Tilray, Inc. (NASDAQ: TLRY) Q4 2021 earnings call dated Jul. 28, 2021
Corporate Participants:
Raphael Gross — Investor Relations
Berrin Noorata — Chief Corporate Affairs Officer
Irwin D. Simon — Chairman and Chief Executive Officer
Carl Merton — Chief Financial Officer
Analysts:
Owen Bennett — Jefferies — Analyst
Vivien Azer — Cowen & Co. — Analyst
Andrew Carter — Stifel — Analyst
John Zamparo — CIBC — Analyst
Rupesh Parikh — Oppenheimer & Co. — Analyst
Tamy Chen — BMO Capital Markets — Analyst
Aaron Grey — Alliance Global Partners — Analyst
Michael Lavery — Piper Sandler — Analyst
Heather Balsky — Bank of America — Analyst
Presentation:
Raphael Gross — Investor Relations
Good morning, everyone. Thank you for joining us to discuss Tilray, Inc’s Financial Results for the 2021 Fiscal Year and Fourth Quarter ended May 31, 2021. Joining me on today’s call are Irwin Simon, Chairman and Chief Executive Officer; Carl Merton, Chief Financial Officer; and Berrin Noorata, Chief Corporate Affairs Officer.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session for analysts and investment firms conducted via audio and participating retail shareholders conducted through the Say Technologies platform. Question submission and uploading through the Say Technologies platform concluded yesterday and the company will read aloud and answer the top questions.
Ms. Noorata, you may begin the conference.
Berrin Noorata — Chief Corporate Affairs Officer
Thank you and good morning. By now, everyone should have access to the earnings release available on the Investors section of Tilray’s website at tilray.com and filed with the Securities and Exchange Commission on Form 8-K. On today’s call, we will also refer to various non-GAAP financial measures, which can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Today’s earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP.
Also, please remember, that during this call we may make forward-looking statements. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties which may prove to be incorrect. Actual results could differ materially from those described in these forward-looking statements. Please note the text in our earnings press release issued today for discussions on the risks and uncertainties associated with such forward-looking statements.
And now I’d like to turn the call over to Tilray’s Chairman and CEO, Irwin Simon.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you very much, Berrin, and good morning everyone. We appreciate you joining us for our inaugural call as new Tilray. Today we will reiterate and reaffirm the strategic and financial benefits of our recent business combination and acquisition; detail the business level strategies and roadmaps to ensure we realize the vision of that combination; outline the progress we have made to date; and, of course, discuss our fiscal fourth quarter 2021 results, which consist of 13 weeks of pre-merger Aphria and four weeks of post-merger legacy Tilray, the world’s largest cannabis company.
When we announced the new Tilray in December last year, we were optimistic that the strategic operational market opportunities in front of us had potential to create the world’s leading cannabis focus consumer branded company. This was our bet, backed by strong trends towards cannabis legalization in our three key markets, Canada, International and the U.S.
Our management team with a track record of building and sustaining value in the consumer packaged goods wellness space, well-defined organic acquisitive and partnerships based on growth strategy that together with full legalization in the U.S., we believe, we will take us to a plan of $4 billion of revenue by 2024.
I want to be clear at the outset. Our conviction in both the opportunities, just as importantly as our ability to execute on that opportunity has never been stronger. The last six months have affirmed the sheer size of global opportunities ahead of us, just as importantly, the effectiveness of a committed and passionate group of team members in building the leading consumer packaged goods business in the cannabis industry.
Beyond what we have achieved over the last six months, our perseverance during COVID crisis itself lends further validation to the fact that this team knows how to pivot, execute and get results. Consider at the highest level and we lost well over a $100 million in revenue as a result of retail store closures and COVID general impact and yet we immediately implemented cost saving measures, ultimately helping us build EBITDA to more than $40 million in 2021. We managed our facilities extremely well, helping ensure they remained open throughout the last 18 months. We acquired SweetWater, announced the closure of the Tilray-Aphria combination and made meaningful progress on the integration as I will discuss in more detail.
We closed on a new bank financing of $100 million term debt and $20 million of credit and ended the fiscal year with more than $488 million of cash and cash equivalents versus $360 million last year. So, throughout today’s presentation, consider these achievements during fiscal ’21, a year of unprecedented change and disruption; highlight the strengths of our new leadership team and should instill confidence in the road ahead as we accelerate integration of Tilray and Aphria amid increasingly favorable market conditions.
The thesis behind Tilray-Aphria business combination and SweetWater acquisition is that the combination of cannabis with a CPG and health and wellness company is a winner. Prior to Aphria, and my team here with me today at Tilray, we built a great CPG business in natural organics; healthy foods, personal care products, beverage alcohol and other industries. And the playbook here is essentially the same. It’s all about building iconic sought-after brands backed by product excellence and variety of educating consumers about our brands, our stringent quality standards and benefits of cannabis products to encourage trial, foster loyalty and having the scale distribution necessary to get them into consumers’ hands and grow market share. To put it simply, Tilray is the only cannabis company with that scale and reach and resources to get it done.
Our business planning and integration are built around five key competitive differentiators: the industry’s broadest geographic footprint and operational scale; leadership positions in Canada with a complete portfolio of product offerings and carefully curated brands; tremendous international growth opportunities; and a meaningful U.S. consumer packaged goods platform to be immediately leveraged for cannabis products upon legalization; and with both companies coming together, substantial synergies.
Geographic footprint and operational scale. I’ll start with item one. Geographic footprint and scale. This is clear and distinct competitive advantage as Tilray now possesses the geographic footprint and operational scale to emerge as a consolidator in the cannabis market. This effort is backed by a strong flexible balance sheet, robust cash balances and access to capital. These attributes provide us with the ability to accelerate organic growth, build EBITDA and free cash flow and look at other partnerships and acquisitive opportunities that could ultimately complement our product line as legalization accelerates. Regardless of the industry, but especially in a nascent rapidly growing industry like cannabis, these attributes should deliver long-term sustainable value for shareholders.
Strengthening leadership position in Canada. In Canada, we plan to grow and strengthen our position as the number one Canadian LP in total sales on a consolidated basis. This is a foundation that will be so essential to getting us from our current combined retail market share in Canada of 16% to our goal of 30% share by fiscal year 2024; new products that are trusted by consumers, that have real brand equity. In fact, putting the two complementary portfolios of Aphria and legacy Tilray together has enabled us to strengthen both brands. Aphria has historically been strong in flower, pre-rolls, 2.0 products and began making inroads on vapes, while legacy Tilray has several high-powered potency flower strains that fit nicely into our portfolio in addition to being stronger overall in edibles and beverages.
Strategic partnerships with provincial boards and retail partners. We have strong relationship with the provincial boards across the country and retailer partners. We will continue to create merchandising and education platforms for bud tenders and consumers to drive brand loyalty to our portfolio. Both of these strategies will drive absolute growth in the Canadian market.
Additional store openings. To this point, there are currently over 2000 stores in Canada. We believe, growing the market demand could warrant as many as 3,000 by the end of calendar year 2022. Of course, this retail performance will likely improve and commensurate with lifting the COVID restrictions, which have, of course, materially impacted retail efforts since the spring of 2020. Our Canadian business will benefit further from the fact that we’re already the low cost producer with a state-of-art cultivation, processing and manufacturing facilities. But this did not happen by accident. In fact, from the beginning, we were careful about how we create cost structures within the organization and now we are accelerating our work on pulling additional cost out of the structure so that we can gain further efficiencies and increase our margins.
While legacy Tilray was generally asset-light, Aphria had invested heavily in brands with great brand equity. We view our ability to now leverage product capabilities and footprints with an asset-light model as a strong combination. Based on OCS sales data, Tilray continues to be the number one market share in Ontario. Further, the consolidation of Tilray also has a number one market share now in Quebec. Innovation will also be a hallmark across our brands and across all segments in Canada. From a Cannabis 2.0 standpoint, this will be within concentrates, edibles and drinks, while for Canadian medical, our focus is centered on the large and growing demand for new high-quality cannabis products that promote health, wellness and well being.
For example, we recently launched Symbios which complements our existing medical brand portfolio; all medical Aphria, Broken Coast and Tilray products. This new brand was developed to provide a broader spectrum of formats and unique cannabinoid ratios at a better price point. In addition, it allows medical patients a full comprehensive assortment of products, including flower, oils and pre-rolls for their health wellness regimen. We also introduced high-potency medical topicals under the Aphria brand designated to target inflammatory joint disease by regulating tissue inflammation when applied topically to the skin.
Also we consolidated facilities within Canada and moved a lot of Tilray’s production into our Leamington facility. We will continue to focus on improving product potency and quality to meet the market demand. As you know, Canada currently restricts how cannabis brands can be marketed to consumers. While product safety is certain to our paramount, it is also crucial to communicate and educate consumers about the products and benefits of cannabis.
During the pandemic, as people were not able to go into stores in Ontario and had to deal with in-store capacity limits in Alberta and British Columbia, we kept our focus on driving brand awareness, worked with the different control board and retailers to use social media and other e-commerce platform to help those that ordered online or picked up at curbside. And as noted a moment ago, until just recently in mid-June, there were over 800-plus stores in Ontario alone that had never opened their doors to customers because of COVID or could only do curbside delivery. This has now begun to change and many stores have since opened across these provinces in June. Although that, of course, did not help our May ending fiscal quarter sales.
And so for the past six months, when customers were looking for product, they were searching online. Most of the websites are organized by price. In other words, price mattered more than marketing. However, as consumers now can resume and interact with bud tenders, when impulse purchase can occur inside the store, we’re confident customers will shift away from price based cannabis purchases and brands will matter and more environmentally characterized by pent-up demand.
Finally, we intend to be effective, innovative advertisers in the true sense of that term. Educating our consumers about the quality and safety of our products is essential and advertising is a critical medium in that effort. We have therefore been working with the appropriate authorities to allow more effective forms of advertising, similar to other regulated industries and we have a marketing strategy that is ready to go.
Accelerating our international growth. Our international growth strategy leverages our two strong medical cannabis brands in our large distribution network in Germany and end-to-end European Union GMP supply chain. Again, these attributes are unique to Tilray and, taken together, they are expected to increase our access and availability to high-quality consistent medical cannabis for all European patients. The European Union, where we already have a very minimal presence represents a powerful growth market and could be a $1 billion business for us from a medical standpoint alone. We will also be ready for legalization from adult-use when the time comes. Our presence in the EU allows us to grow our brands on a global basis with 600 million people that is nearly twice the size of the U.S. with Germany possessing the greatest potential at twice the population of Canada.
We already have a low-cost production facility in Portugal that provides us with tariff-free access to the EU. We also have a state-of-the-art EU GMP-Certified cultivation and production facility in Germany and a subsidiary in CC Pharma, which is a medical distribution business to 13,000 pharmacies. And while our fiscal fourth quarter results in Europe were negatively impacted by the lockdown in Germany, similar to Canada, it is now reopening and we’re confident our business momentum will return.
Among the many benefits of our business combination is the ability to have CC Pharma distribute our product from Portugal to Germany and, in doing so, move up the value chain with the consumer as a part of that transaction. To be clear, revenue synergies are not part of the overall $80 million in synergies that we’ve already articulated. Those were only on the cost side. This transition is taking place and will positively impact the tail-end of our fiscal first quarter, but had no flow-through in recent quarters.
Another key factor in our plans for Europe is that the EU generally is more medically and pharmaceutically-focused than Canada and the U.S., which results in nearly a 3 times difference in purchase reimbursement. And so we’ve expanded to those markets that are more focused on reimbursement and have reimbursement models. We think consumption increase on per capita basis as well.
Earlier this month, our wholly-owned German subsidiary Aphria Rx completed the first successful harvest of its EU GMP-Certified medical cannabis cultivated in Germany for distribution to German pharmacies. This represents an important milestone in granting access to high-quality trustworthy medical cannabis to patients and healthcare professionals in Germany. And despite the challenges of a global pandemic, we remain on track as the first licensed producer to cultivate medical cannabis in Germany. Moreover, we think that our ongoing domestic harvest and production will play an indispensable role in ensuring that patients’ needs are met with products of the highest quality medical cannabis, while at the same time reducing dependence on imported supply.
Other European markets where we are expanding our platform are Poland, Italy, the U.K., France, the Netherlands and Israel. These countries and other parts of the continent are likely to see full legalization before the U.S.
Finally, in South America, there’ll be greater legalization from a medical standpoint. We already have a foothold into Argentina and Colombia, where we see some opportunities. We’ve also shipped some CBD oils into China and should see opportunities eventually in India where THC is already used in a lot of different medicines.
Enhanced U.S. consumer packaged goods presence and infrastructure. Here in the U.S., we have a strong consumer packaged goods presence and infrastructure with two strategic pillars: SweetWater, the 11th largest craft brewer in the nation and leading lifestyle brand with around 4,000 on-premise and off-premise points and with sales across 27 states; and Manitoba Harvest, a pioneer in branded hemp, CBD and wellness products with access to 17,000 stores in North America. Today they are $100 million-plus businesses and quite profitable with enormous potential for growth.
In the event of U.S. federal legalization, which received a high profile boost from Senator Schumer’s recently-proposed legislation, we can foresee, within the next 24 months, Tilray will be ideally-positioned to compete in the cannabis market by leveraging these strong brands and their distribution systems to parlay into THC drinks, CBD drinks, CBD Foods and related adjacencies.
With SweetWater, we’re expanding our product line of leading craft beers and other beverages to build greater brand awareness for our cannabis brands through cross-collaboration and brand extension opportunities. We entered juiced [Phonetic] Hazy, a juicy and refreshing IPA and Oasis, which is a vodka seltzer mix. Both are doing well already. And just last month, SweetWater partnered with Broken Coast to launch U.S. distribution of Broken Coast BC Lager, which is also a milestone event as Tilray’s first Canadian cannabis brand and introduction into the U.S.
We intend to follow this up over time by introducing other great Canadian cannabis brands to the U.S. and doing so will connect us with consumers and other mainstream brands in our portfolio. We’re also currently working opportunities for SweetWater with CBD tequila mixes, wine spritzer mixes, wine in a can, etc., while increasing SweetWater’s distribution in the near term to an additional three states. Let me also say that during the quarter itself, SweetWater, like a lot of other craft breweries, had below plan on-premise sales as many restaurants and bars were closed for operating full capacity, although we did pick up a lot of retail business as consumers bought or expanded their line of products. As business conditions have improved since the end of the quarter, on-premise sales have rebounded and are up 40% year-over-year.
Turning now to Manitoba Harvest. This is a great business and we’re now fine-tuning strategic planning and expanding opportunities, including looking at strategic partnership opportunities and acquisitions that complement our adjacencies to the cannabis world as we position ourselves for federal legalization.
Substantial synergies. As we have said, we plan to deliver approximately $80 million of annual pre-tax cost synergies within 18 months of the business combination. When we first announced the transaction, we said 24 months, but I’ve since moved that up. Key areas of opportunity are within cultivation, production, cannabis products purchasing, sales, marketing and corporate expenses. There’s already been a lot of hard work done by our great team over several months which will, a lot more, go towards achieving these synergies and getting the two entities fully integrated.
So far, we have already achieved $35 million in synergies. So we’re a little bit ahead of our internal plan, but still moving things along so that we can continuously drive positive cash flow within the new Tilray. Notably, as I said this before, the U.S. $80 million are cost synergies and do not reflect any possible revenue synergies that we know are also within our reach.
In conclusion, I know that I’ve covered a lot of ground today, but, hopefully, have also expressed my enthusiasm and excitement for what lies ahead for the new Tilray.
Carl will now review our financial results. But, first, I want to remind and encourage our shareholders of record to read our proxy and vote online or by telephone on the authorized shares proposal and governance proposals. For all the reasons I’ve detailed this morning, we need your help to ensure Tilray grows and to ensure you’re able to participate in our success in a meaningful constructive manner.
As a reminder, the first proposal would authorize additional shares of common stock so that we can move quickly to accelerate our growth through potential acquisition and financing opportunities. However, approval does not mean the authorized shares will be immediately issued; only that these shares would be available if needed in pursuit of these important corporate initiatives to drive shareholder value. And second our other proposals are intended to expand the rights of our shareholders to take into consideration the views held by the investment community on important matters of governance. These proposals require shareholder approval and several amendments to our organizational documents.
If you have any questions or need any assistance in voting your shares, please contact Morrow Sodali at (833)-497-7395 toll free in the U.S. and Canada or (203)-658-9400.
I know that I speak for our entire management team and our Board of Directors when I say that we are working every day to take full advantage of all the opportunities that we have at Tilray to enhance long-term shareholder value and deep appreciation of your support.
With that, I will now turn the call over to Carl. Carl?
Carl Merton — Chief Financial Officer
Thank you, Irwin. I would like to echo Irwin’s sentiment and express my excitement for being a part of Tilray. We are poised to be a strong diversified and profitable company and our early integration process reinforces our confidence that Tilray will create long-term sustainable shareholder value for years to come.
Before we begin, I need to point out some important accounting reminders. Our business combination was determined to be a reverse [Phonetic] acquisition. This means that while Tilray is considered to be the legal acquirer, Aphria is considered to be the accounting acquirer under U.S. GAAP standards. Our financial statements going forward will reflect this, which means that all prior quarter, year or periods are based on Aphria’s prior financial results. These prior results and the first three quarters of fiscal 2021 were adjusted to follow U.S. GAAP and are presented in U.S. dollars. As a result, you cannot directly compare items from the prior periods to Aphria’s historical financial statements.
To help understand our prior periods and to help analysts and investors forecast more accurately, today, we published an appendix to our investor deck located on our website that contains an analyst primer. The primer breaks down Aphria’s U.S. GAAP financial statements for 2020 and 2021 by quarter. Please note, the primer has not been audited. We remind investors that our fourth quarter and fiscal year ended May 31, 2021 results presented today consists of three months and 12 months, respectively of Aphria’s operating results, as well as one month in both reporting periods of Tilray’s operating results.
Throughout our call today, we will reference our audited results and we will also reference our adjusted financial results. Please refer to our press release for a reconciliation of our reported financial results under GAAP to the non-GAAP financial measures identified during our call.
Specific to Q4, Tilray accomplished a tremendous amount despite the COVID-related headwinds impacting the top-line. While we worked hard to maintain our brand’s strength across adult-use and medical and net revenue would certainly have been higher if not for lockdowns in Europe and Canada, our team took proactive and aggressive steps to optimize performance. In fact, our ability to drive significant cost savings by aligning production cost with demand in a dynamic operating environment, managing G&A and the benefits realized from implementing meaningful changes at Aphria pre-merger, as well as in minimizing cost at Tilray during the initial four-week period resulted in another quarter of increased adjusted EBITDA; our ninth consecutive quarter of positive adjusted EBITDA. We believe this represents truly differentiated performance within our peer set.
During the quarter, net income rose to $33.6 million versus a net loss of $84.3 million in the prior year. More importantly, I am extremely pleased to report that for the quarter, we generated positive free cash flow of $3.3 million, achieving a major milestone in building the company and delivering on our comments to shareholders to do so by year-end 2021. We view generating a steady stream of free cash flow as another important differentiator of our business. And having already demonstrated our ability to consistently realize positive adjusted EBITDA, the logical next step in showcasing sustainable profitability at Tilray is sustained periods of free cash flow generation.
One of the key benefits of our business combination was the $80 million of anticipated synergies. Months of planning before the closing and 10 weeks after closing, we are making great progress on integration. This progress includes meaningful lasting efficiencies in business processes and operating initiatives, IT infrastructure, compliance costs, attrition and headcount and facility closures, including, most notably, the closure of the Enniskillen growing facility, effective September 30. But the most important question is our progress against the $80 million goal. In this respect, I am pleased to report that we are ahead of our anticipated pace and took the actions necessary to achieve $35 million of the $80 million in synergies although cash savings in Q4 were closer to $7 million.
Now, let’s discuss Q4 in greater detail. Germany entered a hard lockdown and we were challenged to source sufficient medical supply products from lower cost countries to sell through our German distribution channels. I want to be clear that the orders and the demand were there. We simply could not source supply due to COVID restrictions. Another headwind in our Q4 performance for Europe was that medical patients who might otherwise load up on supply in advance of summer vacations and generate our traditional strong Q4 demand did not do so this year. As a result of these conditions, net distribution revenue was $66.8 million for the quarter compared to $74 million in the fourth quarter of the prior year.
During our fourth quarter, Canada continued to struggle with high infection and low vaccine rates, which led to restrictive lockdowns in Ontario, Alberta and British Columbia for virtually the entire quarter. Net revenue from our cannabis business in the fourth quarter was $53.7 million compared to $39.6 million in the same period of the prior year. Net revenues at SweetWater continued to improve, but remained below pre-COVID levels at $15.9 million and net revenues from our wellness business, Manitoba Harvest, were $5.8 million in essentially one month of activity. All of this led to net revenue increasing 25.3% to $142.2 million in Q4 over the prior year period. The average gross selling price of adult-use cannabis decreased to $2.98 per gram in Q4 compared to $3.90 per gram in Q4 of the prior year as a result of increased competition and price being only way to differentiate during COVID lockdowns; a temptation we did not indulge during the period.
The average gross selling price of medical cannabis, exclusive of wholesale, decreased to $4.54 per gram in Q4 compared to $4.95 in Q4 of the prior year as a result of specific pricing programs offered to assist patients who have been negatively impacted by the pandemic, along with other promotional programs. Our cash cost to produce per gram decreased to $0.72 per gram at our Leamington facilities. This was due to improved yield, potency and cost control efforts that begin in January and they continue to benefit us.
Adjusted cannabis gross profit increased to $23.9 [Phonetic] million in Q4 compared to $18.9 million in the prior year although adjusted cannabis gross margin fell to 44.5% from 47.7%. The decrease in margins was a result of price compression during the COVID-19 lockdowns despite our determined efforts to lower our cost of sales. Not included in our calculation of adjusted cannabis gross profit was a provision of $19.9 million on the combined cannabis inventory of Aphria and Tilray. As part of the business combination, we performed a detailed review of inventory levels, identifying some inventory categories where the combined entity had excess of inventory levels, creating the provision. These efforts included proactively adjusting our cost structure to offset the impact of the decrease in demand, including temporary four-day work weeks at our Canadian cannabis facilities; better managed headcount; and reduced plant operating spending.
Cannabis contributed $6.4 million to our adjusted EBITDA in Q4, up from $3.8 million last year. Adjusted distribution gross profit decreased to $6.4 million in Q4 from $8.9 million in the prior year, while adjusted distribution gross margin declined to 9.5% from 12.1%, all as a result of the impacts of COVID-19 on CC Pharma’s sales mix. Distribution contributed $0.9 million to our adjusted EBITDA in Q4, down from $1.4 million last year.
Adjusted beverage alcohol gross profit was $10.6 million in Q4 and there was no comparable in the prior year as the acquisition was completed last November. Notably, adjusted beverage alcohol gross margin was a healthy 66.5%; far outpacing our other segments, and a sequential improvement from the two previous quarters under our ownership. The SweetWater team clearly did a great job controlling costs despite softer off-premise sales due to COVID restrictions. Beverage alcohol contributed $6.5 million to our adjusted EBITDA in Q4 and adjusted EBITDA margin of over 40%; essentially on par with cannabis’ contribution, but with only about a fifth of the net revenue. Obviously, we remain very bullish on SweetWater, both from a standpoint of expanding its top-line through new products and greater distribution, but also because of the high-margin nature of this business and what it could contribute to our overall profitability over time.
Adjusted wellness gross profit was $1.6 million and adjusted gross margin was 26.9% for which there were no comparables last year. G&A costs increased to $32.8 million in Q4 or 23.1% of net revenue compared to $24.9 million or 21.9% in the prior year, which did not include the acquisitions of SweetWater and Tilray. The increase was the result of headcount increases and increases in our insurance costs.
Transaction costs totaled $33.3 million and were related to out-of-pocket fees to consummate the business combination, including legal, banking and other advisory fees, along with severance payments associated with the business combination.
For the quarter, we reported a net income of $33.6 million or $0.18 per share compared to a net loss of $84.3 million or $0.39 per share last year. In Q4, our ability to generate net income was related to recognizing a $121.5 million in net non-operating income. This was due to an unrealized gain on our convertible debentures, driven primarily by the change in our share price and the change in the trading price of the convertible debentures.
Turning to cash flow and liquidity. As I mentioned earlier, we generated $33.3 million in free cash flow during Q4 representing a $6.7 million positive swing from Q3, all, despite the intensity of COVID restrictions in our markets. This was a major achievement for us and something we have talked about in the past as being one of our highest priorities, demonstrating profitability through key metrics such as adjusted EBITDA and free cash flow. In fact, after having generated positive adjusted EBITDA for more than two years now, we view achieving free cash flow on a consistent basis as our next priority. Our ability to do so beginning in Q4 was because of a substantial increase in operating cash flow to $8.3 million from $0.7 million, coupled with limited capex of just under $5 million, which was just above our $4.1 million expenditure in Q3.
We are also proud of our industry-leading balance sheet including a strong cash position. As of May 31, 2021, we had cash of $488.5 million to both support our existing working capital requirements, including COVID-19-related financial impacts, and our near-term business plans.
Briefly moving to full fiscal 2021 results. This was clearly a transformational year of progress for us and one that enabled us to position Tilray as a leading cannabis brand. Net revenue was $513.1 million, an increase of 27% from the $405.3 million in 2020. Cannabis revenue grew 55%, distribution revenue was flat while we benefited from contributions from both beverage alcohol and wellness totaling $34.4 million that were not in our 2020 results.
Turning to profitability. We significantly increased our adjusted EBITDA to $40.8 million compared to $5.8 million in 2020, reflecting an improvement of $35 million or 603%. With our focus on the future and what we can control, we are executing on our highest return priorities, including business integration and accelerating our global growth strategy across five key competitive differentiators, as Irwin articulated. We are also relentlessly focused on managing our costs in order to maintain our healthy financial condition. Our success will be measured through the scale, expertise and capabilities we will leverage to drive market share, achieve industry leading profitable growth and build sustainable long-term shareholder value.
As we move ahead, we believe our strong cash position and balance sheet flexibility provide us with the means to transform the industry through our highly-scalable operational footprint, a curated portfolio of diverse medical and adult-use brands and products, and multi-continent distribution network.
Finally, and while we are not in a position to issue any formal guidance, I would like to mention that the recent floods in Germany directly affected CC Pharma. Fortunately, all our employees are safe. However, business operations were shut down for three days. We estimate this will create a negative impact of $2.5 million to $4 million in Q1 2022 net revenues, along with a minor margin impact related to the cleanup. We maintain insurance coverage to cover these but do not expect insurance proceeds to be received during the quarter.
With the recent lifting of lockdown [Indecipherable], we not only look forward to increased interactions with our families and friends, we look forward to the changing purchasing patterns and demand for cannabis in our biggest market.
This concludes our prepared remarks. Before moving to analyst questions, Irwin and I will answer a few questions from our retail shareholders from the Say platform.
Questions and Answers:
Raphael Gross — Investor Relations
Thank you. Let’s begin the questions from the Say platform. First question is the following. There is a great limit to the amount of cannabis Tilray can grow and sell in Germany. Will there be permits issued to Tilray for continued growth and production?
Irwin D. Simon — Chairman and Chief Executive Officer
Hi, good morning. It’s Irwin. It’s absolutely yes and it’s limited to our facility and with that — with our current tenders that we have and the ability to fill them, there is lots of opportunities for us in Germany. And I think there will be additional tenders and additional production that will come our way. Listen, the big fish in Germany also is distributing cannabis to those 13,000 drugstores which will go through CC Pharma. The other big fish in Germany is, we hope now with the Green Party, that they push through legalization and it happens within the next eight — which happens within the 18 months in reference to Germany.
Raphael Gross — Investor Relations
Thank you. Question on SweetWater. Will SweetWater THC drinks be soon available in Canada and are there plans to expand SweetWater to California?
Irwin D. Simon — Chairman and Chief Executive Officer
So number one, there will be THC drinks available in Canada as part of the Tilray acquisition. A canning facility and an edibles facility became available to us in London, Ontario facility. So there will be THC drinks in Canada available. Right now I don’t know who the brand is going to be under. But SweetWater as a branded alcohol is available today in Canada. It is our intention to expand it into the Canadian market. And secondly, recently, we completed in Fort Collins, Colorado, buying a facility called Red Truck and that facility will start producing SweetWater products and the intention is to expand into the Western states.
Raphael Gross — Investor Relations
Thank you. Next question. With the pending federal legalization in the U.S., how will Tilray benefit from this? Specifically, how will this affect the value of the company and benefit the shareholders?
Irwin D. Simon — Chairman and Chief Executive Officer
Good question. Listen, I’ve talked about, in my script today, a $4 billion plan to get Tilray to, and sales by the end of 2024. A big part of that is legalization. If you come back and look at Tilray, number one, we look to grow through adult-use, medical, new products, Cannabis 2.0, which is edibles and drinks in the Canadian market. Number two, we talked about growing to $1 billion of sales in Europe through medical cannabis and through our CC Pharma and potentially other acquisitions. Legalization happening in the U.S., which is the biggest market, which today is probably between CBD and THC is close to a $50 billion market. It’s the biggest opportunity for us. And what Tilray will be pursuing is opportunity and options with MSOs that will be able to either integrate them into our business, merge or acquire once legalization does happen in the U.S.
Raphael Gross — Investor Relations
Thank you. Operator, please open the line for analyst questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Owen Bennett with Jefferies. Please proceed with your question.
Owen Bennett — Jefferies — Analyst
Morning, gents. Hope you’re well.
Irwin D. Simon — Chairman and Chief Executive Officer
Morning.
Owen Bennett — Jefferies — Analyst
Yeah, question from me is slightly following up on the last question we just had there. Obviously, you got the votes for more shares tomorrow. I think it would be fair to assume and this could be used to acquire more assets in the U.S. and with the potential change within the next 12 months, that means you could enter the U.S. THC market. I wanted to know how you’re thinking about U.S. assets from here. Is it additional to all the consumer goods assets, like you did with SweetWater or would focus now beyond doing similar things around securing optionality on U.S. THC assets and like we’ve seen a couple of your peers do? Thank you.
Irwin D. Simon — Chairman and Chief Executive Officer
So, Owen, as I said before, I’ve put out there an aggressive stance for Tilray by the end of 2024 to be a $4 billion company. A good part of that is acquiring in the consumer area to enhance our Manitoba Harvest business, in the food area where we would be able to add CBD or THC or our Hemp business and along with our SweetWater business we would like to acquire additional businesses in the alcohol area or the beverage business that would complement SweetWater. And we see those businesses today growing to $200 million business. And we’d like to see about $0.5 billion in sales in the consumer packaged goods business, whether it’s conventional products, whether it’s CBD products, whether it’s Hemp products or THC products where permissible and legalization happens.
In regards to the U..S market, what we’re looking for is to be able to have a $1 billion to $1.5 billion in sales and that would come from companies where we have optionality and invest in those companies with the attention once legalization does happen that we would be able to acquire 100% of those companies.
Owen Bennett — Jefferies — Analyst
Okay, awesome. Thank you very much, sir.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Vivien Azer with Cowen. Please proceed with your questions.
Vivien Azer — Cowen & Co. — Analyst
Hi.
Irwin D. Simon — Chairman and Chief Executive Officer
Good morning, Vivien.
Vivien Azer — Cowen & Co. — Analyst
Good morning. I wanted to touch on your market share aspiration for 2024, which is close to a doubling from where you are today. Just in terms of kind of what underpins the logic behind the 30%? Because certainly you have competitors that have similar aspirations for market share leadership, so market share gains are not a foregone conclusion. So from a marketplace standpoint, it seems like you’re expecting better mix shift as the the category reopens in terms of in-person sales. Like, how much are you expecting in terms of better pricing and better mix to drive those market share gains? Thanks.
Irwin D. Simon — Chairman and Chief Executive Officer
So, Vivien, today we’re at about a 16% market share. And with that, if you step back for a second and it’s aspirational looking to basically double our market share. The Canadian market has been almost closed for seven months. There is numerous stores that have been built that have never been opened in Ontario and we’re only in the third year building legalized — building the awareness of legalization. So for us to grow our share, we have to drive and build awareness to the benefits of cannabis for adult-use. We have to improve consumers’ perception and purchasing of medical cannabis in Canada. We need to get to those 3,000 stores or little less that are proposed to open. We have to bring in more users that understand the benefits of cannabis and a big part of that also is us growing our beverage business and our edible business and a lot of innovation.
And the thing is, I come back with Tilray and someone said to me this morning, if you’re at the top, what does that mean? We have to remain nimble and flexible and entrepreneurial. If not, a lot of the little guys will nibble at us. The other thing that’s got to happen in Canada, there’s got to be change in regards to the way you can market to consumers, educate consumers on the quality, assurance of the products and the safety of the products and that’s what Canada got to do. And I think with that, we can grow to a 30%- plus market share in that marketplace.
Operator
Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.
Andrew Carter — Stifel — Analyst
Hey. Thank you. Good morning. I know that you guys aren’t going to give any formal guidance today. But I just wonder directionally, how you’re thinking of this next quarter with the reopening, stronger on-premise sales for SweetWater, and I appreciate the headwinds. And then within that, kind of, what’s the — you mentioned a lot about the sustainability of free cash flow. So as we think about that — the $5 million in capex, is that a good note for the quarter? Is that a good number going forward or does that step up higher? And then second, the kind of big one is, do you expect a better balance on — in terms of your cultivation in terms of that working capital drag? Thanks.
Irwin D. Simon — Chairman and Chief Executive Officer
Carl, you want to take that?
Carl Merton — Chief Financial Officer
Sure. So — just, Andrew, with respect to free cash flow and capex, I would say, for the next few quarters, the $5 million is probably the high watermark. Most of our large — not most of, all of our large capital projects have finished across the world. We have some investing to do, a little bit on some lighting projects in Leamington to improve lighting. And there’ll eventually be decision on additional extraction capacity in Portugal, but those are not large products. As it relates to inventory levels, obviously, we inherited some inventory as part of the transaction with Tilray, where we’re closing down those — the Enniskillen facility, moving that production to Leamington where we think we’ll have a little bit better control on that. So we should see some of those inventory levels start to draw down as stores reopen.
In terms of the demand portion of the question and what the end of Q1 will look like, we’re not really going to give any guidance. But I think I’ve said this before, you’re seeing an increase in demand at store fronts. I think there is a delay that happens at store level to ordering the inventory to making sure that they remain in lockdowns. If you were here in Canada, it was a lot of people who have been burned by, okay, the lockdown’s over, oh, the lockdown’s back on again. So there’s going to be a little bit of time to make sure that, that process is moving forward. And I think that will lead to a little bit of a delay in order increase or ordering patterns. And then that same piece will play out at the provincial boards. There’ll be the couple of week delay as order start increasing from the retail side before they start placing additional orders with the LPs. And so towards the end of that — of our quarter is when we see the demand increasing from the board.
Irwin D. Simon — Chairman and Chief Executive Officer
And, Andrew, we’re not — regards to guidance, I think it’s important to get all the retail stores open, all of the stores that have been built to open, get all the distribution facilities, get the piped up demand run through the system. And then we got a better handle on what consumption really looks like, what order [Technical Issues] and all our new products and be able to give some guidance after that.
Andrew Carter — Stifel — Analyst
Thanks, I’ll pass it on.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.
John Zamparo — CIBC — Analyst
Thank you. Good morning. I wanted to ask about the prior question on the U.S. So, Irwin, when you say you’re looking for optionality deals in the U.S. Just want to [Technical Issues] are essentially what amounts to costless exercises on warrants for meaningful states. So, is that what you’re looking for? And if so, is it fair to assume you’re looking for cannabis brands rather than vertically integrated operators, whether it’s MSOs or single-state operators?
Irwin D. Simon — Chairman and Chief Executive Officer
So, John, you broke up just as you were going to ask me that pertinent question, but I think I know what you’re asking me. In the U.S., there’s two paths I’m going down. Number one is looking in the consumer products area in alcohol and food, that today, our products that are sold in the marketplace that ultimately be converted to THC and CBD products once legalization does happen and that would become part of our SweetWater and our Manitoba Harvest business. Alongside of that would be to be looking at optionality and investments in MSOs that makes sense that would strategically align with Tilray and look to acquire or merge with them 100% once legalization did happen. So there’s two paths in regards to investments in the U.S.
John Zamparo — CIBC — Analyst
Understood. I appreciate the color. Thank you.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you very much.
Operator
Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.
Rupesh Parikh — Oppenheimer & Co. — Analyst
Good morning and thanks for taking my question. So, Irwin, you referenced in your comments, I think, some of the challenges just on the pricing front that you guys are seeing in the market. I’m just curious, if you look at the competitive backdrop out there, what are you seeing out there right now and how you guys think about just some of the pricing pressures going forward?
Irwin D. Simon — Chairman and Chief Executive Officer
So, Rupesh, good morning. Listen, I think what happened out there, as a lot of products were either bought online and products were locked up at retail stores, you didn’t have your bud tenders able to tell about the qualities of the products, the attributes of the products. So a lot of consumers were just buying products on price. And that’s the bad news. The good news is I think a lot of these products they bought on price, they saw that they were not or learned that they were not good products, not quality products and learned from that.
As I said before, price is key. We are a low-cost producer. On the other hand, consumers like brands and when you’re buying a good tequila, a good vodka, a good alcohol, a good wine, you want a good quality product and that is not going to be any different in the cannabis space. And one thing that I can reassure you, with our over 12 brands, quality products is something that we’re going to come out with. Potency is important, our different strains are important and our different brands. And, listen, pricing is important but we’re not going to be out there as the lowest priced product line and I think building consumer awareness around quality is going to be something very important for us. but I think a big part of it was, it was before bought by on-price, it was not bought on brands, it was not bought on education and consumers tried them and were not happy with the results.
Rupesh Parikh — Oppenheimer & Co. — Analyst
Great, thank you.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Tamy Chen with BMO Capital Markets. Please proceed with your questions.
Tamy Chen — BMO Capital Markets — Analyst
Thanks, good morning. Irwin, I just wanted to ask with respect to your U.S. strategy, the two approaches that you talked about. I’m just wondering it’s a very complex strategy where you’re looking for several things, CBD, hemp, more alcohol, more food businesses and then THC on top of that. So, I guess, the first part of the question is, why pursue both of these routes? It seems to add a lot more to your plate and a lot more complexities. And two is, when you talk about that second path on investments and possibly acquiring MSOs, why you believe that MSOs or even single-state operators would be interested in an investment or possibly acquisition by Tilray? Thanks.
Irwin D. Simon — Chairman and Chief Executive Officer
So number one, again, strategically, we have an alcohol business today. We think alcohol is growing in the 3% to 5% and we think, number one, it’s a great category. We think we can bring a lot of new products to it that we’ve done so far with SweetWater and we’ll continue to do that as we introduce our tequila in a can or wines in a can, our Riff products which are vodka seltzers in a can and gain distribution. We have the infrastructure out there to do that. And that’s no different than Manitoba Harvest. We want these businesses to be bigger businesses and ultimately with the [Technical Issues] to cannabis is something that will be important to us. It’s not we are a consumer packaged goods business just going into food and drink business, it’s important there in adjacencies to our cannabis business, our CBD business. In prior life, the built consumer packaged goods business, as I said before, we want to be the largest branded cannabis company in the world.
In regards to why they would want to partner with us, listen, we are one of the largest cannabis companies today in the world. We have a big business in Canada in the adult-use, the medical use, in regards to Cannabis 2.0 and drinks and gummies and edibles. We have a major business in Europe in the medical business. And as you look at some of these MSOs where they’re, yes, doing business in the U.S., as they look to have that partner that has capital, we have close to a $0.5 billion of cash on our balance sheet. We have great liquidity within our stock, we have a lot — a very experienced management team and we have a good history of knowing how to grow great cannabis with great strengths. So I’m not sure why they would not want to partner with us if it made sense economically for both sets of shareholders.
Operator
Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Aaron Grey — Alliance Global Partners — Analyst
Hi, good morning and thank you for the question. So, Irwin, you mentioned about your marketplace aspirations in Canada to get to 30%, but I just wanted to talk about in terms of the legal market versus the illicit market and maybe some of your goals there. Right now, Ontario recommends about 50% of sales still going to the illicit market. Pricing, at least on the far side, seems to be below the illicit market. Stores have certainly improved a lot in Canada even though they’re still looking for it to get to 3000 and maybe we’ll see more of an impact from the great amount of stores in the back half of the year as the lockdowns kind of ease.
But would love to get your perspective in terms of what else you think would be needed in terms of — from the legal category to better compete with the illicit market, whether it’d be product formats, more quantity for beverages, more milligrams for edibles or what you believe will be needed in order to gain more of that market share over the illicit market. Thanks.
Irwin D. Simon — Chairman and Chief Executive Officer
So number one, as I’ve said before and I say it again, brand equity, brand equity, brand equity. You got to go out there and build your brands, you got to go out there and get consumers to trust your brands that go through the quality assurance and the regulatory that products go through and you know what you’re getting in regards to a potency type of — potency product in regards to, if a product has any type of additives, if a product is sprayed with pesticides or how it’s grown, etc. So that’s important to educate consumers on the product safety, the product quality, the product attributes.
Number two, what’s really important is this here is pricing. And I agree price is important and — but when you pay the price you know you’re going to be happy and satisfied with what you’re getting in the product. Number three is distribution and making sure we can sell our products across all the Canadian provinces and have a strong presence in each of the provinces. Number four is innovation and that is key. Listen, if you come back and look at it, we sold close to $100 million of vapes today and two years ago vapes were not around. In regards to pre-rolls and the different technology in pre-rolls today, in regards to our different hash’s and waxes and oils, an innovation is going to be key.
So it’s not we’re just growing flower and putting flower out there, we’re putting multiple new products, multiple innovation. And the big expansion for us today is also in the drinks and edible area where we have very limited business today. And now that we have the facility, we have the opportunity to grow that business.
Aaron Grey — Alliance Global Partners — Analyst
All right. Great, thanks.
Raphael Gross — Investor Relations
Hello? Is the operator there?
Irwin D. Simon — Chairman and Chief Executive Officer
Hello? The next question, please?
Operator
I’m so sorry about that, technical difficulties. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Michael Lavery — Piper Sandler — Analyst
Thank you. Good morning.
Carl Merton — Chief Financial Officer
Good morning, Mike.
Irwin D. Simon — Chairman and Chief Executive Officer
You’ve — you have some of the attractive assets that came with the Tilray deal and obviously the Portugal facility is a big one of those. You did also inherit it’s business that it’s prior auditor cited material weaknesses in internal controls. Can you just help us understand how you’re addressing that and how hard it is to fix?
Carl Merton — Chief Financial Officer
So, Irwin, if you’re okay, I can take that. Michael, there were — I believe, it was three material weaknesses that had been identified by the prior management team with the prior processes that existed at Tilray [Phonetic]. We have been working on those items since — even during the integration period — sorry, more than just the integration period, even during the pre-closing period, to help strengthen those controls. Those same processes are — obviously, we have similar processes at Aphria and we have been able to design controls around it that did not result in a finding of a material weakness. And so we believe by integrating their processes into ours and taking best practices moving forward that, that material weakness will be fully remediated within the next year before we report our next review. Yeah.
Michael Lavery — Piper Sandler — Analyst
Okay.
Operator
Thank you. Our next question comes from the line of Heather Balsky with Bank of America. Please proceed with your question.
Heather Balsky — Bank of America — Analyst
Hi, thank you for taking my question. So, first, as we’re seeing Canada open up to some degree, can you walk us through June and July and sort of what was open and any sort of signs that you’re seeing or hearing of improvement? And just as a follow-up to that, there’s — we’ve seen consumers across the board, not just in Canada, shift to shopping more online with all these lockdowns and curious how you’re thinking about consumer habits going forward and confidence that you have that the consumer hasn’t or a portion of the consumer hasn’t permanently shifted to buying online. Thanks.
Irwin D. Simon — Chairman and Chief Executive Officer
So, Heather, Good morning. And number one in the Canadian market — and, Carl, jump in here anytime because you’re in Toronto, but what we’re seeing is a lot of piped up demand and a lot of getting back to business and stores opening. As you’ve heard me say, there was close to 600 stores where licenses were granted that did not open during the pandemic, and did not want to open, that are going to start to open now, which will give consumers opportunities to go in and buy products. And what consumers want to see is all the new products that have come out and get back to buying at their local retail stores.
In regards to buying online, I think, if anything, the reverse has happened where consumers, they want to get into stores, want to get educated about the new products and want to go back to shopping at retail. And I’m seeing that in the supermarket industry, in other retail stores. And I think that is something we’ll see in Canada right now because there’s going to be a lot of new stores that are opening up. And with that, I hope to see a lot of buying from that piped up demand. A lot of our new products will be introduced into the stores. And the big thing is what we have to do is educate consumers again about our products because it’s almost been a year that we have not been able to really talk to them, show them and let them try our products and let them purchase their products.
Heather Balsky — Bank of America — Analyst
Great. Thank you very much.
Irwin D. Simon — Chairman and Chief Executive Officer
And we plan to spend a lot more in marketing dollars in regards to social media and getting out on these products and that’s what’s important to get out there and spend. And as I say, the Canadian market is limited, what you can do in advertising, but we are going to be aggressive.
Operator
Thank you. There are no further questions at this time. I would like to hand the call back over to management for any closing comments.
Irwin D. Simon — Chairman and Chief Executive Officer
Thank you very much, operator, and thank you very much everybody for getting on the call today. I got to tell you, in 2021, it’s been a tough year. If you step back and look, Canada was closed pretty well since November, Europe was closed as well. And with that, we were able to do two major acquisitions, one in October in acquiring SweetWater, and then announcing in December the Tilray and closing on both of these deals. We’ve put in place a very strong management team. I really like to thank my management team because these successes happened because of the management team and the great people I work with. I also want to thank our Board of Directors for their support during this pandemic and getting these things done.
You heard me talk about how [Technical Issues] we’ve put in place, a lot of cost savings close to $35 million between putting both businesses together. We originally said we’d do this in 24 months, we’ve moved it up to 18 months. In regards to the fourth quarter, still with Canada closed, we grew our business. We grew our business 55% in cannabis, net income of $33 million, we’re cash flow positive, we’re sitting with $485 million in the bank.
One of the questions asked to me, what do we bring to the U.S. in regards to why an MSO would want to partner with us. Let me tell you something, Canada has been a tough market for us. We’ve learned a lot. We’ve learned how to grow. We’ve learned how to produce products, we’ve learned how to innovate and taking a lot of those learnings from Canada and Europe into the U.S. will be very helpful for any MSO that partners with us.
I appreciate the support from our shareholders and sticking with us. I know times — and I get the notes from our retail shareholders which I really appreciate them, and it’s important for us to communicate. It’s very important today if you are a shareholder that you get out and vote. As I’ve said, when we close this deal, we are left with no shares, both to go out there and do any of these acquisitions and to invest in the future of our business.
With that, enjoy the rest of your summer and thank you again. And I look forward to speaking to you in the future. Have a great day.
Operator
[Operator Closing Remarks]