World Pharma biotech and the first export and medical campus from Portugal to spin World Pharma will produce the first medical cannabis products for clinical trials, and Spain with til rate GMP certified medical cannabis.

And just last week, we announced a new agreement with growth pharma to import and distribute <unk> medical cannabis products and the United Kingdom.

This new agreement gives doctors and patients access to sustainable supply towards full range of pharmaceutical grade medical cannabis flower and oil products.

With these exciting new developments Tory and medical cannabis products will now be available to patients and 17 countries around the world.

We have many reasons to remain bullish about our existing competitive position and ongoing business potential in the EU medical cannabis market.

Our recent market entries, and France, Portugal, Spain, and the U K provide powerful validation for EU market approach and we believe these countries will be modules for other European and international markets.

While the coming quarters may be volatile due to always changing COVID-19 restrictions, we are committed to long term profitable growth and Europe and are well positioned to take advantage and future opportunities.

Following Germany, France, Portugal, and Spain, we believe other EU countries will begin implementing medical cannabis programs as doctors patients and pharmacists embraced medical cannabis and our success across the EU market gives us confidence that we have built a foundation that positions to Ray <unk>.

Benefits from these ongoing opportunities.

And 2020, Manitoba harvest revenue increased 28% to $76 $9 million.

Due to a full 12 months of operations and 'twenty and 'twenty versus 10 months from our acquisition date and 2019 and.

And Q4, however, we did not achieve our goals Q4, 'twenty and 'twenty HAMP revenue decreased 18% and $15 $3 million compared to the year ago period, and 23% from Q3, 'twenty and 'twenty. 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 and 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-19 related impacts to consumer behavior and the effects on retailers that carry our products.

2020 was a year and which sits so great team delivered outstanding results despite challenging conditions.

Solid year behind Us I'd like to briefly discuss and next chapter and until this journey, specifically the transformative transaction with a free and that we anticipate completing during the second calendar quarter of this year.

There are many strategic and financial benefits of the combination that would like to highlight before I turn the call over to Michael.

First scale matters, and 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 and all major candidates product categories.

And we're in the earliest stages and the continued development and expansion of the global cannabis market and it's clear that scale massive market footprint.

I'd product range and brand expertise will be characteristics of companies that win.

Additionally, free has generated positive adjusted EBITDA over the last seven quarters and we just finished our first quarter and positive adjusted EBITDA as a combined business and new til rate will be positioned to deliver market leading profitability.

Given the EBITDA profile and the two companies.

And the 100 million Canadian dollars pretax synergies to be realized.

The combined business will have a robust platform and 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 and global growth opportunities and stockholder value.

Second product leadership they can be.

<unk> company will have a portfolio of carefully curated and complementary brands and every major cannabis category, including flower pre rolls oils and capsules day.

Animals, and beverages and across all consumer segments economy value core mainstream and premium we.

We will also have 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 and and the EU GMP supply and distribution channel.

This includes our European EU, GMP cannabis cultivation and production facility in Portugal, and a free as German medical cannabis distribution footprint that reaches more than 13000 pharmacies.

Fourth we will be able to enhance our presence and infrastructure and the United States by leveraging the Sweetwater and Manitoba harvest businesses.

Presence and these two leading brands positioning the combined company to establish a commanding presence and THC products and THC as federally legalized.

The combined company and we'll be able to leverage Sweetwater and craft beer manufacturing and distribution network to build brand awareness via craft beers hard seltzer and other beverages as well as Manitoba harvest brand presence and distribution and hemp and wellness products to capture market opportunities and the CBD and THC spaces.

As market regulations permit.

Given these positive dynamics, we are thrilled to bring together two leading cannabis companies and the leverage the enhanced scale.

Geographic footprint.

Alex offerings.

Developed distribution brand expertise and low cost production and the combined entity to deliver sustainable attractive returns for shareholders the entirety entire till right team.

Look forward to working with a free tier to leverage our combined strength and capabilities.

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 and the cannabis industry and when both financial investors and strategic partners, our value and who is likely to be a global winner and exploit positive political changes that may occur and the U S. I believe they will look at the tail risk free to combined business.

And all its positive attributes are clear favorites.

With that I will turn the call over to our CFO, Michael <unk> to review our financials.

Thank you Brendan and thank you to everyone joining us on the call. This afternoon as a reminder, all the financial information provided today is prepared in accordance with U S GAAP and as and U S dollars unless otherwise indicated.

Before we get started I'd like to take care of one housekeeping item.

<unk>, we have broken out stock based compensation and acquisition related expenses on our income statement.

And the case of stock based compensation expense. This is now distribute them on cost of sales general and administrative.

Sales and marketing and R&D expenses.

As a noncash item, you'll still find the total amount on the cash flow statement and the.

The case of acquisition related expenses. These are now included in general and administrative expenses now.

Now to our financial performance.

And 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 at all.

Came around the globe has done an incredible job executing on our ambitious initiatives I'll also prudently managing the business to pandemic related challenges.

And doing so the entire organization came together to meaningfully grow our topline and substantially reduce our costs and noticeably improve our gross margins.

And as also prepared us for the next stage of tourists evolution as we look to combine the <unk> business with Africa 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 and our international medical adult use and Canadian medical channels, which was partially offset by declines in on bulk and hemp product channels.

Excluding bulk cannabis sales.

Net revenue mix in Q4, 'twenty, and 'twenty was 73% cannabis and 27% temp compared to 57% candidates and 43% and Q4 of last year, and 60% cannabis and 40 per cent him and Q3 'twenty and 'twenty.

Excluding bulk sales candidates segment revenue increased 69% to $41 2 million compared to $24 $3 million and the same period last year.

The increase was driven by a 191% increase and international medical sales to $11 7 million or 49% increase and adult use sales to $25 $4 million, and 27, and 20% increase and Canadian medical sales to $4 million.

Bulk sales were essentially reduced to zero as we planned to sell through this channel on an opportunistic basis, primarily to help manage inventory levels and certain products and.

As previously indicated we will continue to focus our efforts on higher margin opportunities.

The growth and adult use is attributable to several factors, including improved presence and retail outlets, partly due to the relationship we established with kindred starting in Q3 2020 and.

The launch of our cannabis two pointed out products starting in December 2019, and.

And more active management of our pricing strategies across brands and product lines and locations.

And Q4, two point out products accounted for approximately 20% and now that your sales and has contributed to our growth and the adult use channel and part due to the introduction of new form factors, including the launch of our hash product and Q4 and exciting new flavors and the case of our gummy lineup.

The growth and Canadian medical is mostly attributable to growth of renewal prescriptions. The lunch as Dave says and medical form factor early in the year and some increased pricing due to mix shifts and the back half of the year.

And as Brendan mentioned earlier, our growth and international medical was generally attributable to solid performance and our German business, but was also complemented by strong results and our Australia and market.

Our Canada segment mix continues to evolve and and Q4 of 2020 was made up of 62% adult use versus 60% and Q4, 2019, and 63% and Q3 2020.

28% international medical compared to 14% and the year ago period, and 26% and Q3 'twenty and 'twenty.

10%, Canada medical versus 12% and the year ago period, and 11% and Q3 2020.

And essentially no bulk sales during 2020, while they represented 14% and 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 and the prior quarter.

The decrease was mostly due to a major customer working down their inventory of Manitoba harvest branded products as they move to a private label strategy compounded in part by shifting consumer behavior due to COVID-19, and the lack of clear strategic direction that 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 and the CBD category.

On a sequential basis, excluding bulk sales revenue increased 10% and Q4 and 2020 to $56 6 million from 51 4 million and Q3.

Below the surface is a good news story and all cannabis segments.

National Medical grew 44% to $11 $7 million, Canada adult use improved 27% to $25 4 million and Canada medical increased 24% to $4 $2 million.

These robust increases in sales were partially offset by a 23% decline and net product sales.

Total kilogram equivalents sold decreased 54% to 6000, and 830 and Q4 2020 from 15039 and the prior year's Q4.

The decrease was primarily due to the conscious lack of bulk sales and 2020.

Our average net selling price per Gram of cannabis and Q4 2020 was $5 97.

And 118% increase or $4 <unk>.

And the $1 88.

During the same period and 2019 and it's like two 9% decrease from our reported selling price of $6 15, and Q3 of this year.

The increase was versus 2019 was due to a continued shift and distribution channels and product mix, including growth and international medical sales.

Shifting sales to higher potency and higher price products and the adult use market and the continued growth of cannabis two <unk> products and Canada.

The decrease from Q3 was due to the accelerated sales growth the cannabis flower and products and 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 to point out products and 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 and the reasonably near term and we are positioned well to capitalize on these opportunities.

Our average candidates cost per Gram increased to $3 72, compared to $1 53, and the fourth quarter of 2019 and decreased from $4.23 and 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 two <unk> products, which have higher costs and dried flower.

The decrease in Q4 is attributable to additional realization of cost cutting measures and better absorption rates and Portugal.

Recall that we stopped attributing any cost to byproduct and our high 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 flower and derivative products. They do have value.

As we've previously discussed a portion of our cost cutting efforts directly impacted production costs and our Canadian facilities and.

In addition to closing high Park gardens, we've reduced head counts improve processes and enhanced our cultivation methods, which has resulted in reduced overall production costs, but also improved yields by approximately 40% and our growing facilities.

With the continued expansion of two point on offerings and Canada adult use we expect to see ongoing improved throughput and cost absorption and our high Park farms and high Park holdings processing facilities.

And Portugal, we also expect to see ongoing improvements and our production costs as our international medical sales growth and our cultivation assets come fully on line during 2021.

Gross margin for Q4, 'twenty, and 'twenty, including inventory valuation adjustments increased to 29% from negative 121% and 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 1400 basis point increase from 23, 1% and the year ago period, and roughly 400 basis point increase from 33, 4% and Q3 2020.

Gross margin for cannabis, excluding inventory valuation adjustments and stock based compensation increased to 36, 9% and Q4 2020 from 15, 5% and a year ago period and from 27, 4% and Q3 2020.

The sequential increase and gross margin was partly due to increased international medical sales and lower cost and 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 valuation and adjustments remained flat at 35% and Q4, and 2020 compared to 35% and the year ago quarter, and 43% and Q3 2020.

As previously indicated these reductions are largely due to a major customer shift to private label products.

Going forward, we expect margins to fluctuate between the mid <unk> to mid Forty's and as we work to offset the negative margin impacts with new distribution of higher margin products.

Moving to expenses excluding.

And impairment charges acquisition related expenses net loss from equity method investments and stock based compensation Q4, total operating expenses were $23 8 million or 31 $4 million decrease compared to the prior year quarter and slightly below the $24 8 million and Q3 2020.

These favorable expense comparisons reflect the significant progress we made over the past few quarters and aligning our cost structure with the current business environment and strengthening our position as a leaner and more efficient leader and 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.

These head count 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.

And as Brendan noted a cost savings measure began before the pandemic and we're not and direct response to its subsequent impacts.

Net loss for Q4 2020.

Negative $2 9 million or negative <unk> <unk> per share compared to net loss of $219 2 million or negative $2 14 per share and Q4, 2019, and a net loss of $2 3 million or negative <unk> <unk> per share and 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 and Q4 of last year.

This was a significant achievement and as you know was a goal we established late last year the.

The improvement and the year over year adjusted EBITDA is due to our significant efforts to reduce costs improve our operating efficiencies improved revenue mix and our ability to accelerate sales and key segments.

On a sequential basis, our adjusted EBITDA was $3 $7 million improvement from the negative $1 5 million loss and Q3 2020.

The Delta is attributable to improved gross margins and reduce costs.

Regarding some balance sheet activities and November we exchanged approximately $197 2 million and 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 and aggregate principle amount and notes remain outstanding.

The purpose of the transaction was to opportunistically reduce our debt and eliminate approximately $9 2 million and 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, nine 1 million shares for proceeds of $75 $4 million as of February 2016, 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 Apria and expect the transaction to close during Q2 of this year.

And we view this transaction as a win win it brings together two leaders and the cannabis industry that share a culture of innovation brand development and quality cultivation.

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 our leading portfolio of branded products designed to help patients and delight consumers.

The balance sheet strength and flexibility taxes capital on favorable terms.

And I'll focus on delivering the identified approximately Canadian and 100 million pretax 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.

Thank you Michael before we turn over the call for.

And for questions I wanted to take this opportunity to thank you for supporting tourists success since our company kimberlite and 2013.

A list of firsts from that point on our.

Our numerous.

First GMP certified medical cannabis producer and North America, one and.

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 Africa, Australia, Europe, and South America.

And the first producer.

And to receive cultivation licenses and the national governments, 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 with our medical product applications that we were able to help patients and real time, we built a global production and distribution footprint, including our stand the art low cost GMP certified production stone and Portugal.

And we entered into industry disruptive partnerships and alliances with iconic global brands, giving us critical competitive strength.

And our success and we were the first cannabis company to complete and initial public offering on a use stock exchange, which further supported and accelerated our growth.

Throughout that time, the industry has evolved and advanced and the new tool will be ideally positioned to continue to drive forward, the global cannabis market and create value for all our stakeholders.

I feel immensely proud to work with and serve all of you.

And look forward to continuing to do so after the closing of the transaction as a director of the new tool right.

Thank you.

We will now turn the call over to questions.

Operator.

At this time, we'll be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation from them on indicate your line is and the question queue.

They start to if you would like to share a little your question from the queue for participants using speaker equipment, and maybe not to say free to pick up your handset before pressing the starkey and.

And I'm just of time, please limit yourself to one question one moment, while we poll for questions.

Our first question comes from the line of Chan with BMO Capital markets. You May proceed with your question.

Hi, Thanks, Good afternoon, and I, just wanted to and focus a bit on the recreational day. So.

Just wanted to understand it looks like by my math and correct me, if I'm wrong, but it seems like the rack to your point on sales.

As a percentage on kind of declined a bit sequentially I thought seemed like more of the strength of and it wasn't the flower side. So just was hoping for a bit more color there and additional services.

On the distribution that you mentioned was there are some form of a significant load in of new flower products and the quarter and how should we think about the trajectory as we look into January and February with the impact of the Ontario locked out and thank you.

Sure.

Thanks Tommy.

And so on the growth in terms of the.

Products that are the distribution of products within the category.

We saw good growth and the quarter over quarter Q3 of on all of our products, but it was led by a flower.

So we saw solid growth and Vapes edibles and oils are across the board. So I would say that we didn't necessarily see decline.

Adjusted the flower grew faster.

So that was the first part of your question in terms of the the added distribution.

We have seen is that.

And this is I guess, it's a little bit hard because it's somewhat self reported.

But on a self reported basis, what we're seeing is that we.

He has increased.

Our.

Our reach and the marketplace listings by about 101 hundred 100, plus hundred and 20 listings or so and in terms of points of distribution were probably talking about something in excess of 4250.

So I think that that's a combination of a bunch of things its new products and new markets its existing products and.

And our new products and existing markets. So it's a combination and we think that a good portion of that is <unk>.

Both our own team working internally and maintaining the relationships, we've got with the provincial boards.

And as well as the relationship that we've got with kindred, where they've got more breadth and depth.

In terms of the reach and they've got compared to the number of people that we had out in the marketplace.

And then I think for us relative to where things are in the first quarter here.

And is that.

It's kind of real time, and and I don't know that we've got true visibility quite yet what we're saying is that.

Provincial boards are getting more.

I guess sophisticated and their approach to carrying our products and what they have on the shelf and.

And we're actively working with them to try and figure out for products that they want to consider discontinuing as how we replace it with something else that might be more attractive to consumers. So I don't know that we've got a specific visibility quite yet in terms of wendover on beans to the 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.

Yeah.

Yeah.

Our next question comes from the line of Aaron Grey with Alliance Global Partners. You May proceed with your question.

Yeah.

Hi, good evening and thanks for the question.

So for me and I wanted to ask a quick question on Manitoba harvest. So just.

Just trying to get some more color in terms of kind of the reason for some of the management changes. So I realize that low down pretty good amount sequentially, you talked about a shift to private label for a large customer which seem to avoid and not only on sales, but also on margin. So just want to kind of talk about maybe the overall trend that you think youre seeing there on the hemp side do you think that's a trend to other customers.

And 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 youre, hoping the new management team will bring to hopefully turn around on that.

And for you guys. Thanks.

And looking looking at Manitoba harvest historically.

The company.

And its products have been extremely successful.

Historically and.

In Costco.

And we've seen a lot of success in.

Amazon and.

Whole foods as well.

Those are those are clearly our three largest customers.

Looking looking at the the move to private label our.

And at Costco.

Hum.

The company has always had a small.

Private label business, where.

For a few other customers, we produce our private label products.

But the shift at Costco.

And is something that.

Certainly we've been aware of over the last two years and and really the the long term objective at Manitoba harvest is to to make the other points of distribution and the United States.

And as successful as a Costco has been historically.

For the company and for the the products and so that's the real that's a real opportunity.

No.

Rephrase that and <unk>.

Customers at Costco.

And it has historically have purchased a lot of Manitoba harvest and.

Food products and.

And the day objective and the opportunity that's out there is to get.

Consumers customers at other use.

U S retailers, whether it's Walmart target Kroger.

Kroger to get those customers to purchase Manitoba harvest products, just like they purchase them at Costco.

Michael anything to add there.

And I would just say that you know our goal is with that additional distribution is to recapture the bargain.

Don't believe that we think are a significant portion of our customers will be looking to switch to the private label based upon the visibility. We've got right now so we would certainly hope that that's a branded product play and the other piece of it is is that I do believe that we are going to focus on building out the CBD a portion of our business and a more aggressive.

And fashion and we have we've got a brand that we acquired.

Acquired with the business that we own previously by the name of pollen and.

And we plan to leverage the pollen brand and the CBD space as our go forward product for us.

Alright, great. Thank you.

Our next question comes from the line of repurchase Perry with Oppenheimer. You May proceed with your question.

Good afternoon, and thanks for taking my question. So I guess, just just going towards the current quarter and Q1 are you guys, providing any forward commentary insurance and how you think gross sales or EBITDA for the current quarter.

Yeah.

I think if this were if this were not I mean, well, let me start out. So I think we're really pleased with the results we delivered for 2020 and its entirety and specifically in Q4.

On the commercial side of the business the cost side of the business and obviously down through the EBITDA line. There, obviously a lot of moving parts due to COVID-19.

And absent a COVID-19 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 a real solid.

Solid guidance at this point to say that here, so and we feel things are going to turn out over the coming quarter on our quarters.

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 I don't know that were and are positioned to be giving specific guidance.

Okay, Great I'll pass it all and thank you.

Our next question comes from the line of.

And <unk> with Cowen and company you May proceed with your question.

Hi, This is Steve schneiderman pinch hitting for Vivien Tonight.

On the adult use side of the business, which you indicated was primarily driven by flower.

And as well as the other product lines, but within flower and what price point did you see the most market traction and given the reset that you guys did.

And the third quarter. Thank you.

Yeah, well I mean, I'd say, Steve and let me just pull up some information here.

So we we continue to see our sales predominantly in the mid and high potency as we indicated.

And our sales continue to be and.

And the 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.

And so we did see and that was primarily driven by some products on the day bond 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 cash product in Q4, which was very well received and and Quebec.

In fact, I think it's considered the number one <unk> product and the marketplace right now so I'd.

And I'd say that that would 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 last quarter.

Yeah.

Alright, great. Thank you guys.

Our next question comes from the line of <unk>.

Pablo <unk> with Cantor Fitzgerald, you May proceed with your question.

Thank you Brendan if I can ask two questions here. The first one and maybe it comes across as a stupid question, but given the great quarter and you had the very good news on the export markets and the last month.

The big gap and evaluation with enough free until rates is there a room to negotiate exchange ratio it would seem that that would.

Both the fiduciary duty here or.

And what does that just doesn't make sense at all and then the second question related to you and export them out and give somebody a week. Congratulations on all the products you are making can.

Can you talk about stickiness in those markets.

We have Portugal shipments on Canada, but there are a lot of 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 and the sales person on the service Youre, providing and thank you.

Great. Thanks, Thanks, Pablo and.

And I can't speak to short term individual shareholder sentiment.

And I can always speak to my perspective.

And you know when I look across every every metric financial operational and product geographic reach the due to the combined until Ray I think offers shareholders. The greatest return.

And in this I've been in this industry for 11 years, and and when I look out over the next decade, I can identify and other industry that's going to see.

On a continual growth on a on a year over year basis. So we're working to close the transaction on the terms proposed and.

And announced on December 16th and and that's our that's our focus and I can't really speculate speculate beyond that.

In terms of your second question.

Finding that it's extremely sticky we're seeing.

Despite a despite new.

New entrants into the market, we're seeing you know our market share grow and in Germany, and we've seen it grow.

On a quarter over quarter basis.

And really throughout the last.

Throughout the last two years.

Hum.

And and it grows because the purchase process and it is different right and the patient goes to a doctor the doctor prescribes the products that the patients that goes into the into the pharmacy and the pharmacist distribute the products and so we're seeing them I would say, we're seeing more stickiness and and more brand loyalty and.

And international.

Pharmaceutical markets, then that would be certainly on the adult use side and and.

And Canada.

And we see that stickiness and not only in Germany, but we see it in Australia, and and New Zealand.

And I think that's I think that's part of.

And that's part of the rationale behind some.

Some of the announcements that we've made over the last.

Six to eight weeks in terms of.

Her most of them and Germany and.

Product registration market authorization and in Portugal, and the exports and Spain the agreement and.

In the U K.

And the announcements regarding France, it's important too.

Establish a relationship with the regulators in each country its important to established.

And educate physicians and each each country as well as.

Pharmacists and patients and so.

And I guess the short answer would have been yes, we are seeing thickness.

But we expect to continue to take market share and.

And in countries, such as such as Germany.

Great. Thank you.

Our next question comes from the line of Michael Library with Piper Sandler You May proceed with your question.

Oh, Thank you good evening.

No.

I just wanted to come back to the U S O U.

Certainly I believe you're well positioned for that and and you know I think referred to yourselves as a as a clear favorite for for for succeeding and I think you touched on some of the reasons why but I'd love to understand maybe a little bit on your thinking on timing.

And part maybe what you expect from regulatory reform and then a little bit related to just in terms of the timing piece of it.

As far as some of the advantages you point to are things like the free of brands and.

Do you have any ability to be working with them at all now to do any planning how how actively are you.

Trying to prepare for a U S entry.

So and so on the medical side we're.

We're very active we have.

We're one of the food companies that.

And that has performed.

Multiple imports and the U S with the DEA and FDA approval.

What day multiple.

I think it's around half a dozen and so far.

And for clinical trials, and when and when I look at are the agreements we have around the world.

We have.

I think we've announced 18 countries and I think we shipped to 17 countries around the world.

And when.

When I look at the U S. I think that's I.

I think that there's going to be and opportunity to important medical cannabis just like free.

Just like we import a medical campus. The 17 other countries around the world I think there's going to be and opportunity to import a pharmaceutical grade GMP certified medical cannabis products and for distribution and in.

And the U S through and through a more pharmaceutical supply chain, so really outside of the the M.

And that's so model and so I think that's.

I think that's a huge opportunity and I think it's something that.

Relatively few.

International companies are prepared to do.

And there's almost no GMP product available inside the U S and so that's and that's a huge opportunity its something we are aggressively.

Aggressively pursuing and when it comes to the adult use market and in the U S.

Continue to pay.

Pay very close attention to regulatory changes and new.

States legalizing for adult use.

This year is going to be unique and that you will see more states legalize through.

The legislated.

Branch rather than.

Through ballot measures and balance.

Initiatives.

I think that I think in November.

And its.

It's a possibility that youll see a state like Ohio legalized.

And through through about measure and then tears out a.

A year from this November.

And I think I'll say, another four or five really Republican states legalize.

And don't use cannabis and medical cannabis, but the key thing, we're paying close attention to them and the U S is really the distribution model.

We're seeing we're seeing about will take place right now.

And the existing Msos and the.

Tobacco companies you know there's been lots of press.

Press recently about some of the lobbying that ultra has been doing and the U S. And then thirdly day.

The use alcohol companies and so the big question. We have is which model is it is it going to be and.

And I'm.

I have a pretty strong opinion that the existing NSO and adult.

Use model is not going to be the model and future I think it was more of like tobacco I think what's more like alcohol.

And I also think that that adult use cannabis products.

And we'll cross state lines, you'll see Interstate commerce, and I think that's going to be.

Extremely disruptive too entrenched.

Layers extremely costly to entrench players.

And so that's that's what we look at.

And that's what yeah, that's what I imagine the combined company.

And we'll look at when it comes time to.

To deploy capital and the U S.

And can you touch on the timing piece of when you think that might come.

Hi.

And I mean, you're asking a great question I still think.

I still think some of that.

That.

And the next 12 to 18 months.

On the timeline and.

I think it's.

I think it's incremental and 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, we medical cannabis should be legal and 68% believe adult use should be.

And and so it's one of the few.

Issues that have bi partisan support certainly amongst the voters, but also and Congress and so it could be.

It could be two months from now, but I I I'm sort of still looking at that 12 months, a 12 month time on 12 to 18 months from now.

Okay, great. Thank you very much.

Okay.

Hum.

Uh huh.

Yeah.

Ladies and gentlemen, we have reached the end of today's Q&A session I would like to turn the call back over to Mr. Brendan Kennedy for closing remarks.

Great. Thank you operator.

To conclude and we're proud of our Q4 results and and are ready to take our business to the next phase, but by bringing together two candidates and this industry leaders and 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.

And with a strong financial profile and low cost production, leading brands and distribution network and our.

And unique partnerships.

We believe the combined company will be well positioned to deliver this.

Stable attractive returns for shareholders I'd like to thank <unk> 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 and until right and your participation on our quarterly call have a pleasant evening. Thank you.

Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.

Yeah.