Tilray Brands Inc (TLRY) 2020 Q3 法說會逐字稿

Greetings, and welcome to Tilray's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Raphael Gross, Investor Relations. Thank you, sir. You may begin.

Good afternoon, and thank you for joining us on Tilray's Third Quarter 2020 Earnings Conference Call. With me today are Brendan Kennedy, Chief Executive Officer; and Michael 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 and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Tilray's reports filed from time to time with the United States Securities and Exchange Commission and Canadian 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 today's call, management will also refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustments, which are non-GAAP financial measures. While the company believes that these non-GAAP financial measures are useful information to investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Today's earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP.

And now I'd like to turn the call over to Brendan.

Hello, everyone. And thank you for joining us. I would like to cover 3 items today: First, I will review highlights from Q3, including how we have continued to significantly improve our financial performance by optimizing our cost structure. Next, I will provide an update on our strategic priorities and the current state of our business. And finally, I will discuss what's next for Tilray as we look ahead to 2021 and beyond.

As I've discussed on prior earnings calls, 2020 has been a transitional year at Tilray, a year during which we have realized significant accomplishments by focusing on profitable growth in our 3 core businesses: International Medical, Canada Adult Use and Manitoba Harvest Hemp Foods.

At the same time, I'm proud of the challenging work that our team has done to optimize our cost structure and mitigate the impacts of COVID-19. In doing so, we have strengthened our financial position against a challenging industry backdrop, better aligned ourselves to market demand and established a foundation which we can leverage to generate enhanced shareholder returns. We are encouraged by our progress in Q3 as we substantially narrowed our adjusted EBITDA loss compared to both Q2 and Q1. Based on our Q3 results, we believe our current momentum positions us to achieve our goal of breakeven or positive-adjusted EBITDA in Q4. As we have stated throughout 2020, this has been our objective and is now clearly within reach.

Sequentially, adjusted EBITDA in Q3 improved to a loss of USD 1.5 million, from a loss of $12.3 million in Q2 or 87% improvement. And when compared to Q1, adjusted EBITDA loss improved by $17.2 million or 92% from a loss of $18.7 million. These results demonstrate the significant impact we have achieved with our broad-based cost cutting measures. Notably, and as I will explain in more detail, this was accomplished with Q3 revenues of $51.4 million, which is moderately better than Q2. We remain focused on growing our top line sales despite our cost-cutting efforts and continue to invest in our business where we see opportunities for reasonable returns.

Importantly, our new cost structure and improved balance sheet will allow us to leverage future sales growth without adding significant SG&A. For reference, we have reduced our quarterly SG&A, including R&D, from approximately $48 million in Q4 2019 to roughly $26 million over the past 2 quarters, a remarkable improvement over a short period of time. Although we will continuously evaluate opportunities to optimize spending, the heavy lifting is now behind us.

As I indicated, we have refocused our business on 3 key areas of growth: International Medical, where we have built an enviable track record and are a leading provider; Canadian Adult Use, which is making tremendous inroads in converting the listed market to the legal market, but still has a long way to go. This transformation provides a catalyst for expansion as more value-added and legal cannabis products come to market and become more accessible and affordable through increased points of distribution, including the number of brick-and-mortar retail stores. I should add that the transition to e-commerce ordering, curbside pickup and delivery in the current COVID environment coupled with the heightened concern for quality and safety appears to be accelerating the migration from the U.S.A. market. Manitoba Harvest Hemp Foods, which provides us with a hemp and CBD products platform in the United States and 19 other countries around the world.

Now let's discuss each of these segments in greater detail. International Medical sales were flat compared to Q2. Although there was good demand in the marketplace, the market experienced 2 unexpected setbacks. First, there was an approximately 4-week period in early Q3 when cannabis imports to Germany were curtailed market-wide, due to International Narcotics Control Board, or INCB, quotas.

Second, we were subject to COVID-related administrative delays for import permits on products entering Germany. While we were able to recognize some of these sales later in the quarter, some activity shifted to Q4. We remain bullish on our competitive position and business potential in the EU and Germany, in particular. However, the EU market may remain volatile in the coming quarters due to recently reimposed COVID restrictions. We are continuing to see increases in both the number of patients in Germany with cannabis prescriptions as well as the number of doctors who are writing prescriptions for these patients.

While these increases are off of a relatively small base, we believe that we are effectively building brand awareness similar to the way that we did in Canada 4 years ago and expect to see continued patient and revenue growth given Germany's large population base. In fact, we believe that the adoption curve in Germany is occurring at a faster pace compared to Canada during 2014 and 2015. Recently, we have seen a number of competitors either cease European operations or significantly reduce their presence there. We believe this will become a long-term strategic advantage for Tilray. The commitments we have made to the EU market with our Portugal GMP campus and regional leadership team based in Germany, position us well to continue to capture market share in Germany and more broadly in Europe.

In Portugal, our Phase 2 construction is all but complete. Given its warmer climate that is amenable to year-round cultivation and a lower cost of labor, our facility in Portugal has annual capacity of roughly 40 metric tons of dried cannabis that can be shipped to other countries around the world. With full GMP certification is our international hub for medical cannabis exports and R&D.

Looking ahead, we are optimistic about our opportunity in France. We will be submitting our application, and we'll wait to hear if we have been selected as one of the suppliers for the country's medical cannabis trial. The French Government recently published their decree that provides details on how the medical cannabis experiment will be administered. The French authorities have indicated that approximately 3,000 patients will be able to participate, and that the selected companies will supply medical cannabis that complies with pharmaceutical standards including GMP. The first prescriptions are expected to occur in early 2021. Given our experience with GMP practices and the reputation we have established in Germany, we believe Tilray is well positioned to be selected as a supplier for the program. This will allow us to establish the foundation for future business in France.

We're also encouraged by the possibility of participating in the Dutch coffee shop experiment. The Dutch Government is currently determining whether and how controlled cannabis can be legally supplied to coffee shops. The program is called the controlled cannabis supply chain experiment. We recently applied for one of the 10 licenses that will be awarded, which would be another international revenue opportunity for Tilray.

Our medical cannabis sales in Australia and New Zealand continue to benefit from patient growth, broader distribution and stable pricing, all of which have resulted in solid gains for the business. On September 28, we announced that Australian researchers published preliminary results indicating that one of our GMP produced products may reduce nausea and vomiting for cancer patients undergoing chemotherapy. The pilot phase in the study ran for 2.5 years with 81 participants enrolled. The trial will now move to a Phase III clinical trial to determine with much more certainty the effectiveness of medical cannabis to combat nausea and vomiting and determine if it should be considered for use in routine cancer care.

In summary, we are committed to long-term profitable growth in Europe as regulations continue to change and country markets develop. Our early partnership approach with government agencies, our emphasis on clinical data, and our ability to produce high-quality GMP manufactured cannabis products at scale in the EU, for the EU, puts us in a leading position. As new international market opportunities are presented, we will leverage the knowledge and experience of our Medical Advisory Board to determine what is best for the company.

Turning now to Canadian Adult Use. Our Q3 revenues increased 13.1% compared to Q2. This demonstrate how we can grow this business without focusing on the deeper value segment of the market. We attribute our success to several strategic decisions, including partnering with Kindred as our exclusive sales agent, evaluating our portfolio pricing, introducing new 2.0 product, and improving our operations. Relative to operations, we have made significant improvements, which have resulted in increased yields and potency. In 2020, our yields are up approximately 42% at our Enniskillen, Ontario facility relative to 2019, and all of the harvests have been above 20% THC potency.

Our Kindred partnership has established us to leverage the breadth and depth of their sales force to grow distribution with both existing and new potential buyers and retail partners. While we continue to focus on higher premium categories, we evaluated our pricing strategy to ensure our product offerings are priced appropriately in all category segments. Our combined mainstream and premium product offerings now make up over 70% of our Adult Use business compared to mid-50% in Q1 as we continue to deprioritize value product offerings.

In late September, our wholly-owned subsidiary, High Park, announced the newest addition to its cannabis-infused edible product line: Chowie Wowie Gummies. Chowie Wowie Gummies are handcrafted using clean and simple ingredients, are vegan, and gluten-free. THC watermelon gummies and balanced THC/CBD pineapple mango gummies are currently available in 6 provinces across Canada. A THC sour cherry gummy will be available in Q4. The gummy complement our already existing impressive array of 2.0 offerings, including vapes under our Canaca and Marley Natural brands; chocolates, under our Goodship and Chowie Wowie brand; CBD Beverages Everie, sold by Fluent Beverage Company; our JV with Anheuser-Busch InBev.

We continue to work on additional form factors and plan to introduce additional innovative products to Canadian consumers that meet the needs of this growing industry. As indicated, our Adult Use strategy is focused on profitable, long-term growth. Consequently, while we introduce the value segment product offering, we are not aggressively fighting for market share gains in a segment that offers little or no profit potential. Instead, we continue to manage our product offerings and margins with the goal of maintaining rational pricing and sensible margins.

During Q3, we were pleased to have grown our share of the market, and we're encouraged by the fact that we did so while selling approximately 90% of our products in the mid- to high potency categories. At the beginning of the year, we were estimating end of year store count between 800 to 1,200. We have been pleasantly surprised that the count has exceeded the high end of our range with approximately 1,250 stores currently opened. This is a positive for both Tilray's growth and the growth and evolution of the broader Adult Use market in Canada. We are also hopeful any potential COVID-related restrictions will not negatively impact store count growth going forward. Coming off of a solid Q3, we are bullish on our prospects for continued growth in the Adult Use market in Q4 and beyond.

Q3 revenue for Manitoba Harvest was slightly below Q2. As we have said before, we view this business as a relatively predictable revenue and profit engine to help fund other growth initiatives. We continue to drive for additional distribution and sales but are cautious about COVID-related impacts to our consumer behavior and the effects they may have on retailers that carry our products. Our team is working hard to broaden the distribution and grow the direct-to-consumer business to offset any negative impacts we may see from reduced retail traffic.

As we head into the final quarter of 2020 and look forward to 2021, we see opportunities in our business that will enable us to deliver revenue growth, improve gross margins and breakeven or positive adjusted EBITDA in Q4. We were disappointed with the results of the recent adult use legalization vote in New Zealand; however, we remain optimistic. Over the next 3 years, we see the possibility of 40 additional countries legalizing medical cannabis and 4 additional countries, taking serious steps towards legalizing adult use cannabis. The acceptance of cannabis will provide opportunities for us to expand the reach of Tilray brand around the world.

In the United States, we saw several state measures passed with a strong majority of the vote in Arizona, Montana, New Jersey, South Dakota and Mississippi. The number of states with the legal medical market now increases from 34 plus Washington, D.C. to 36. The number of states with adult use now increases from 11 plus Washington D.C. to 15. The case for federal legalization and cannabis reform emerges stronger from this election. We now believe that it is only a matter of time. An additional 5 Republican senators centers now represent a state whose constituents have legalized cannabis. Adult-use legalization in New Jersey is likely to have a domino effect on the states of New York, Pennsylvania and Connecticut as elected officials are worried that their residents will go to New Jersey to purchase product and thereby not generate tax dollars in their home state. For now, we will build and strengthen our portfolio of trusted CBD brands in states where legally permitted. We will address the federal CBD market upon further clarity from the FDA.

To conclude, we are operating in an efficient manner across our entire business, global medical cannabis, Canadian adult use cannabis and global hemp. With the completion of our significant cost reductions, we are now poised to leverage our cost structure and ensure we are one of the global winners in this industry. We have ample cash availability on our ATM to execute our strategy. With our infrastructure in place, we will continue to focus on building brands and developing products that resonate with consumers and establish Tilray as the most trusted cannabis and hemp company in the world.

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

Thank you, Brendan, and thanks to everyone joining us on the call this afternoon. Please note all the financial information we provide today was prepared in accordance with U.S. GAAP and is in U.S. dollars, unless otherwise indicated.

Before we get into details, I'd like to reemphasize that the Tilray team has made remarkable progress in Q3 and year-to-date. The team has been successfully and safely managing the challenges presented by COVID, growing our core business, reducing our cost structure, improving margins and positioning our company to leverage future revenue expansion. We have experienced unprecedented circumstances, and our employees around the globe have responded by staying focused and delivering strong financial results. Now to some details.

Q3 2020 total revenue of $51.4 million was flat compared to the same quarter last year. Looking below the surface, however, robust growth in our adult use, international medical and hemp products channels was offset by our decision to discontinue any meaningful bulk sales, all of which were recorded in Canadian Medical sales last year. Excluding the year-over-year impact to Bulk sales, total revenue increased 25%. Including Bulk sales, cannabis segment revenue decreased 11% to $31.4 million compared to $35.5 million in the same period last year. The decrease was almost entirely driven by the lack of Bulk sales in the current year compared to $10 million of Bulk sales included in the prior year period as well as a 12.8% decline in Canadian medical sales to $3.4 million.

On the other hand, Adult Use sales grew to $20 million or 25.8% while International Medical contributed $8.1 million during the current quarter, a 42% increase year-over-year. Excluding the impact to Bulk sales, our Cannabis segment revenue increased 23.5%. As previously indicated, we expect continued growth in both the Adult Use and International Medical channels and minimal, if any, bulk sales as we focus on higher-margin opportunities. We will take advantage of bulk sales on an opportunistic basis and in cases where it helps us rebalance inventory levels in certain products. Going forward, we expect cannabis to continue to grow at a faster rate than hemp and to reflect a higher percentage of our total revenue.

The growth in Adult Use sales is attributable to several factors, including improved presence in retail outlets, the launch of our Cannabis 2.0 products starting in December 2019, the start of our Kindred relationship in June 2020 and a recent review of our pricing strategy. Year-to-date, 2.0 products accounted for approximately 19% of Adult Use sales and are expected to contribute to our growth in the Adult Use channel as we continue to introduce new form factor.

Our Cannabis segment sales mix continues to evolve and is now characterized by 63% Adult Use in Q3 2020 versus 45% in Q3 2019 and 58% at the end of Q2 2020; 11% Canadian medical in this year's Q3 versus 39% in the year-ago period, including Bulk or flat at 11%, excluding Bulk, and compared to 13% in Q2 2020; and 26% International Medical in Q3 2020 compared to 16% in the year-ago period and 28% in Q2 2020. As mentioned earlier, there were no Bulk sales in Q3 2020 while Bulk represented 28% of cannabis revenue in last year's comparable period.

Hemp segment revenue increased 27.7% to $20 million compared to $15.7 million for the same period last year. The increase was generally due to greater promotional activity in large-format retail and increased e-commerce sales. Going forward and despite the significant year-over-year growth, we expect Manitoba Harvest business to deliver relatively consistent revenue unless there is more clarity from the FDA on CBD in the U.S. Until CBD can provide a growth catalyst for the business, our team continues to explore expanded distribution for our hemp-based products and other ways to generate sales growth despite the negative impact COVID-19 may have on our retail partners.

Segment revenue mix during Q3 2020 was 61% cannabis and 39% hemp compared to 69% cannabis and 31% hemp in Q3 last year. In Q2, our segment revenue mix was 60% cannabis and 40% hemp. As indicated, we expect an ongoing shift to higher percentages of cannabis sales over the coming quarters. On a sequential basis, revenue increased 2% in Q3 2020 to $51.4 million from the $50.4 million in Q2 of this year. This was driven by a 13.1% increase in Adult Use sales which was offset by an 11.4% decrease in Canadian Medical sales, a 1.3% decline in hemp sales and a 2.6% decline in International Medical sales.

The declines in Canadian Medical and hemp sales were largely consistent with market trends, some of which were due to COVID-19-related patient and consumer behavior changes. The decrease in International Medical sales was primarily due to German quota related and import export approval related delays during the quarter. Recent activity indicates we may be able to recover a portion of the lost sales attributed to these delays during Q4.

Total kilogram equivalents sold decreased 53% to 5,107 in Q3 2020 from 10,848 in the prior year's Q3. The decrease was primarily due to the discontinuation of Bulk sales.

Our average net selling price per gram of cannabis in Q3 2020 was $6.15, an 89.2% increase or $2.90 from the $3.25 during the same period in 2019, and a 133% increase from our reported selling price of $2.64 in Q2 of this year. As you may recall, we had a onetime transaction in Q2 related to the settlement of a supply contract without which, our reported selling price would have been $5.03. Compared to the normalized figure, the Q3 net selling price per gram increased by 22.3%. The increased selling price during Q3 was due to a shift in distribution channels and product mix, including the continued growth of our International Medical business, a shift in sales to higher potency and higher-priced products, and the continued growth of our 2.0 products in Canada, which did not exist in the same period last year.

Going forward, we expect our average selling price per gram to remain stable or increase over time as sales of International Medical cannabis continue to make up a larger percentage of our sales mix. While we remain optimistic on International Markets, given the recent resurgence of COVID-19 in European countries and the restrictions that are likely to follow, we are cautious about the potential impacts and are taking whatever measures possible to ensure the uninterrupted supply of product to our distributors and patients. Our average cost per gram of cannabis sold in Q3 2020 was $4.23 per gram, an 85.5% increase from $2.28 during the same period in 2019 and $2.06 during the Q2 of this year. Please recall, the cost per gram in Q2 of this year was skewed by a onetime Bulk transaction associated with the settlement of a supply contract. Excluding the onetime transaction, the cost per gram in Q2 2020 was $3.42. The year-over-year increase is due to a combination of fewer kilograms sold due to the lack of Bulk sales, the sales growth of higher cost Cannabis 2.0 products, our decision not to attribute any cost to buy products starting in 2020 and the limited absorption of fixed costs at our Portuguese facility while we ramp up cultivation.

As previously indicated, we made the decision to stop attributing any cost to buy a product produced in our High Park and Portugal facilities. This decision should reduce our need to make future inventory adjustments; however, this decision also had the impact of increasing our cost per gram on the flower and derivative products that do have value. We continue to implement process improvements at all our facilities to reduce production costs. Our efforts have included the closure of High Park Gardens and enhancement to our cultivation methods that have improved yields by over 40% at our growing facilities. As we expand our 2.0 offerings in Canada and as Adult Use sales continue to grow, we anticipate better throughput and cost absorption at our High Park Holdings processing facility. In Portugal, we should see future improvements in our production costs as we see our International Medical sales grow and our cultivation assets come fully online.

Gross margin for Q3 2020, including inventory valuation adjustments, was 7.3% compared to 31% in the same period last year and negative 10.7% during Q2 2020. During Q3 of this year, we took a charge of $13.4 million related to inventory. Approximately $8 million was the result of an exhaustive review of all products in stock, cannabis and hemp and a thorough evaluation of their potential use or demand in the market. The other roughly $5 million was related to a payment made to settle a supply contract and was disclosed as a subsequent event in our Q2 10-Q. The terminated contract will leave us with future purchase commitments totaling $17.4 million. Gross margin for Q3 2020, excluding inventory valuation adjustments, was 33.4%, which represented a 200 basis point increase from the year ago period of 31.4% and a 720 basis point increase from Q2 2020 of 26.2%.

Gross margin for cannabis, excluding inventory valuations and adjustments, was 27% in both Q3 2020 and the year ago period, an increase from 10% in Q2 2020. Looking ahead, we expect to see expansion of gross margins due to lower costs at our facilities, resulting from our cost-cutting measures and additional operating efficiencies from more throughput and better fixed cost absorption, supplemented by the availability of low-cost third-party supply on an as-needed basis.

Gross margins per hemp, excluding inventory valuations and adjustments, was 43% in Q3 2020 compared to 43% in the year ago quarter and 50% in Q2 2020. The sequential decline is due to a labor and overhead rate adjustment made in the previous quarter. Excluding the rate adjustment, Q2 gross margins were 41%. As previously indicated, we expect hemp margins to fluctuate between the mid- to high 30s and mid- to high 40s, depending upon the nature and timing of discounting and promotional activities.

Moving to expenses. Excluding impairment charges, of which there were none during Q3, total operating expenses were $36.5 million in Q3 2020, a $3.1 million or 8% decrease compared to the prior year quarter and a $5.5 million or 13.1% decrease from Q2 2020, excluding the $28.4 million of impairments incurred last quarter. However, the savings are even more significant if we compare Q3 to the annualized SG&A run rate of Q4 2019, which results in an $18.5 million reduction or 48%. These favorable expense comparisons reflect the significant progress we have made over the past few quarters in aligning our cost structure with the current business environment and strengthening our position as a leaner and more efficient leader in the cannabis and hemp industries.

To date, during 2020, we have eliminated 482 positions throughout the company and are on pace to achieve an annualized savings impact, net of severance costs, of $38 million. These head count reductions, combined with our already implemented efforts to achieve operating efficiencies, have resulted in $55 million annualized cost savings versus our Q4 2019 run rate. All our efforts began before the onset of COVID and were not in response to the pandemic.

While this challenging and hard work is behind us, we will continue to look for ways to increase our efficiency and optimize our cost structure as we adapt to the dynamic business conditions of a fast-evolving industry. Importantly, and while our focus on cost-cutting over the last 3 quarters may have moderately distracted our efforts to grow sales, we do not believe any of the implemented reductions will have a negative impact on our ability to generate growth in any of our segments. On the contrary, we believe we are now better positioned to invest in opportunities that will generate the highest expected returns.

In particular, we expect ongoing growth in International Medical, a category in which we have established a proven track record, additional growth in Adult Use driven by increased listings of our flower products and sales from our new and existing 2.0 products and continued baseline sales of hemp products until we can launch CBD nationally throughout the U.S. As we increase sales, we are now positioned to realize the benefits of our new cost structure.

Net loss for Q3 2020 was $2.3 million or $0.02 per share compared to a net loss of $36.4 million or $0.37 per share in Q3 2019. This marked a $79.4 million improvement compared to Q2 2020 and a $181.8 million improvement versus Q1 2020. We do expect to experience volatility on the net income loss line due to the ongoing revaluation of the outstanding warrants associated with the equity offering completed in March of this year. Adjusted EBITDA loss for Q3 2020 was $1.5 million compared to the adjusted EBITDA loss of $21.9 million in Q3 last year. The improvement in the year-over-year adjusted EBITDA loss was primarily due to lower operating expenses and better revenue mix. On a sequential basis, our adjusted EBITDA loss was an 87.4% improvement from the $12.3 million loss in Q2 2020. The reduced loss is mostly attributable to our cost reductions and operational efficiencies. As indicated in prior quarters during 2020, we remain focused on achieving breakeven or positive-adjusted EBITDA by the end of Q4 2020 and believe we have the momentum to realize this goal.

Turning to the balance sheet. We ended Q3 2020 with cash and cash equivalents of approximately $155.2 million, representing an increase of $18 million from $137 million at the end of Q2 2020. This included proceeds from our ATM offering program of $45 million during Q3 2020. Between our cash balance, future access to the ATM program and increased efficiencies in our business, we believe we have sufficient capital and access to capital to manage our operations and execute our plans for the foreseeable future.

Our estimated cash flow need for Q4 2020 is approximately $30 million to $33 million, which primarily consists of operating cash needs of $8 million to $10 million, plus interest and principal payments of approximately $15 million and CapEx of approximately $7 million to $8 million. These numbers assume no meaningful additional impacts due to COVID-19, and the remaining CapEx assumes completion of Phase 2 in Portugal this year.

As we look ahead, we intend to leverage our 2020 achievements by generating significant revenue growth with a lower cost base that will allow us to deliver solid shareholder returns. We are still in the early stages of the legal cannabis industry, and while meaningful revenue opportunities currently exist, we believe future opportunities will continue to surface as more countries legalized medical and/or adult-use cannabis. We also believe there will be additional revenue opportunities related to CBD in the U.S. once the FDA provides more clarity on nationwide regulations.

While 2020 has been a transitional year for Tilray, the actions taken will enable us to expand our presence in existing markets for cannabis and hemp and capitalize on future opportunities in new and emerging markets. We are well on our way to being recognized as the most trusted cannabis and hemp company.

Thank you for your interest in Tilray. Brendan and I are now available to take your questions.

(Operator Instructions) Our first question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

Can you just touch on the German market? I mean we're hearing different things, right? The data for the third quarter showed a sequential drop of 28%. You spoke partly about it. But just what has to happen in terms of catalysts for growth to accelerate in that market? And then remind us about your edge in that market, right, because other companies also talk about being or entering that market. You have companies from other parts of world also talking about that. So just a reminder of your edge and then key catalysts that help to drive that growth for the market there?

Great. So when we look at the German market, look at patient prescriptions and compare them to Canada back in 2014, '15, the growth in Canada is -- sorry, the growth in Germany is steady. Obviously, off of a much larger population base, more than double the population. And so we're confident that we'll continue to see patient growth there. In Q3, we were set back slightly by some issues regarding Germany's item INCB quotas. And so we had some product that we were scheduled to ship from Canada and from Portugal to Germany in Q3 that because of the fact that Germany was, as quoted, we had about a 4- to 6-week delay and so some of that revenue pushed over into Q4.

When we think about our edge, we have invested heavily in our GMP facility in Portugal, so we have a medical cannabis cultivation and processing facility in the EU, for the EU. And so we've been able to historically ship product from Portugal to Germany. And we believe that European campus gives us an edge, not only in countries such as Germany, but also in countries such as France that will implement their medical cannabis program here this quarter, and we expect to most likely ship product from Portugal to France in the first half of next year, hopefully, in Q1. And so when you look at the 2 largest economies in Europe: Germany and France, over 140 million people, we think that's a long-term opportunity. And both are just starting. But clearly, we think all the countries in the EU will begin to implement and grow their medical cannabis programs.

And if I may, just a follow-up. I understand the hemp food CBD strategy. But when you think about U.S. market, other companies are trying to use their brands there whether it's beer or CBD products to raise awareness for their own THC brands. So someday, when they can sell in the U.S., they have already brand awareness, right, and supposedly, an advantage there. Do you think along those lines also? Or obviously, I don't think Manitoba Harvest as a brand we would be using for THC, right? Is that something you have to be focused on right now? Or is that something more long term, that's not a priority right now?

It's something we discuss on a regular basis. Clearly, Manitoba Harvest has CBD products in market in the U.S., and we do think that there is brand awareness, and that Manitoba Harvest as a CBD brand has great potential. But it's most likely not a tasty brand. We do think about the long-term opportunity and our strong desire to get our brands into the U.S., not only the Tilray brand but other adult use brands. The big question for the U.S. is, what will the eventual distribution model look like.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

First one for me is just in terms of kind of the shift away from the value segment into more of the premium pricing, certainly makes sense just given kind of the margin profile, but just given the fact that value has been growing so much kind of overall within the Canadian market, could you just kind of speak more to the reasons why you're not going to kind of focus as much on the value or you just not able to get kind of the product out there at a reasonable profit? Or kind of what the strategy is just given the value segment continues to grow there?

Yes. Thanks for the question. I think that as we've looked at the value segment and we look at the pricing that's going on there and the opportunity to actually capture some margin products, we just don't see it as an opportunity for us to go ahead and continue to enter with new products in that market. We do have the batch in that particular segment of the market that we do quite well with, but we just don't think that there's real need for us to go ahead and try to grow that significantly with very low with any margins. Instead, we've been focusing on the premium sector of market. And we're now selling a significant portion of our products in both the mid- to high potency as well as the mid- to premium categories. The other thing is I just think that we're seeing significant price compression in that value segment, and it just -- it's too costly to chase it.

All right. Great. And then just second one for me, quickly. Congrats on kind of getting closer to that EBITDA profitability. I just want to kind of help us think about kind of the EBITDA margin improvement kind of over the next 12 to 18 months? Where do you think the EBITDA margin profile could go from here?

Yes. I don't know that we've got kind of a forecast of the EBITDA margin. I mean we're still focused on delivering Q4 in terms of the breakeven or positive EBITDA as we talked about. And I think that we'd like to look to make improvements on that as we move into 2021. But I don't have the visibility to provide you guidance right now.

Our next question comes from the line of Vivien Azer with Cowen.

So my first one is just a housekeeping item. Thank you very much for all the detail on your uses of cash. I've certainly been getting a lot of investor questions around your balance sheet and liquidity broadly. So I apologize if I missed it, but did you guys tap into your ATMs after closing the quarter?

After closing Q3?

Yes.

No, we did not.

Okay. Great. And then my real question is a follow-up to Aaron's. So I fully appreciate this pricing exercise and portfolio kind of pivot, if you will, or reprioritization, makes a lot of sense for you guys from a margin perspective, but I am curious on what kind of competitive landscape assessment you guys have done. Like do you feel that you are as well placed to go after a smaller portion of the market successfully? Like what's your assessment there? Like are you thinking about your competitors and price segments increasingly? Because everyone wants to sell premium, it's the highest margin. So just curious how like an evaluation of the competitive landscape can form our position at all, if at all?

Brendan, do you want to take this? Do you want me to start?

Yes. So thanks, Vivien. We launched the bet about a year ago because we saw it as an opportunity. And in that value segment, we've seen price compression. We are waiting a bit to see how it plays out over the long term. We've had success with Marley [Natural]. We continue to do really well in the 2.0 categories, whether it's edibles, vape -- in the edible category. Chocolate, we've launched gummies in Q3, and we'll continue to release a number of new form factors in Q4 from additional gummy products to a hash product, new beverages, vapes, topicals will be Q1. And so we see that as a long-term opportunity, and we'll continue to evaluate how much we want to pursue that value segment over the long term.

Yes. I mean, I guess I'd add just a little bit of color to that also relative to the premium segment. I think we have looked at kind of where we sit in that space. And we did make some price adjustments to be competitive in the space so that we can go ahead and capture our share. I think when we look at it, we're probably not in as many retail locations as we could be right now, and that's the benefit of our relationship with Kindred that we are getting additional points of distribution on a pretty aggressive basis. And we feel like there's a lot of opportunity for us still in the higher-priced segment just by being in places where we don't currently exist. And so that's a good opportunity for us. So we're still focused on capturing our fair share of the market in that particular space. And we'll keep a presence in that value segment but just not look to win there in a sense of trying to work on market share growth there, where we don't think it's sustainable.

Got you. That call out on incremental points of distribution is really helpful.

Our next question comes from the line of Graeme Kreindler with Eight Capital.

Yes. I wanted to follow up on the comments made regarding the international market and specifically some of those bottlenecks that were experienced in the Q3 period regarding shipment restrictions and import permit delays. I'm wondering based on the facts you have right now or the outlook you have right now, would there be any sort of disruption in terms of the outlook on international revenues outpacing the domestic revenues because of it? And I was wondering, based on those disruptions in the quarter, is it possible? Could you give us the magnitude what the adjustment would be if those didn't exist where the international growth might have gone?

So our international -- thanks, Graeme. Our International Medical has been -- has seen significant growth compared to medical growth in Canada. The delays that took place is the INCB in Germany. I sort of see that as a onetime, one quarter delay. And not only a delay between Q3 and Q4, but a longer-term one quarter delay as we look at the size of the International Medical market and when that international market will exceed the market opportunity in Canada.

Okay. And then just to follow-up on that. I mean the timing remains outstanding, and it's difficult to actually pin. But when you talk about that point about when it ultimately exceeds what's being generated in Canada, what is the real linchpin for that? You hit a construction milestone in Portugal right now. I would assume that's part of the equation here. Is it part of sales and marketing and education efforts on the ground in Europe? What -- maybe you could lay out some of the steps here to understand what the building blocks are as you've hit a milestone on here on capacity? What else comes in behind that to really get to that inflection point? That would be appreciated.

Yes. I think the 2 biggest drivers are going to be patient growth in Germany and France, so we were hopeful that we will ship product from Portugal to France in the first half of next year and the first quarter of next year. And the market size there is 83 million people in Germany, I think, roughly 67 million people in France. So 140 million, I guess 150 million -- that's not right. I (inaudible) 130 -- roughly 130 million. And the opportunity there is that we will see other countries legalize medical cannabis following behind Germany and France and how long will it take for all of those countries to legalize? I think that we'll see possibly the entire EU legalize cannabis for medical-use over the course of the next, let's call it, 18 months. And so we need to see regulatory change in the EU. We need to see doctors and pharmacists embrace medical cannabis as medicine.

I think if I'm going to look at one key driver for the rest of Europe, it would be how quickly the patient count in France exceed 3,000 patients. That will be a good indication of how quickly that market is going to grow. In Q4, COVID, the real unknown for the EU, not only in terms of growth, but in terms of patient acquisition, are fewer patients going to see their doctors because of COVID? The answer is likely yes. And so that may reduce growth from what it would be in a non-COVID environment.

And all of this growth is really focused on medical. I am optimistic about our chances in the Netherlands. And I do think we will see a number of countries in Europe legalize for Adult Use throughout 2021 and [2026.]

And maybe I'll ask one follow-up question to that. When you're talking about the -- a wave of regulatory reforms in Europe in terms of unlocking more market value, do you see potential developments in the United States, particularly on the medical cannabis side of things? Do you see that as a potential catalyst just for further reform in the EU? Or do you look at those 2 markets as being exclusive of one another?

I really look at those markets as being exclusive from one another. I don't think any medical cannabis change in the U.S. will drive medical cannabis change in the EU. You could potentially argue that medical cannabis change in Europe might drive medical cannabis change in United States. It's not absurd to think that at some point, there could be an opportunity to export medical cannabis from Canada or from Portugal to the United States for medical cannabis purposes, just like we export from Portugal and Canada to countries such as Germany, New Zealand, Australia and the U.K.

Our next question comes from the line of Scott Fortune with ROTH Capital Partners.

Real quick, a follow-up on that kind of leveraging your partnership there in Novartis and kind of expanding, can you call out the other countries you think will expand in Europe? And then are you leveraging your partnerships in Europe for launches and ramping up that side of the business?

We use -- we have a number of different -- besides our relationship with the Sandoz division of Novartis, we used a number of different pharmaceutical partners in countries around the world. So we use a half a dozen partners in Germany. From our importer: Paesel + Lorei to pharma provider, NOWEDA, GEHE, Phoenix in Germany. We partner with government agencies in some countries such as Croatia. We use PCI in Australia, CBC in New Zealand and 4 different partners in Latin America from Megalabs, [Solco brand,] Hypera, there. So we continue to build relationships with pharmaceutical partners in individual countries around the world. We continue to have a healthy pipeline of product registration in countries around the world. So we're registering our products. Anywhere from half a dozen -- sorry, anywhere from a dozen to 2 dozen of our pharmaceutical products on a regular basis in additional countries so that we can export from Canada and Portugal, whether it's an oil product or a flower product based on whatever individual distributors are looking for in individual countries.

Okay. And then real quick follow-up. You've -- kind of the clinical studies and the medical studies you've done, are we going to see more data come out in 2021 to continue to drive that side of the business potentially? Or kind of how are you looking at the clinical studies going forward here?

We are. We saw a clinical trial in Australia and move from Phase II to Phase III. So I think -- I believe Phase II was about 81 patients and Phase III is more than 200. I can't remember the exact number, but it's more than 200 and somewhere in the range of 200, 350. We've seen a slight delay in 2 of our U.S. clinical trials entirely due to COVID. So it was -- those research institutions in the U.S., in New York, had a slight delay of recruiting patients in the middle of COVID. But they have recovered from that initial delay. So we may see some of the data coming out of those 2 U.S. trials delayed by a quarter in 2021.

Our next question comes from the line of Mike Hickey with the Benchmark Company.

Congrats on the quarter, guys, and I've got 3 questions, but they're the pretty small Brendan and Michael, so I think you can speed through them. Just one, I was hoping that you could remind us of the size of the Canadian cannabis market and how much of that market is the black market, still illegal sales and what you're seeing in terms of possible conversion of that black market to the legal market? I thought for a while maybe COVID would be there, maybe it's not, but obviously location and price selection.

The second one, Brendan, I know you look at the US a lot. Michael, you're based in Boulder, you look at the Colorado market that was considered mature. It expanded 13%, 19% and 23% year-to-date through August. So when you see that sort of market growth, double-digit market growth on a market that was considered mature, what does that tell you about the possibilities of accelerated growth or more growth than you originally thought in Canada, your home market?

And lastly, curious about the pickup in yield, 42%. That's pretty significant with high potency. If you can remind us who is your Head of Corporation there? If you've had any changes on your team or what exactly you're doing to get those sort of strong results?

Great. So your first question was around the size of the Canadian market. I think that the wins that I saw was that 2020 -- 2020 retail sales were going to be somewhere in the $2.6 billion range. The overall Canadian market is roughly sized, I believe -- size of the illicit market and the legal market a few years ago in the $6 billion to $8 billion range. I think it's -- my guess is in a fully mature Canadian market, it's likely to be $8 million (sic) [billion] to $10 million (sic) [billion.] And so one way of thinking about the Canadian market is that there's a roughly 100% growth opportunity to take us from $2.8 billion to $5.6 billion. It's certainly a possibility over the course of the next, let's call it, 1 to 2 years.

The question will be, doesn't mature -- and really sort of tie in question 1 to question 2. I think the question will be what does the illicit market look like in a fully mature Canadian market? And so if you think about let's pick, if CAD 10 billion is the size of the Canadian market, in Canadian dollars. CAD 5.6 billion we got 56% of the total market being legal versus 44% illicit. I think we can get to a stage like Washington, State of Colorado, where the legal market -- the regulated market is 80% to 90% and the illicit market is 10% to 20%. So there's still tremendous upside in the Canadian market over the short to the midterm.

The question will be 2 years from now, 3 years from now, 5 years from now, does the Canadian market look more like Colorado and Washington state, where the illicit market has essentially been stamped out? Or does it look like California, where there is still a robust and thriving illicit market? And so that's how we think about the long-term opportunity and compare it to a place like Colorado where you still see significant growth on a year-over-year basis.

In terms of cultivation, we -- at our Enniskillen facility, you're right, our yields were up 42% compared to last year. Almost all of the products -- actually, all of the product coming out of that facility is above 20% THC. And we have a Head of Cultivation, Françoise Lévesque. She does an amazing job and then the team of (inaudible) Ontario that has figured out how to dial in that facility. And each one of these facilities is -- it's a unique machine. And it takes a little while to fine tune all the different variables, whether it's nutrients, soil, temperature, humidity, CO2 that we pump in. It takes a while to dial it all in, in order to maximize yields, maximize potency. So we're proud of what we've accomplished there and hope to continue to improve both the quality and the potency of our products and continue to decrease our costs.

Our next question comes from the line of Andrew Carter with Stifel.

Appreciate the cash flow guidance you outlined for next quarter. I just want to check the tick because it says, there's $69 million noncancelable inventory purchases in the Q, $78 million last quarter, and I assume that was part of the write-off. Could you help us understand kind of what's happening with those locations? Are they negotiated or kind of how that fits within the cash plans?

So Andrew, I'm happy to answer the question. I had a really hard time hearing you and understanding all the details of your question.

Yes, sure. $69 million in noncancelable inventory payments in the Q? Could you hear that?

Yes. Yes. Yes. So I mean there are some longer term contracts that we've got in place. We've done a good job of negotiating out a significant portion of those. And we continue to work on what we can do to go ahead and get ourselves into a favorable position with any remaining contracts that we think are not necessarily in our favor. So we're focused on it, and we just -- it's one of those things we've had success, and we continue to look at what we can do going forward.

Okay. And I guess the second question is, and this is, I guess, this could be put to other LPs with all the times on the call talking about the U.S. I guess I don't understand what the fundamental right to win is here? I mean, we have the Canadian template. Everything has taken longer. I don't hear like an affirmation of adjusted income guidance which was 25% to 30% or in terms of this platform and why that cascade in the U.S.? And I'm kind of speaking specifically, and this is the first question to get from investors on the story here. I mean the insider sales has been pretty significant here. So could you talk about what your confidence and how you put investors for kind of investing towards the U.S., which would be required?

Thanks, Andrew. I think that I would segment the opportunity with this industry into 3 categories: We have seen Canadian industry whether medical or adult use grow over the past several years, where while we have been operating internationally since 2015, 2016, it's very early days. When I think about the long-term opportunity, I don't focus on the 37 million people in Canada. I'm much more focused on the 700 million people in Europe, where there's clearly a long-term medical cannabis opportunity, and we're well positioned. As well positioned, if not better positioned than other LPs to win there.

And then there's -- the third category is the U.S. And when we look at the U.S., we have built a brand in that portfolio of products that we think can be successful in the U.S. Most of our executive team is based in the U.S. I feel like I know that market well. The real question that I have besides our U.S. CBD strategy, that's part of Manitoba Harvest. The real question that I have is, in the long term, how will this product be distributed in the U.S.? Will it be distributed like the current MSO model? Will be distributed like a chocolate product? Will be distributed using a distribution channel that's more similar to tobacco? Or will it be distributed like an alcohol product, like beer?

And the answer to that question really determines the right U.S. strategy. I happen to be of the opinion that I think in the long term, this product is not distributed in the U.S. like the current MSO model. It's not distributed like a chocolate product in retail locations throughout the U.S., but I do think it's distributed more like tobacco, more like [in and out] on the adult-use side. And I think on the medical side, the product is distributed more like our medical products in Europe and less like the current MSO model. And I think that is a huge leg up on the existing U.S. MSO company.

Our next question comes from the line of Glenn Mattson with Ladenberg.

I just realized that it's late and most of my questions have been answered. But just a question quick on the ATM, I think, Vivien referenced. She said -- you guys said you haven't tapped it since the end of the quarter. But can you just give us an idea of what your plans are going forward? If you intend to continue to use it? Or if you feel like you're well positioned as far as the balance sheet goes? And that's it for me.

Yes. Thanks, Glenn. We look at the ATM as an opportunistic way for us to go ahead and raise capital. And I think it's one of those things that we will use at points in time to go ahead and continue to strengthen the balance sheet, and we'll just kind of -- when it suits us and when it seems appropriate, we'll go ahead and continue to layer in additional cash.

Our next question comes from the line of Bill Kirk with MKM Partners.

So I guess my question is, the cost structure looks ripe for leverage, but what gives you confidence you can get Canadian growth or share without having to re-increase spending, I guess, because you're spending slowed and with it your Canadian market share and kind of regional sales were stagnant, so how does it increase without a return of spending?

So I'll take a stab at this first, and then Brendan can go ahead and fill in where I miss some things. But one of the things, as I indicated earlier, in one of the questions that was asked, I think, we've got an opportunity to go ahead and expand our distribution pretty significantly still. We've got in -- I think in Q3 alone, we added over 46 listings. And I think between Q3 and into October, we've got over 110 new listings that we've gone ahead and increased. And that's on the basis of working with our partner, Kindred, because as we indicated earlier, when -- as we went through the cost-cutting exercise, we had 18 internal salespeople that were working for Tilray. They're out in the field. And by moving to Kindred, we got 43 people in the marketplace go ahead and enhancing the reach of our products. And so I think that's one of the ways that we just -- and that's a variable cost for us. And so we benefit, they benefit. And so I don't think that, that really has a significant impact on the cost structure going forward.

The other thing is that we're going ahead, and we've actually narrowed our focus in terms of our brands. And so we are focusing more dollar -- or I guess the same dollars on the fewer brands in the sense of making those win for us. And we think that that's another opportunity for us in terms of moving forward in the Canadian marketplace. And I would say that when we look at where we are, we actually are growing pretty nicely now. I think in Q3, we had some pretty good momentum, and in particular in certain categories. And we looked that, that will continue into Q4. We've seen promising results into the beginning of this quarter without really committing additional dollars. And we think that, that will continue as we go forward into 2021.

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

So I guess just going back to your Cannabis 2.0 efforts. You did give some color in the prepared comments. So as we look towards next year, what are some of your key priorities? And then as you look to, I guess, what's already happened this year, just curious what's gone well and maybe areas that maybe haven't met your expectations thus far?

Yes. Looking forward in Q3, we launched 2 different gummy products. So that's our entrance into the gummy segment. We expect to launch a third gummy product this quarter, a hash product this quarter. We've seen Everie emerges as Canada's #1 CBD beverage, which is now selling in 9 and 10 provinces. Everie will innovate the CBDs again with Everie Mint Tea launching in Q4. A little further out, we anticipate launching a few additional vape, topical and chocolate products in Q1. And so we've seen success really across the board in 2.0 products. We think we've got a good lineup. I think that if I were to change something in terms of 2.0 in relation to your question, we actually would have brought more form factors to market faster, and vape was crowded as we expected, but we would have launched more innovation in terms of edibles, concentrates. There was less -- there were less 2.0 product in non-vape categories, fewer 2.0 products in non-vape categories than we originally anticipated. And so I would have changed our strategy a bit and launched a few more of the initial product that we held back.

Our next question comes from the line of Mike Grondahl with Northland Securities.

This is Michael on for Mike. Maybe just one quick one. On the extract's revenue growth year-over-year, can you just give us an idea what the mix was there from adult use versus international?

I'm sorry, you're asking for the extract revenue growth?

Yes.

And the difference between the adult, rec and international?

Yes, just the kind of mix difference between those 2 and how they contributed that?

Yes, well, so I've got the extract compared to flower on the international side of things, but they just don't think that I've the comparison of Germany to Canada. So if you want, I can follow-up with you on that one. But I just don't have that comparison handy.

Our next question comes from the line of Michael Lavery with Piper Jaffray.

Just one quick follow-up on your thoughts on the U.S. You've given some good color on how you think that market will evolve and a distribution model similar to alcohol or tobacco in some form or another. But if that's not how it exists today, obviously, whenever permissibility or legalization comes, would it be right to assume that you would rather wait until the market evolves to something more like you expect and hope for rather than try to make any entry into the current state-by-state model?

Yes. So we continue to evaluate potential options for entry into the U.S. into evaluate those opportunities on a regular basis. Based on our -- based on being U.S. dollar, C corporation and listing on NASDAQ, obviously, we're prohibited from entering the U.S. market in a way that the U.S. MSOs have, but we do continue to evaluate options similar to the way that our competitors have. I think that we will continue to see more clarity in terms of how cannabis products both Adult Use and Medical will be distributed in the U.S. In terms of Medical, we do think we have clear opportunities to export from other countries into the U.S. In terms of adult use, a little more clarity into the distribution model would severely drive the path that we would use to enter in the U.S. market.

So just a wait and see for the most part and have to know what you're up against before you really can make some decisions, I guess, I think, is a big part of it?

That right. I'm optimistic about the U.S. When I started in this industry, 10 years ago, 50% of the Americans thought that cannabis should be legalized for adult use. That would gallop the number back in 2010. Today, it's -- I saw 68% of as of this morning. So it's pretty significant growth and more than 90%. I think 94% of the Americans believe that medical cannabis should be legalized. And so it's clearly, there is change in terms of public opinion. I think that the ballot measures, cannabis was undefeated this election cycle. And I think that we'll see 5 Republican senators now. 5 additional Republican senators now represent a state where the constituents have legalized cannabis. And that's how you drive change in the U.S. Senate.

Our next question comes from the line of Angad Dhamija with Jefferies.

I just have one on Germany. Just wanted to get a sense about how the competition is building up over there. And if that has any near-term implications on the selling price over there? And the kind of trajectory you're seeing for price available there, that will be quite helpful.

Michael, you start on price?

Yes. So yes. So in Germany, let's say, in terms of price, things we're seeing, I guess, stability in prices relative to the oils that are still there, and we're seeing some price pressure on some of the flower. Although I will say that in general, what we saw for us, at least that we were able to take some pricing on our flower in Q3. And so we actually increased it over Q2, and the pricing for the oils was relatively stable. What we were able to do also is that we saw single-digit growth in terms of prescriptions there, and we picked up roughly 200 basis points in market share. And so from a competitive perspective, I think that we're holding our own, obviously, growing at the pie growth, which is a good opportunity for us, and we continue to see that. So I think that we're -- that's generally what we're seeing. And -- but I would say that from the beginning of the year, we have seen some price pressure, but we were able to go ahead and increase prices a little bit in Q3.

Our next question comes from the line of Sam Gurwitz with Carronade.

My question was answered previously.

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

In conclusion, thank you to our Tilray team for their work and dedication to our mission of bringing in people's lives the power of cannabis and hemp. We appreciate your interest in Tilray, participation on our quarterly call and wish you all a good evening. Thank you.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.