Categories Earnings Call Transcripts, Health Care

Tilray Inc (TLRY) Q4 2020 Earnings Call Transcript

TLRY Earnings Call - Final Transcript

Tilray Inc  (NASDAQ: TLRY) Q4 2020 earnings call dated Feb. 17, 2021.

Corporate Participants:

Raphael GrossInvestor Relations

Brendan KennedyChief Executive Officer

Michael KruteckChief Financial Officer


Tamy ChenBMO Capital Markets — Analyst

Aaron GreyAlliance Global Partners — Analyst

Rupesh ParikhOppenheimer — Analyst

Steven SchniedermanCowen and Company — Analyst

Pablo ZuanicCantor Fitzgerald — Analyst

Michael LaveryPiper Jaffray — Analyst



Greetings, and welcome to Tilray’s Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn this conference over to your host, Mr. Raphael Gross, Investor Relations. Thank you. You may begin, sir.

Raphael GrossInvestor Relations

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 Kruteck, 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 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 Aphria 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 Aphria will file a management information circular.

Additionally, Tilray and Aphria will file other relevant materials in connection with 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 Aphria are urged to carefully read these entire documents, including any amendments or supplements of such documents before making any voting decisions with respect to the proposed transaction. The Tilray proxy statement and Aphria management information circular will be mailed to Tilray and Aphria shareholders respectively, and will be available on the EDGAR and SEDAR 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, although company believes that these non-GAAP measures provide useful information for investors, the presentation of this information is not intended to be considered an 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.

Brendan KennedyChief Executive Officer

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, an environment with anything but normal. Our ability to achieve these results is attributed to Tilray’s relentless focus on revenue growth, operational expense, 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 rightsizing 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 by 42%. Notably, however, we did not allow our cost cutting efforts to distract us from our revenue growth goals.

Turning now to the detail of our 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 150% 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 required dedication, commitment and focus. I’m proud to say that 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 in sensible margins. Full year 2020 revenue grew 50% to $83.8 million, while our Q4 2020 revenues grew by — grew to $25.4 million or 27% sequentially from Q3 2020. Our solid performance can be attributed to several factors.

First, our 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 sales people, we previously had working at Tilray.

Second, taking advantage of the increased store count. At the beginning of 2020, we estimated an end of year store count between 800 and 1200. During the year, and despite COVID, we were encouraged by the opening of 653 net new stores for a total retail count of 1,318 including 240 stores in Ontario. We do new store openings, as a positive for Tilray’s growth as well as the growth and evolution of 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 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 believed paid dividends in Q4. More generally, our products mix for the Canadian Adult-Use market has been focused on growing our existing portfolio of 2.0 products, introducing new innovative products that the light consumers and maintaining a stronger presence in the high potency and premium priced 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 no-frills brand focused on delivering quality Cannabis flower and pre-rolls at competitive prices.

In Q3, we launched our best on Chowie Wowie Gummies with two flavor offering, THC Watermelon and balanced THC/CBD Pineapple Mango. In Q4, we introduced the third flavor THC Sour Cherry. During Q4, we also brought several new form factors to market, including the 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 offline of vapes, topicals and chocolates.

Emphasis that the success in our Canadian Adult-Use business also reflects a meaningful operational improvements, that are resulting in increased yields and potency. In 2020, our yields increased roughly 42% at our Enniskillen, Ontario facility relative to 2019 and virtually all of our harvesting cannabis during 2020 were above 20% THC potency. We view the ingredients driving success in our Canadian Adult-Use business as the power of partnerships, smart, disciplined retail growth and dynamic 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 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 at this market. The conversion from the illicit market to the legal market is supported by the expansion of more value-added and the 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, was 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, 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 Q4, revenue increased 44%. We attribute most of our international medical growth to Germany and Australia. More broadly, we remain focused on the opening in 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 years to seven years ago.

We are further encouraged by the early performance of our relationship with Hormosan. In early December, we announced the signing of the cooperation agreement with Hormosan for the promotion of medical cannabis extracts in Germany. Hormosan is primarily focused on pain therapy and neurology and is part of the Lupin Group, an international corporation that sells innovative drugs in generics. The Hormosan team and Kansas [Phonetic] doctors and prescribers offices to familiarize them with Tilray products, our GMP quality standards and our reliable supply. We believe this strategic partnership will continue to expand Tilray’s presence in Germany.

At the end of 2020, our Phase II 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 the cornerstone of our long-term commitment to expanding our presence and leadership as a supplier of GMP-certified medical cannabis throughout Europe.

As you know, our EU campus and cultivation site in Portugal consists of a fully GMP certified facility, includes an outdoor cultivation product, 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 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 the last 18 to 24 months. We expect patient counts to expand quickly during 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 our well-established European team gets all the credit for making this happen. This outcome was another example of how our commitment to and experience in the European market continues to accelerate our business interests.

Our European milestone also include the following important events. We received the first and only market authorization to offer medical cannabis products in Portugal. We have the partnership with Worldpharma Biotech in the first exported medical campus from Portugal to Spain. Worldpharma 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 towards full range of pharmaceutical-grade Medical Cannabis flower and oil products.

It is an exciting new development of 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, ongoing business potential in the EU medical cannabis market. Our recent market entries of France, Portugal, Spain, and 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 maybe vulnerable 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 20% 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 and 23% in 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 in 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 the year in which to Tilray team delivered outstanding results despite challenging conditions. With a solid year behind it, I’d like to briefly discuss the next chapter in Tilray’s journey, specifically the transformative transaction with the period that we anticipate completing during the second calendar quarter of this year. There are many strategic and financial benefits of the combination 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 the major geographies and a complete portfolio of market-leading brand in all major cannabis product categories. We are in the early 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, Aphria has generated positive adjusted EBITDA over the last seven quarters and we just finished our first quarter in 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 CAD100 million of pretax 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 to accelerate the company’s global growth opportunities and stockholder value.

Second, product leadership. The combined company will have a portfolio carefully curated in complementary brands in every major cannabis category, including flower, pre-rolls, oils, capsules, vapes, edibles, and beverages and across all consumer segments, economy, value, core, mainstream, and premium. 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 to be able to pursue international growth opportunities with an end-to-end the EU GMP supply and distribution chain. This includes our European EU GMP cannabis cultivation and production facility in Portugal and for [Phonetic] German medical cannabis distribution footprint that reaches more than 13,000 pharmacies.

Fourth, We will be able to enhance our presence in infrastructure in the United States by leveraging the Sweetwater and Manitoba Harvest businesses. The presence in need to leading brands position the combined company to establish a commanding presence in THC products and 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 and the CBD and THC spaces as market regulations permit. Given these positive dynamics, we are thrilled to bring together two in in-cannabis companies and are 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 team — the entire Tilray team looks forward to working with Aphria to leverage our combined strength and capabilities to meet the need of the patients and consumers around the world, while also delivering best-in-class financial results.

Finally, plan, vision, the future landscape for 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 US, I believe they will look at the Tilray, Aphria combined business, and all its positive attributes as a clear favorite.

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

Michael KruteckChief Financial Officer

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 US GAAP and is in US 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 alone. 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 Aphria 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, cannabis segment revenue increased 69% to $41.2 million compared to $24.3 million in the same period last year. The increase was driven by a 191% increase in International Medical sales to $11.7 million, a 49% increase in Adult-Use sales to $25.4 million and a 27 — 20% increase in Canadian Medical sales to $4 million.

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 Kindreds 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% Adult-Use sales and this 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 in exciting new flavors in the case of our gummy line-up. The growth in Canadian Medical is mostly attributable to growth of renewal prescriptions, to market vapes as a medical form factor early in the year, and some increased pricing due to mix 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 in 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 major customer working down their inventory of Manitoba Harvest branded product 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 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 cannabis segments. International 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 in hemp product sales. Total kilogram equivalents 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 in our reported selling price of 615 in Q3 of this year. The increase was — 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-priced products in the Adult-Use market, and the continued growth of Cannabis 2.0 products in Canada. The decrease from Q3 was due to accelerated sales were the 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 the 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 cost 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 contributing any cost to byproduct at 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 that do have value.

As we’ve previously discussed, a portion of our cost-cutting average directly impacted production costs at our Canadian facilities. In addition to closing High Park Gardens, we have reduced headcounts, improved processes, and enhanced our cultivation methods, which has resulted in reduced overall production costs, but also improved yields by approximately 40% in our going 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.

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 1400 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, remained 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 private label products. Going forward, we expect hemp margins to fluctuate between the mid-’30s to mid-’40s as we worked to offset the negative margin impacts with new distribution of higher margin 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 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 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 were not in direct response to its subsequent impacts. Net loss for Q4 2020 was negative $2.9 million or negative $0.02 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 $0.02 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 improved gross margins and reduced 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 the 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 Aphria 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 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 our leading portfolio of branded products designed to help patients and delight consumers. We will have the balance sheet strength and flexibility tax as capital on favorable terms. We will focus on delivering the identified approximately CAD100 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.

Brendan KennedyChief Executive Officer

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 thirst [Phonetic] from that point on are numerous. We are the first GMP-certified medical cannabis producer in North America. We are the first producers revised 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 with their medical product applications but that we were able to help patients in real-time. We built a global production and distribution footprint, including our Stanley Yard [Phonetic], low-cost GMP certified production facility in Portugal, and we entered into industry disruptive partnerships and alliances with iconic global brands, giving us critical competitive strength. Based on our success, we were the first cannabis company to complete an initial public offering on the U.S. Stock Exchange, which further supported and accelerated our growth. Throughout that time, the industry has the bulk 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. I feel immensely proud to work with in terms of all of you and I look forward to continuing to do so after the closing of the transaction as a Director of the new Tilray. Thank you.

We will now turn the call over to questions. Operator?

Questions and Answers:


[Operator Instructions] Our first question comes from the line of Tamy Chen with BMO Capital Markets. You may proceed with your question.

Tamy ChenBMO Capital Markets — Analyst

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 actual point of sales as a percentage kind of declined a bit sequentially. So seem like more of the strength of is in — was in the flower side. 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 loaded of new flower products in the quarter and how should we think about the trajectory as we look into January, February with the impact of the Ontario lockdowns? Thank you.

Brendan KennedyChief Executive Officer

Sure. Thanks, Tamy. So on the growth in terms of the product set or the distribution of the 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 flower. So we saw a solid growth in vapes, edibles, and oils across the board. So I would say that we didn’t necessarily see decline just as the flower grew faster. So that was the first part of your question.

In terms of the added distribution, what we’ve 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 probably have increased our reach in the marketplace, listings by about a 100 plus, 120 listing to show. And in terms of points of distribution, we’re probably talking about something in excess of 1,250. So I think 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 we think a good portion of that is both our own team working internally and maintaining the relationships we’ve got with the Provincial Boards, as well as the relationship that we’ve got, we generate, but they’ve got more breadth and depth in terms of the reach they’ve got, compared to the number of people that we head out in the marketplace. And then I think for us relative to where things are in the first quarter here. Is that– 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 the Provincial Boards are getting more I guess sophisticated in their approach to carrying our 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 consider 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 drove all 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.


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

Aaron GreyAlliance Global Partners — Analyst

Hi, good evening, and thanks for the question. So for me I want to start with quick question on Manitoba Harvest. So, just can you give 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 talked about a shift to private label for a large customer, which seem to way not only on sales, but also on margins. So, I just want to kind of talk about maybe the overall trend that you think you are seeing there on hemp side, do you think that’s a trend to other customers 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 the new management team will bring to hopefully turnaround that segment for you guys? Thanks.

Brendan KennedyChief Executive Officer

Now looking at Manitoba Harvest historically, the company and its products have been extremely successful historically in Costco and we’ve seen a lot of success in Amazon and Whole Foods as well. Those are clearly our three largest customers. Looking at the move to private label at Costco, the company has always had a small, private label business, where 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 big, the long-term objective at Manitoba Harvest is to make the other points of distribution in the United States as successful as Costco has been historically for the company and for the products and so that’s the real opportunity. So to rephrase that, customers at Costco historically have purchased a lot of Manitoba Harvest hemp food products and the objective and the opportunity that’s out there is to get consumers, customers, other U.S. retailers, whether it’s Wal-Mart or Target, Kroger to get those customers to purchase Manitoba Harvest products just likely they purchased at Costco. Michael anything to add there?

Michael KruteckChief Financial Officer

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 evidence 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 the 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.

Aaron GreyAlliance Global Partners — Analyst

All right, great. Thank you.


Our next question comes from the line of Rupesh Parikh with Oppenheimer. You may proceed with your question.

Rupesh ParikhOppenheimer — Analyst

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 your sales or EBITDA for the current quarter?

Michael KruteckChief Financial Officer

Rupesh, I think if this were, if this were not — I mean, but let me start out. So I think we’re really pleased with the results 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 EBITDA line. There are obviously a lot of moving parts due to COVID and absent of 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 in 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 over the coming quarter or quarters. We’re relatively bullish on where the business fits right now and we feel good about the progress that we have 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 we’re in a position to be given specific guidance.

Rupesh ParikhOppenheimer — Analyst

Okay, great. I’ll pass it on and thank you.


Our next question comes from the line of Vivien Azer with Cowen & Company. You may proceed with your question.

Steven SchniedermanCowen and Company — Analyst

Hi, this is Steve Schneiderman continuing for Vivien tonight. On the Adult-Use side of the business, which you indicated was primarily driven by flower as well as the other product lines, but within flower, what price point did you see the most market traction, given the reset that you guys did in the third quarter? Thank you.

Michael KruteckChief Financial Officer

Yeah, well, I mean, I’d say, Steven let me just put some information here. 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 segment. 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 demand 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 No.1 hash product in the marketplace right now. So I’d say that, that were — those are 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.

Steven SchniedermanCowen and Company — Analyst

All right, great, thank you guys.


Our next question comes from the line Pablo Zuanic with Cantor Fitzgerald. You may proceed with your question.

Pablo ZuanicCantor Fitzgerald — Analyst

Thank you. Brendan, I am going to ask two questions here. The first one, maybe it comes across as a stupid question, but given the great quarter you had and the very good news you have on the export market in the last month, the big gap in the valuation within Aphria and Tilray, is there room to renegotiate the exchange ratio? It would seem that there would be part of fiduciary duty here, what is 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 our repeat business and why did they go back to a brand or the sales person, or the service you’re providing. Thank you.

Brendan KennedyChief Executive Officer

Right.Thanks, thanks, Pablo. 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 the greatest return. I’ve been in this industry for 11 years and when I look out over the next decade, I can’t identify another industry that’s going to see a continual growth on a year-over-year basis. So 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 — we’re seeing despite certain new entrants into the market, we’re seeing our market share grow in Germany and we’ve seen it grow on a quarter-over-quarter basis, really throughout the last two years and the growth because the purchase process is different, right. The patient goes to a doctor, the doctor prescribes the products, the patient then goes into the pharmacist 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 we 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 Hormosan in Germany and product participation, market authorization in Portugal, the export to Spain, the agreement in the U.K. and the announcements regarding France. It’s important to establish a relationship with regulators in each country. It is important to establish and educate physicians in each country as well as pharmacists and patients. And so, we — and I guess the short answer would have been, yes. We are seeing stickiness. But we expect to continue to take market share in countries such as Germany.

Pablo ZuanicCantor Fitzgerald — Analyst

All right, thank you.


Our next question comes from the line of Michael Lavery with Piper Sandler [Phonetic]. You may proceed with your question.

Michael LaveryPiper Jaffray — Analyst

Thank you. Good evening. I just wanted to come back to the U.S. You certainly believe you’re well-positioned for that and I think refer 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, 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 as far as some of the advantages you point to are things like the Aphria brands, do you have any ability to be working with them at all? Now, do you have any planning? How actively are you trying to prepare for U.S. entry?

Brendan KennedyChief Executive Officer

So from the medical side, we’re very active. We have the few companies that has performed multiple imports into the U.S. with DEA and FDA approval. And I think 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, we have — I think we’ve announced 18 countries, then we shift to 17 countries around the world. And when I look at the US, I think that there is going to be an opportunity to important medical cannabis just like free — 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 at GMP certified medical cannabis product for distribution in the U.S. through more pharmaceutical supply chain. So really outside of the MSO model. And so I think that’s a huge opportunity and I think it’s something that relatively few international companies are prepared to do and there is almost no GMP product available inside the U.S. And so that’s — I think that’s a huge opportunity, it’s something we are aggressively pursuing.

When it comes to the adult-use market in the U.S., we continue to pay very close attention to regulatory changes in new states legalizing further use and I think this year is going to be unique in that you will see more states we go out through the legislative branch rather than through ballot measures and ballot initiatives. Although, I think that — I think in November, it’s a possibility that you’ll see if they like Ohio legalized through ballot measure and then tiers out a year from this November. I think you will see another four or five really Republican states legalize, adult-use cannabis and medical cannabis. But the key thing we’re paying a close attention to, in the U.S. is really the distribution model. We’re seeing that that will 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 Ultra has been doing in the U.S. and then thirdly, the U.S. alcohol companies. And so the big question we have is, which model is it going to be in? I have a pretty strong opinion that existing MSO adult-used model is not going to be the model of the future. I think it’s 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 entrench players, extremely costly to entrench players. And so that’s what we look at and that’s what — yeah, that’s what I imagine the combined company will look at when it comes time to deploy capital in the US.

Michael LaveryPiper Jaffray — Analyst

And can you touch on the timepiece of when you think that might come?

Brendan KennedyChief Executive Officer

I mean you asked right question. I still think sort of that next 12 to 18 months timeline and I think it’s incremental. I think you’ll see a couple of steps along the way rather than one when giant shift, although it’s completely unpredictable right now. Looking at 95% of Americans believe medical cannabis should be legal, 68% believe it or not, you should be. And so there’s — it’s one of the few issues that have biased partisan support certainly amongst 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 months to 18 months from now.

Michael LaveryPiper Jaffray — Analyst

Okay, great. Thank you very much.


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.

Brendan KennedyChief Executive Officer

Great. Thank you, operator. To conclude, we’re proud of our Q4 results and we’re ready to take our business to the next phase by bringing together two cannabis industry leaders, Tilray and Aphria. 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 advanced patient care around the world with the 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.


[Operator Closing Remarks]


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