Tilray Brands, Inc.
Q1 2019 Earnings Call Transcript

Published: 14 May 2019

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Tilray's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session . Now it's my pleasure to turn the call to Rachel Perkins.

[Rachel Perkins:]

Good afternoon and thank you for joining us on Tilray's first quarter 2019 earnings conference call. On today's call are Brendan Kennedy, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer.

[Brendan Kennedy:]

Thank you, Rachel. Good afternoon, everyone. And thanks for joining us. Today, I will review the progress we have made since our last call just eight weeks ago. This includes focusing on our global growth strategy, and providing an update on our opportunities for long-term growth in the global medical, wellness and adult-use cannabis markets. Mark will then review our first quarter 2019 financial results in more detail and discuss our long-term financial targets. After that, we will open the call for your questions. The global transformation of $150 billion worldwide industry is just beginning. At Tilray, we're building a global platform to be a multibillion dollar consumer packaged goods company known for delighting consumers with the house of trusted brands, and delivering those brands to market through world class multinational supply chains. We are taking decisive actions to create a global infrastructure that can be scaled globally over the long-term. We're pleased with our first quarter results, which included the first full quarter of adult-use market sales. Revenue increased 195% year-over-year to $23 million. And total kilogram equivalents sold increased both sequentially and on a year-over-year basis to 3,012 kilograms. We are proud to have achieved this growth despite the continued supply constraints across Canada.

[Mark Castaneda:]

Thanks, Brendan. Good afternoon to those you joining us on today's call and webcast. It is a pleasure to be speaking with you today. Please note all the financial information we discuss today is prepared in accordance with U.S. GAAP and is in U.S. dollars unless otherwise indicated. We had a strong start to the year and we believe we will continue to gain momentum as we progress throughout the year. Focusing on Q1 results in more detail, Q1 revenue essentially tripled to $23 million or C$30.6 million, compared to the first quarter of last year. Excluding excise taxes revenues were $21.5 million. Revenue growth was primarily driven by the Canadian adult-use market. The addition of hemp food sales from the Manitoba Harvest acquisition and strong growth in international medical markets. Extract products represented 37% of non-food revenue for the first quarter of 2019 compared to 40% of revenue in the same period last year. We are pleased with our performance in the Canadian adult-use market so far, which represented 34% of revenue for the first quarter. Adult-use revenues grew approximate 80% sequentially from Q4 to Q1. We are still in the early days of the adult-use rollout with limited number products available due to regulations and supply constraints. These constraints will loosen this year with other form factors being available later this year. On the hemp food side, we closed the acquisition of Manitoba Harvest on February 28th and included one month of results in our first quarter. As we discussed in the prior earnings call, we expect approximately $20 million of contribution per quarter from this business. We also anticipate the rollout of U.S. CBD products in the second half of this year. On the international side, our revenues increased fourfold to $1.8 million from $432,000 in the prior year. The growth is primarily driven by Germany and Australia. Our growth internationally and in Canada continue to be limited by lack of supply that we expect to improve over time. Moving on to operational metrics excluding hemp foods, total kilogram equivalents sold more than doubled to approximately 3,000 kilograms from 1,300 kilograms in the same quarter last year. The overall average net selling price per gram was $5.60 or C$7.54 and $5.28 or C$7.02 excluding excise tax. This compares to $5.94 in the prior year's first quarter. Gross margin for Q1 increased sequentially to 23% from 20% in the prior quarter. Gross margin continues to be impacted by increased costs with the ramping up of cultivation facilities, as well as high cost third-party supply.

[Operator:]

And our first question is from Vivien Azer with Cowen. Your line is open.

[Vivien Azer:]

Hi, good afternoon.

[Brendan Kennedy:]

Good afternoon, Vivien.

[Vivien Azer:]

So just to kick things off on revenues came in really nicely certainly ahead of our estimate, ahead of consensus, wondering how your fiscal 1Q results compared to your internal expectations. And if there was upside to your expectations from a segment perspective, what drove it? Thanks.

[Brendan Kennedy:]

So Vivien, yes, our numbers came in pretty solid for Q1. As you know, some of the key drivers to that is having plenty of supply and sufficient supplies to go after each of these markets. But if you look at our adult-use market, we were up 80%, which was ahead of what we originally were expecting for Q1.

[Vivien Azer:]

Great, that's terrific. Mark, you reiterated that you expect to be recognizing revenue from novel form factors that will be legalized later in the year, I am just curious to understand how you're thinking about the 60 day notice period, because it doesn't leave a ton of legal room to generate revenue in the fourth quarter if I'm thinking about it right. Thanks.

[Mark Castaneda:]

Yes, you're absolutely right. There's an additional 60 days on top of the mid-October date. That only leaves a really small window in the second half of December. We are still expecting to be able to have revenues kick in earlier than that. So we're still waiting to see the final regulations on the 60 day window.

[Vivien Azer:]

Got it. But just to clarify then, you're expecting some kind of flexibility from the government?

[Mark Castaneda:]

We are.

[Vivien Azer:]

Okay. My last question is on the capacity build out, make sense, given that you're pushing out your target for supply and demand balances in the marketplace. Your comment was that those build outs will be completed by the end of the year, but in thinking in terms of how that translates into revenue recognition, and understanding that the construction will be done by the end of the year and then we should add another 12 to 15 weeks for cultivation and processing or could it be sooner than that? Thanks.

[Brendan Kennedy:]

Yes, so I think you're looking at it the right way. So as we finished, it's still going to take time to have the plant startup and to have the cycles of the plant start. So you're thinking about it right.

[Vivien Azer:]

Great, thanks very much.

[Operator:]

Thank you. And our next question is from Graeme Kreindler with Eight Capital. Your line is open.

[Graeme Kreindler:]

Yes. Hi, guys, thanks for taking my questions here. First question, just wanted to elaborate on the wholesale supply available you were discussing earlier. Now that we're into sort of mid-May just wanted to get some color on what the picture looks like in wholesale supply? Has it improved into Q1 or is this something that can be kind of lumpy in the market?

[Brendan Kennedy:]

I would say it's pretty lumpy. We haven't seen a whole lot of supply out there and when our team goes out to inspect the supply that is there, we're not finding the greatest quality. And so we oftentimes will inspect product and it's just not have a quality where we feel comfortable putting it in our packaging and selling it under our brand. We do see some progress, we see some very nice facilities coming online. But I think we're still expecting several quarters of supply imbalances here in Canada. I think you'll see some smoothing of the lumpiness when we start being able to sell other form factors in Canada that will give producers such as us and consumers more options, products to sell and products to buy.

[Graeme Kreindler:]

Got it, thanks. And to follow up on there, the pricing - average net selling price per gram from Q4 looks like it decreased into Q1. So I was wondering if I could get a bit of color there in terms of what the contributing factors were?

[Brendan Kennedy:]

Sure. So if you think about our pricing, the pricing is relatively fixed to the provinces and most of our channels, so pricing hasn't moved. It's really a function of mix. So when we actually have sold a little bit less extracts this quarter versus the prior quarter, or prior year's quarter versus last quarter. So it's more a function of mix as opposed to any price changes. And as you saw that adult-use was a higher percentage of revenue compared to last quarter as well.

[Graeme Kreindler:]

Okay, great, that makes sense. And then my last one here, I'll jump back in the queue. You mentioned about pursuing other strategic partnership. So I was wondering if you could elaborate on what specific verticals would be higher up in your pecking order. And, if you're putting any sort of timeline, or range of timelines in terms of when we could see another strategic partnership be announced?

[Brendan Kennedy:]

That's a good question, Graeme. As we see cannabis disrupting a number of other industries. We've been inundated with contacts from Fortune 500 companies who are interested in exploring partnerships with Tilray. And it's a range of companies from a broad variety of industries. And generally the deals that have been done with other companies, we generally talk to those people at some point in their process right. Imagine if you're a business development person have a fortune 500 company that's looking at the cannabis industry that person wouldn't be doing the job if they didn't talk to us. So obviously lots of other tobacco companies are looking at the industry, lots of other CPG companies are looking at the cannabis industry from all different categories within CPG. And we're also starting to have conversations with U.S. retailers who are interested in carrying CBD product in the second half of this year. Some of the conversations are focused around carrying our products and other conversations revolve around essentially contract manufacturing some of their in-house brands using Tilray sourced cannabinoid.

[Graeme Kreindler:]

Okay, thanks. Appreciate that and I will jump back in the queue. Thank you.

[Brendan Kennedy:]

Thanks, Graeme.

[Operator:]

Thank you and our next question is from Michael Lavery with Piper Jaffray. Your line is now open.

[Michael Lavery:]

Thanks. Good evening. You mentioned the harvest in Portugal and that the certification is in the works. Can you give us a sense of how to think about the trajectory there, I know working to get the certification is out of your control to some extent on timing there. But when should we think about shipments and how that builds over the course of the year.

[Brendan Kennedy:]

Sure. So I first went to Portugal three years ago, and the first step in the process was signing an MOU, memorandum of understanding with various departments within the Portuguese government, Ministry of Industry Investments there, public-health regulator informats and then there an investment agency called AICEP and we sign that MOU we did what we promised, we build out, we invested heavily and built out a facility, the facility is now complete and we have had a greenhouse operating since last December. And so we had multiple harvests from that greenhouse. So we're building out the inventory in Portugal. The next step is for us to process that product and begin to export it from Portugal to other countries within the EU. I imagine that the first shipment will likely be from Portugal to Germany. As we're building up that inventory, I would expect three different GMP certifications to take place really over the next four-five months. So the first one we're expecting within the next months or so we will receive another GMP certification from the Informat or regulator in Portugal essentially the Health Canada equivalent in Portugal. The second GMP certification we would expect sometime Midsummer June, July and then the third one in the fall. The third one is for oils and extracts. And so we expect revenue really in the second half of the year from that facility in Portugal. At the same time we've approved the 300% increase in our capacity in Portugal. So we'll build an additional 3 hectors of glass house there in that so 7.5 acres we expect that to come online just at the end of year starting next year obviously the Vivien's question it takes a while to ramp up essentially these facilities are like a large machine, it takes a while to ramp up and start up these facilities. And then in Portugal, this summer we will have an outdoor THC grow. We did one last summer. To grow this summer in Portugal outdoors will be about 50 times larger than the one we did last year and we have also approved an indoor expansion in Portugal and that's probably still about three quarters out from being complete.

[Michael Lavery:]

Thank you. That's great. And then on the comments around supply balancing, could you give a sense of when you look at that, does it factor in I assume exports, say to Europe and kind of the whole global view. And then second, just as you think about the net impact for you, obviously, that would suggest potentially better pricing, but maybe less favorable costs on the spot market. How should we think about where you net out and how that may have changed relative to what you might have expected before?

[Brendan Kennedy:]

I think, the first change you'll see this summer from us is that more of the product that we produce in Canada will stay in Canada for the medical market here in Canada in the adult-use market. And what we'll do is we'll replace the product that we've previously been exporting from Canada other countries with products that's produced and processed and packaged in Portugal. So that's the first and most immediate change. Over the short-term, we expect to see relatively high prices on the spot market. But we expect those prices to become much more reasonable over the course of the next - really over the course of the next two years.

[Michael Lavery:]

And a sense of kind of where that nets out, obviously, if you're buying on the spot market, that's a cost for you, but the industry's pricing would seemed a bit - the selling prices would seem to be better. Do you have a sense of if this shift is - if the supply balance seems to be a little bit further out than it was before. Is that net positive overall or negative or not much difference how should we think about that?

[Brendan Kennedy:]

I think over the long-term, you will start to see more pricing segmentation in most of the provinces. Most of the buyers in the various provinces have this. They have a good, better, best. Some of them have a good, better best premium pricing segmentation. And so, I think that you'll start to see that segmentation look more like what you see in probably beer, where you have a one or two times pricing segmentation across the lowest price products to the highest price product. And so that's one change you'll see obviously with increased supply. I think you'll also see more of that. You'll see more pricing segmentation with the addition of other form factors in the fall. It's much easier to have pricing segmentation with oils and extracts and beverages and edibles. And so I think that's one change that's coming down the path after October.

[Michael Lavery:]

Okay, thank you very much.

[Brendan Kennedy:]

Thank you.

[Operator:]

Thank you. And our next question is from Tamy Chen with BMO Capital Markets. Your line is open.

[Tamy Chen:]

Thanks. Hi, Brendan. Hi, Mark. My first question is could you talk a bit about how you're thinking about the pace of revenues in the Canadian vacs market over the coming quarters in the sense that, we've seen a very slow rollout of retail stores across the country? And does that have an impact or does that limit the cadence of demand from the provinces or this demand continues to actually grow, it's just a matter of having enough supply right now?

[Brendan Kennedy:]

I think there's a bunch of different things going on. I think you hit on at least two of them. Obviously, it's taking a while for the retail stores to open, which isn't that - it's not that different from what we saw in Nevada and what we saw in Washington. I think there is probably, if you're looking for an analog in the U.S., those are probably the best two examples. But we now see, I think there's 450 retail stores - a little over 450 retail stores in Washington state, which has a relatively similar population to Ontario. And we have less than 25 open in Ontario. And so there's a lot of room for growth in terms retail in Ontario. So and I think you're right on that point, I think there are supply issues and I think the other key factor that is sort of slowing down growth in the industry or creating less growth - lower growth than we anticipated is really the form factors. You can go into illicit retailers in Canada today and buy all the same products that you can buy in a U.S. state, you can buy a beverage, you can buy an edible, you can buy wafer or cartridges, which is what consumers want, based on what we see across the U.S. And so you've got these consumers in Canada that can buy the legal products that they want. And so I think that is continuing to fuel the illicit market in Canada, I think that one the other form factors are allowed in October that's when you will start to see more and more illicit consumers convert over to this fully legal system.

[Tamy Chen:]

Okay, got it. And then my next second question is, a more high level one, just thinking about it from a prospective of a CPG company evaluating the cannabis opportunity and what do you feel are the advantages or merits for a CPG company to partner with a Canadian license producer versus considering a strategy such as leveraging off takes from a more dedicated extraction company and then just using their own CPG brands for whether it's the U.S CPG market or other market's out there.

[Brendan Kennedy:]

Brands are expensive and they a long time to build and that is a number one asset of any Fortune 500 CPG company and when they're looking to enter an industry, enter a space that is complicated and they don't necessarily understand it. They have a choice of doing it alone or partnering with someone who understands the cannabis industry and probably more importantly, understand how to partner well. And if Tilray can meet the quality standards of companies like Novartis and Sandoz, the quality standard of companies like and has a push in that that means we can meet the quality standard of any Fortune 500 company. And so when they look at making the decision that you describe, they look at us, they feel that we have very high quality standards, we are inspected regularly, not only by government regulators around the world, but our partners not only Sandoz and ABI, but all of our distributors in countries around the world. We can meet those standards. And we know how to partner well, not only with pharmaceutical and alcohol companies, but with companies like Authentic Brands Group that own over 50 iconic brands. They went through a similar vetting process and decided that it was much better for them in the long run to partner with Tilray than go it alone.

[Tamy Chen:]

Got it. Okay, thank you.

[Brendan Kennedy:]

Thanks, Tamy.

[Operator:]

Thank you. And our next question comes from Brett Hundley with Seaport Global. Your line is now open.

[Luke Perda:]

Hi, this is Luke Perda on for Brett Hundley. First question, do you guys expect to have beverage production ready for later this year and what about other products for the Canadian marketplace?

[Brendan Kennedy:]

We do, we've been aggressive building out capacity in our London, Ontario facility. And in addition to all of the equipment that we have there today we're putting in additional extraction equipment, a small kitchen and a beverage line. And we anticipate having edibles and beverages in market as soon as we can. We've been - the edible side is easier. We have lots of people on our team that have produced those products previously outside of Canada. And with beverages the joint venture with ABI has been aggressively performing R&D as well as our internal team over the past two years, aggressively pursuing R&D so that we're ready for that launch and we have some new brands and new products that we're excited to bring to market.

[Luke Perda:]

Great, thanks. And second one, can you talk a bit about the recent expansion announcement inside Canada? Specifically, can you speak to the long-term strength of its sales arrangements and why the company feels confident that capital should continue to be spent on Canadian cultivation rather than other areas of the supply chain? Or even greater levels of cultivation in other countries?

[Brendan Kennedy:]

So in Canada when we look at the ROI in terms of investment dollars the easiest calculations are with expansion at our existing facilities. There it's a very known path. We know what we're building, we know what we're getting, we know that in Nanaimo and Enniskillen, London and Leamington, we know that we have the - essentially the utilities are really important. We have the power, the water already piped into our facilities. We oversized all of those when we were doing our initial build outs. So we have capacity and the return on that investment is that's really easy math, compared to a lot of the overpriced M&A opportunities that are available in Canada today. Outside of Canada, we're making our most significant investments in Portugal, where not only are we investing significantly 300% increase in cultivation, several hundred thousand square feet of indoor capacity. Like I said more than 50 times our outdoor cultivation this summer than the last summer. But our production and manufacturing space in Portugal is really built for 300% of the cultivation that we can do. And so our intent is to purchase raw materials cannabis and oil from other producers around the world and bring that product into Portugal process it, package it and distribute it in finished form to other countries. So that's where we're making our largest investment because from Portugal, it's very easy to distribute products globally.

[Luke Perda:]

Thank you. And just one last one here, as Tilray is engage in more R&D what is the view in the company's ability to drive forward production, inclusion in sale of unconventional cannabinoids like CPG, CBN and alike is Tilray on a similar timelines that of the overall industry and what's the best way to get these cannabinoids be that biosynthesis or plant reading technologies?

[Brendan Kennedy:]

So we're seeing increasing demand in the U.S. for minor cannabinoids CPG, CBN to name a few. We're also - we looked at biosynthesis whether we're talking yeast or E. coli we've made a few small investments there and explored a number of them. So I think in the long run those cannabinoids are likely to be produced outdoors using specific genetics that are high in certain cannabinoids. And we've done some work on our end internally. Not necessarily with breeding but selecting the right strains that have wide variety of cannabinoids for use in outdoor cultivation. I think it's going to - I think you're going to see really interesting math over the long-term where I think some of these biosynthetic producers are going to face some steep competition from large 100,000, 200,000 acre hemp and cannabis farms.

[Luke Perda:]

Great, thank you.

[Brendan Kennedy:]

Thank you.

[Operator:]

Thank you. And our next question is from Robert Wertheimer with Melius. Your line is open.

[Robert Wertheimer:]

Hi, good afternoon, everybody. So my first question is just obviously you guys have a lot you can evaluate. But I wonder if you would flush out for us the decision on the tender in Germany and just the pros and cons of that, obviously, of investments in Portugal, versus importing. I don't know if there's a particular cost that you are concerned on whether there was just no need. Maybe you could give us a little bit of background there.

[Brendan Kennedy:]

Sure. I first went to Germany in November 2015. First day I met with two members of German parliament the next that afternoon I met with two members of B pharm the Health Canada FDA equivalent in Germany and two activists. The next day I hired our first employee in Germany I believe we're the first cannabis company certainly, the first Canadian LP to have an employee there. Throughout the rest of 2015 and 2016, we had regular meetings with B pharm and essentially the equivalent . And the more we talked to the regulators there, the more we realized that the Germans really wanted to control medical cannabis at the border. They were going to go through this tender process, but they - my sense was that they wanted to control medical cannabis at the border. German medical cannabis legalization really was similar to Canada with the results of a few different lawsuits, and one patient won the right to grow cannabis in his apartment, which terrifies the Germans. And so they opened up their program. We saw an initial tender go out, which blew up after I think nearly a year, we didn't participate in that tender and based on conversations we had with government officials in Germany didn't participate in the second tender. The second tender, really is I think there were 13 different - I'm not exactly sure how many that were open, I think there were roughly 13 bids to produce about 200 kilograms a year at a fixed price. That product is sold to the German government at a fixed price. And so there's no opportunity for refining products or branding or packaging. And it just - it wasn't a tender that we were interested in when we can obtain a license in Portugal to produce massive amounts of cannabis there. And we knew that the regulators in Germany were more than willing to import our product from Portugal, just like they've allowed us to import product to Germany from Canada, where we currently sell Tilray flower and Tilray oil in pharmacies throughout Germany.

[Robert Wertheimer:]

Very helpful, thank you. If I can ask another on your sort of supply demand analysis looking in Canada, obviously Canada has different pinch points, maybe at different times, whether it's straight up growing or packaging or distribution that you've talked to some of today. Do you expect growing to be a shortage for the next 12 months and is that an advantage? I mean, when do you expect, I guess, to have a healthy supply of available product to source in? And, and how much of that might you do?

[Brendan Kennedy:]

I don't expect it to resolve in the next 12 months. Going back 18 months ago, a lot of the media and a lot of the analysts covering the industry in Canada were talking about how there was going to be a glut of cannabis today. And I think one of the main issues was that a lot of the Canadian LPs were being valued on a really strange metric. They're being valued on a multiple of funded capacity, which led all of the CEOs of the public LPs to closely overestimate the capacity that they would have in place today. And we believed them and our intent along was to purchase raw materials from some of these cultivators, if you look at a company like ABI, they don't grow wheat, malt and hops and barley, and so our intent was to buy raw materials from these cultivators and process those raw materials and build brands. If I can go back 18 months, 12 months ago, I would have invested another $100 million to $200 million in terms of Canadian cultivation that was a mistake. But we believed all the hype 18 months ago. And so, I think it's based on what I've seen, I think that we're still 12 to 24 months out from reaching some sort of demand supply equilibrium, like I mentioned in my answer to Vivien's question. I think that other form factors in October will help. But I think that it's still going to take quite some time for some of these high quality facilities to come online.

[Robert Wertheimer:]

Thank you.

[Operator:]

Thank you. And our next question is from Mike Hickey with Benchmark Company. Your line is open.

[Mike Hickey:]

Hey guys, thanks for taking my questions, congrats on the strong quarter. Just curious, obviously, you've showed some caution on supply and that's obviously you become more conservative over the few weeks since you last talked initial guide for 2019 in 2 times 2018 sales plus 65 from now to harvest you did sort of 18x food sales. So, curious if you think that guidance is still relevant or what sort of expectation you can reset for us for 2019? Thank you.

[Mark Castaneda:]

Yes, so just first point is we don't give guidance, we give general direction. But we typically don't give specific guidance. But the numbers we gave out still hold. The risk that we always see in this industry is regulatory. So if for some reason GMP takes longer, or the regulations in Canada for other form factors get pushed, as Vivien indicated, it may get pushed until mid-December, which could push out revenue opportunities. Now, that's just timing. When you're starting a new industry, when you look back at the alcohol industry, no one remembers whether it started in year one or year three, I mean, it's still a massive industry. So there maybe delays here and there, but we will stand by kind of our directional guidance based on what we know today.

[Mike Hickey:]

All right. Fair enough. I guess on the regulatory risk point that you just made when you look at sort of the edibles market. I think it's something we should be excited for. But when you sort of consider the pending regulatory construct, you think it's just too restrictive to give edibles - legal edibles a real chance to take market share from the illegal market.

[Brendan Kennedy:]

I'm fairly optimistic on the opportunity. I think that the guidelines, the regulations around potency and form factor serving size all those are fairly reasonable. I think the biggest challenge is still that they're not certain yet, and we don't have any certainty in terms of packaging. And so we were installing lots of equipment, but we don't know exactly what the products are going to look like coming out of those manufacturing one. So we'll have to - that forces us to install a lot of machinery that has to have some flexibility. I think the - to your question, I think the one issue that still remains is that in lots of the products that are available in the illicit markets are beautifully packaged right and beautifully branded. And it's a little bit strange in that those products, many of them look like they should be the legal products and the packaging that has all the warnings on it. It looks very different from what you see in individual U.S. states.

[Mike Hickey:]

Okay, thank you. Last question from me, a peer of yours made a recent acquisition of a U.S. multi-state operator. So I'm curious your thoughts on that strategy as a future path to the U.S. market upon legalization. Thank you.

[Brendan Kennedy:]

I think looked at that deal as we have with most of the deals our competitors announced and we decided that it wasn't right deal for us. We expect to see copycat deals between Canadian LPs and U.S. MSOs. We have had a lot of those conversations I've been in the industry for about nine years started in the U.S. and so you can imagine if any of those companies are contacted by a Canadian LP they generally reach out to us. We expect to see further consolidation in the industry. We expect to see copycat deals. We're focused on making decisions and placing bets that will payoff for our investors over the long-term. So if we found the right partner and the right structure that's certainly something that we would consider.

[Mike Hickey:]

Thanks for the call guys best of luck.

[Brendan Kennedy:]

Thanks, Mike.

[Operator:]

And our next question comes from Aaron Grey with Alliance Global. Your line is now open.

[Aaron Grey:]

Thanks for the time guys. Just one quick question from me. So it's great to see the momentum on the adult side, but just taking a quick look at medical side, where we saw revenues decline sequentially and what we've seen the past three quarters, can you just talk about the trends there? And some of that might be driven by both, but just focusing on the medical side with about six months of adult-use now past us, do you think that decline might be a more function of demand or allocation of limited product? Or I guess just more broader way to seeing from the category dynamics there. Thank you.

[Brendan Kennedy:]

Aaron, it's definitely about allocation we've taken - at the start of every quarter we have to estimate what demand is going to be and we make decisions based on what we think demand is. And there is one of the surprises over the last five or six months is that there is still robust medical demand. And so we would - going forward, we would allocate more towards medical more product at the beginning of the quarter.

[Aaron Grey:]

Okay, great. Thank you.

[Operator:]

Thank you. And our next question is from Scott Fortune with Roth Capital Partners. Your line is now open.

[Scott Fortune:]

Good afternoon. Real quick one it's actually based on kind of the CBD opportunity in the U.S., what type of - talking to retailers, what type of product opportunities are you seeing from the topicals to the pictures inside for CBD and kind of what's your expectations for the product rollout from Manitoba Harvest going forward here?

[Brendan Kennedy:]

Yes, we're expecting - we're having a lot's of conversations with - we'll have some different retailers they all want everything, I think one big surprise for me over the last six months. When changing dynamic is really different in the U.S. is that a lot of the demand right now is driven by consumers and retailers and not the large CPG companies that we were talking about earlier in one of the earlier questions. But every large retailer is looking for a wide array of CBD products today and this change is really being driven by them, they are way ahead of the curve, compared to the CPG companies. And so everything from extracts and oils, tinctures, gel caps, oral spray, protein powders looking at lots product like that for Manitoba Harvest. On the Authentic Brands Group side looking at lots of different topicals under some of their brands and expect to launch topical series of products - set of products in the second half of this year. And then have had lots of conversations with the large CPG companies that are interested in products that we would never manufacture ourselves, whether it's antiperspirant or gum, things like that. And what they're looking for is a Tilray certified CBD ingredient.

[Scott Fortune:]

Real quick on that, do you think some of these larger retailers are waiting for FDA clarity here. They have a meeting on May 31st. How you think they're going to move with injectables versus the more topical side of products.

[Brendan Kennedy:]

That's a really good question, Scott. So there's no - there's not one answer. There are retailers in the U.S. that are going to do this, no matter what, which I think is going to lead to really interesting second half of the year. And so there are retailers in the U.S. that aren't waiting for the FDA. And then there are - as you can imagine, there are more conservative retailers that are going to wait and see what happens with some of the FDA hearings at the end of this month and over the course of the summer.

[Scott Fortune:]

Okay, thanks.

[Operator:]

Thank you. And our next question is from my Mike Grondahl with Northland Capital. Your line is open.

[Unidentified Analyst:]

Thanks, guys. This is Michael on for Mike. Maybe just a quick one on the sudden mix of extracts for the total, should we see that kind of staying the same through the rest of the year until you get the new regulations in Canada?

[Brendan Kennedy:]

Yes, so the extract mix was in the 30s range. It really is going to depend on somewhat of the mix for adult use as well as the mix for international. Some of those that might drive the change in that mix, but it'll be relatively in that range.

[Operator:]

Mike, does that answered your question?

[Unidentified Analyst:]

Yes, thanks.

[Operator:]

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Brandon Kennedy for his final remarks.

[Brendan Kennedy:]

Thank you. I want to thank our 1,100 employees for their dedication and extraordinary efforts in building Tilray and for improving patients and consumer lives through cannabis. We appreciate everyone's questions and participation on today's call. Have a great evening.

[Operator:]

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.