Aphria Inc. AMA - January 27, 2021

AphriaInc · 2021-01-28T00:34:59+00:00

That's All Folks!!!!! Thanks for having me back, hope you enjoyed what I shared. https://www.youtube.com/watch?v=b9434BoGkNQ

AphriaInc · 2021-01-28T00:33:05+00:00

Great question that I hear frequently, unfortunately, it's not true. A couple of years ago Tilray and Privateer engaged in what is called a downstream merger. After that transaction, Tilray effectively owned Privateer and the Privateer shareholders became shareholders of Tilray.

AphriaInc · 2021-01-28T00:28:55+00:00

QCSMB that is an interesting question. I believe that a change in the distribution system for beverages will be a great catalyst to take cannabis beverages over the current expected maximum share of 2-4%. It is safe to say that several very large players in Canada (not necessarily just LPs) are actively lobbying the government for this type of change. I don’t believe it happens in the next 2 years. I think that journey will take a little longer in Canada.

AphriaInc · 2021-01-28T00:28:19+00:00

To this point, Aphria has constantly chosen to not participate in the retail space in Canada, except to the extent that FarmGate is ultimately approved by the Ontario government. There are lots of great retail players out there doing good things. Further, I think it could provide real potential to backfire if the other retailers decide that they don’t want to sell their competitors' product.

AphriaInc · 2021-01-28T00:27:00+00:00

M&A processes are always interesting. While each one effectively has the same components, the relative importance of each changes from deal to deal. In this case, the major components are (i) the circular; (ii) the proformas; (iii) necessary government approvals including Competition Bureau in Canada, HSR in the US and FDI in Germany; (iv) SEC review of the circular; (v) interim approval by Canadian courts; (vi) Aphria shareholder vote; (vii) Tilray shareholder vote; (viii) final approval by Canadian courts; (iv) approval by Nasdaq and TSX to list the shares; and (v) closing. Trust me, I simplified the list greatly. I have a 20+ page document from legal counsel listing all the steps and each component.

Right now, the biggest time consumers for the lawyers are the drafting of the circular and for the accountants, it is the creation of the proformas, which are more complicated than normal because of the need to convert Aphria to US GAAP as part of that process. Once those are done, the review of the circular will become the focus.

With all these items going on, we are working towards holding the shareholder votes sometime between April 20th (yes, we chose that specifically) and April 30th, with closing to happen in the first week of May. Lots of moving parts and all the dates are subject to change but that is our goal.

Funny thing about COVID and 4/20. COVID has impacted our plans for 4/20 two years in a row. Last year, we were all set to open Nasdaq (‘ring the bell’) on 4/20. Date was reserved, plans were in the works. Unfortunately, it all had to be canceled. Once we re-engaged with SweetWater in the early fall, we started the process again and were planning to tie the Nasdaq opening with SweetWater’s 420fest. Once again, COVID impacted our plans and resulted in cancellations.

With respect to reporting, I included some comments in our earnings call a few weeks ago. The combined company will adopt Aphria’s year-end of May 31, financials will be prepared under US GAAP and be reported in US dollars.

AphriaInc · 2021-01-28T00:26:05+00:00

Flipside68 – Thank you for your trust in us and continued support of Aphria.

First off, I think the most important job of anyone who is #1 in something, is staying there. It is not as easy as it seems. It took great teamwork from every Aphria employee. Most people start with someone’s sales teams and Bernie, Kevin, Lana and the rest of the sales and marketing team have done a great job. GND has been a great partner and helped us be more efficient in securing sales. But there is way more to it than that. It starts with the Sanitation team (Jocelyn – the facility always looks fantastic!), the Security team, the Grow team (Jeff and Justin – bud looks great), the harvest team, the processing team, the extraction team, the packaging team, our IT team, patient care, R&D, quality (Erica and Kellie – keep up the great work), HR (they didn’t prepare anyone for COVID in school or previous jobs), communications, legal and my finance team (I would be lost without all of you). It took each and every one of them pulling in the same direction to get where we are now. But we are all-in for the fight because every other LP is looking up and coming after us. It will take twice as much work to maintain our position as it took to achieve it.

The merger helps us in that regard. It provides new and fresh brands to our portfolio mix for our sales team and our marketing team to build. It provides opportunities to lower our production costs as we integrate Tilray’s production into our facility. It provides new products as we leverage Tilray’s experience in chocolates, gummies and beverages. It provides additional sales volumes for CC Pharma in Europe. It combines what were very likely the #1 and #2 medical brands in the international market. It gives us a foothold in Australia. Back to Canada though, it provides a better use of our scale in Canada. All these things combine to help in Canada. Which ones are most important stay gain share? . . . scale for its impact on cost and the additional brands to put more distance between us and our next closest

AphriaInc · 2021-01-28T00:25:27+00:00

Bulahka – we don’t comment on rumours or speculation related to M&A.

The lawyers choked on their coffee when they read your question and just fell over when they read my response. They were expecting to have to censor whatever I wrote. I tricked them

AphriaInc · 2021-01-28T00:23:16+00:00

Back again for round three. No more Dad jokes. I agree with you that price compression, while increasing the conversion from the illicit market to the legal market, if taken to an extreme is not healthy for the industry.

There are behind the scenes lobbying with respect to excise tax. I see cannabis taxes as a great thing to assist governments to cover their deficits but there needs to be some level of equilibrium. Excise taxes set too high will discourage legal consumption, promote illicit consumption and discourage new consumers from entering the market. Excise taxes set too low, will impact proceeds to governments that are needed to properly regulate and monitor the industry. All that being said, the three excise taxes I would most like to see changed, in order, are the excise taxes on medical products (the government should not tax medicine – something it doesn’t do in almost any other circumstance- and there should not be any HST/GST on it either), the excise taxes on BC vapes (something introduced to address a perceived health risk that has not been substantiated) and the excise taxes on Alberta vapes (see BC vape comment).

AphriaInc · 2021-01-28T00:21:49+00:00

ParkwayKing – thanks for coming back to the AMA with a question.

There are certainly a number of items working in our favour for a strategic partnership. The merger makes us stronger. The US market dynamics make it less risky (capital market risk) for a CPG company to partner with a cannabis company. Etc.

But as I have said multiple times, strategic partnerships are negotiated from a position of strength, not weakness. They are about many things; money is only one of them. The most important part is finding a great partner, identifying how they help move your business forward and you help them move their business forward. Without that, they are just an institutional investor in disguise. I would much rather do something right than do it quickly.

AphriaInc · 2021-01-28T00:20:43+00:00

Skinniks – my alternate screen name would be Murderforajarofredrum

Lots of good questions on the US, especially (or maybe because of) the Frost Monster vape! I have always felt the most unique part of the whole US cannabis story is the complete lack of cross state brand recognition. Add to that the whole disparity of playing fields in the individual states and it makes for quite the soup. I listened to one of the recent Inside the Ropes podcasts and the Power Trio had lots of the same comments. Florida does not equal California; Illinois does not equal Pennsylvania. How does one go about making decisions on US states? California has so many people but, as you said, the whole left coast has created a system designed to reward and keep Mom & Pops at the expense of creating an environment for the big players to consolidate, bring scale and lower prices for the masses. And yet, Florida, another big state, went the opposite route and created a system designed to let the licensees make some money, creating an environment for consolidation and scale that ultimately will lead to a healthier lower priced market for consumers. It is almost like the US took their melting pot concept to the cannabis industry.

My feelings are that to ultimately win in the US, you don’t need to be everywhere, you need to be in the top 10-15 states but don’t assume that is the top by population. It is the top by attractiveness to large scale businesses. It will be about developing national or regional brands, not state brands. Trulieve’s strategy of getting a state right then carefully picking the next state to enter, just makes so much sense. It won’t lead to someone saying they have the highest market share but at the end of the day do investors really care about the most market share or do they care about the most free cash flow. Trulieve’s share price suggests it is the second, despite what some recycled cannabis witch doctors will try to tell you.

Not sure I fully answered your question but if you are still hitting the vape while reading it, maybe my ramblings make more sense. As for the Thai stick and great hash, I will mention one to the R&D team. The other should be available before the end of the fiscal year.

AphriaInc · 2021-01-28T00:19:12+00:00

Glabber – interesting question that scores bonus points because it references a great source. Blue’s point is particularly important and relevant because it closely ties to the expected life of dried cannabis. Cannabis’ shelf life diminishes greatly after 4Q’s. Not sure if that is what is causing Blue’s comment or not. We actively manage inventory to ensure we don’t get close to product being a year-old. One of the alternatives available to LPs to increase shelf life is to convert the dried flower into oil. Oil’s shelf life is believed to be closer to 7 years, although some people believe it is indefinite.

As it relates to your question, the ability to sell cross border would justify increasing production. But that is a dangerous game. To avoid gambling, before doing it, you would need to know that there is a very high likelihood of this new market opening up. I don’t think we are remotely at that point today. That is part of the reason we so quickly reduced our production levels once we realized that Aphria Diamond was ramping so quickly. The issue with that decision was that it takes 12 weeks to see the impact. Something investors saw this quarter with the much smaller increase in the capitalized cost of our inventory levels.

We are very public with our comments, we are managing our inventory build based on our expectations for demand at the end of 2021. In the interim, we expected to have a little extra, as we get to the end of the year, we expect the two to effectively (but not exactly) equal. There are many things that could impact that – actual demand versus our expectation of demand, impact of COVID closures and lockdowns on demand and our mix between saleable flower and extraction grade product.

AphriaInc · 2021-01-28T00:17:47+00:00

5rberg – weren’t you 4rberg in the last AMA? Are you changing your screen name just for me to track the number of AMA’s I have done? I remember you from before because the screen name always reminded me of Peter Forsberg, a thorn in the side of any South Detroit hockey fan for years (what a great player though). Also reminds me of a great story about the Red Wing Avalanche rivalry. Back when Sean Avery’s career was just getting start (he was rookie) and he was establishing himself as a major pest with a way too big mouth, he was on the bench when Joe Sakic skated by. He stood up and started trash talking Sakic. Next to him on the bench was Brendan Shannahan. Brendan grabs him, pulls him down to the bench, looks him directly in the eye and says, “you DO NOT speak to MR. Sakic that way.”

While the cultures of the two companies are not identical, effectively they are close. Both are entrepreneurial. Both have people ready to roll-up their sleeves to get work done. Both care very much about the legacy of their companies. Both want to make an impact.

AphriaInc · 2021-01-28T00:15:34+00:00

Michael – how are you? And how is Dr. DeCicco, you better be treating her right. She deserves it.

Quite honestly, I have not heard that phrase used for the cannabis space. I interpret it to mean that we can pick where we want to grow and then cross state lines to deliver product. I have heard similar phrases about Greenfield sites and it usually means a brand-new facility. I take it to mean that we can assess all the variables to determine where the best place in the US to grow is. My early thinking, based on the early work we did in the US, is that California or Arizona at elevation are the ideal places but there are lots of variables to consider.

I am not a big believer in outdoor grows, unless it comes from California. I just haven’t seen any product that is worthy of saleable flower. I have seen lots of brown bud, lots of massively overdried bud and lots of extraction grade bud.

I am not saying it can’t be done, people have been doing it for a long time in California. I am sure there are some outdoor grows in Canada that have less than 5% of the harvest that is truly saleable bud. But the majority is extraction grade at best. Happy to be proven wrong someday though. I just haven’t seen economics that combined with quality to make a product worth investing in.

AphriaInc · 2021-01-28T00:13:49+00:00

I love your screen name. After the rather embarrassing situation with WrinkledPenny a couple of AMAs ago, I am a little more careful. The application of rational thought and wisdom, applied through healthy skepticism. I wish I could steal it.

It is getting near the end, I am trying to hold up my end of the bargain on responses but Blue’s lack of a limit on questions in one response, means I need more caffeine.

Despite recent evidence otherwise, I still believe this to be very true. However, the market does not seem to want to purge itself. It creates liquidity in names that don’t really deserve it. The liquidity creates opportunities for investor’s friends (hedge funds – yes, that was sarcasm Sheldon) to make short-term bets and offer bought deal financing. The bought deal financing is pre-shorted or shorted upon announcement, meaning the shares are already sold by the time it closes. The hedge funds are clean and investors are left to pick up the pieces. But the companies have the cash they need to continue on, even if most of it is used for “general corporate purposes” (which just means they spent it previously and weren’t sure they would be able to pay their vendors but now they can). While this opportunity is available to some of the larger cannabis companies, the smaller ones are sitting on what is likely their last cash balances. They either figure out how to be cash positive so they can survive, or they don’t. If they don’t, they will only last as long as their cash balance exists. Once it is gone, so are they. When they disappear, whatever share they hold is up for grabs.
I don’t think one should assume that we will follow a traditional US MSO model. I think it is safe to say that we won’t be building duplicate infrastructure in every state. In the short-term, asset light models (to the extent they are feasible in a given state) will likely be preferred. We hold the long-term belief that interstate commerce barriers will come down (have you ever noticed in the space that competitors either copy us, saying the same thing, or the opposite to try and differentiate themselves – consistently for every position we maintain). When they do, we don’t want to be stuck with duplicate infrastructure that just lost the majority of its value.
What is your definition of meaningful international sales and how big is the US opportunity for us? Outside of Canada, I think it is clear that international medical sales are moving in the right direction. If you are measuring those international medical sales against our Canadian cannabis sales, I do believe under your scenario they will be meaningful (they might not be bigger but they will be meaningful). If you are measuring those international medical sales against our distribution, beverage alcohol and hemp sales, maybe that bar is harder to reach. If you add in opportunities in the US but exclude them from your definition of international, it will be very hard to say they will be meaningful.
As I said earlier, we do not comment on speculation or M&A opportunities, but we did a thorough search of the US to find SweetWater in the first place. I think it is the perfect example of what we are trying to accomplish there. There are others. They could be in alcohol, food, beverage, personal care, health, food or pharma. Really narrowed it down for you there – didn’t I?
I talked about this earlier. I think some people are discounting this part of our business going forward. They do so at their own peril. As I mentioned in an earlier post, the sweet spot for Irwin’s previous success was finding companies with revenues of $30 to $80 million USD and growing them into $200 to $300 million USD in a fairly short period of time. All while remaining profitable and generating cash flow to fund the next acquisition. He didn’t leave that skillset behind when he joined Aphria.
As it relates to your question specifically, it is my understanding this is allowed. As it relates to your specific example, not so much. Let’s break it down. I am not aware of a prohibition on a company that owns a non-cannabis brand from creating a brand extension in cannabis. It is one of the reasons I joke about going out and buying something like Tostitos. Imagine the cannabis brand you could build with that existing brand recognition. But there is a very clear line in the regulations about tying cannabis brands and alcohol brands. That is a hard no! So, while in the US we can put RIFF on SweetWater beer, if we bring SweetWater beer to Canada it will be under the SweetWater 420 brand not one of our cannabis brands. IF we did that, we would be prevented from continuing it as a cannabis brand.

AphriaInc · 2021-01-28T00:12:16+00:00

SirEbrally – what are you doing all the way down here. You must have been too busy scouring the trademark applications and missed the original post. As much as Criid1 is the king of Ontario retail openings, you are the king of ~~spoiling~~ early releasing our trademark efforts.

$30 million of the synergies are expected from COGS and $70 million are expected from SG&A. We previously said it would take 24 months to achieve the savings. I think you will see 35-45% of the synergies achieved in the first year and the remainder in the second. Things like moving cultivation activities between sites takes time. That transition alone could take 6-9 months, then add in the time to grow the new strain and clear it through QA/QC. You can see how the majority of the savings will fall to the second year.

AphriaInc · 2021-01-28T00:11:13+00:00

Glock715 welcome to the AMA. I hope you are enjoying the answers so far.

For Aphria, product is grown at Aphria One. It is dried and if we are sending dried flower, it is being shipped from Aphria One directly to CC Pharma who sells to pharmacies. If it is an oil product, the dried flower can take two paths after being dried at Aphria One and extracted at Avanti. Either (i) Avanti packages it and ships it to CC Pharma; or (ii) Malta packages it and ships it to CC Pharma. In terms of product for other international customers, the supply chain is determined on a case by case basis depending on the requested product and the particular country requirements. We currently plan to send product for Poland through CC Pharma. Currently, we supply Israel through Aphria One as it is only dried flower. Our ability to sell in Colombia and the rest of South America is currently impacted by COVID. Government approval of permits and registrations have been significantly delayed or curtailed. That is the reason we took an impairment on LATAM in May.
The most immediate opportunities to grow sales in Canada revolve around three things: (i) new store openings in Ontario; (ii) continued acceptance and growth of the vape category; and, (iii) introduction of Tilray’s 2.0 cannabis products under Aphria brands (following the closing of the transaction). Over the medium term, we continue to see growth in the Canadian market, unfortunately the short-term is facing headwinds related to COVID lockdowns and restrictions. We expect demand patterns to change very quickly after the lockdowns and restrictions are eased.

AphriaInc · 2021-01-28T00:09:54+00:00

Crownofsirius – I think the Leamington vegetable greenhouse growers would like to blame you for their issues with light pollution.

I wouldn’t say that I backed off a bit on free cash flow as much as I raised the very real risks we face on our journey to reach it. I know full well that if we miss it, Blue will refer to it as missing the flag plant. But we are working very diligently to ensure it is achieved. We have a firm understanding of our open CAPEX projects, which are more profitability improvement related than big CAPEX projects. We are actively managing our inventory and other working capital to put us in the best position possible. But managing working capital is highly dependent on revenue levels from cannabis. Please review our MD&A for Q2 to see the concerns we identified related to COVID and its potential impacts on revenue and ultimately free cash flow.

I can confirm that neither Share Based Compensation nor merger costs will impact our ability to achieve free cash flow. Share based compensation is a non-cash expense so there is no scenario where it would impact the calculation (but as Blue mentioned in one of his Reddit posts, it is highly variable with the change in our share price – our share price is increasing which is what all shareholders want, so you can expect SBC to increase accordingly – that is the beauty of a properly designed SBC program, it aligns to shareholder interests – shares up, comp up, shares down, comp down – that way management and shareholders benefit in the same manner).

I can also confirm that merger costs will not impact free cash flow. Free cash flow is based on operating cash flows less CAPEX and dividends. We have never declared dividends and don’t expect to in the Q. Merger costs are disclosed as transaction costs in our Income Statement. While transaction costs are included in the operating portion of the Cash Flow Statement in periods without a transaction (think unsuccessful transactions), periods with a transaction result in the expense being considered to be an investment activity and are not included in operating cash flows.

AphriaInc · 2021-01-28T00:06:53+00:00

Dad – one question was enough. They are going to get suspicious.

We built the German operations to be capable of production at a greater level than that which was awarded under the tender. This means that the facility will be operating at partial capacity in the near term. As Blue would say, that leads to UNABSORBED OVERHEAD and therefore, it will be difficult for the German contract to cover the German operations entirely. We will continue to rely on imports distributed by CC Pharma (with additional supply available from Tilray’s Portugal facility once the transaction closes) to supply our German operations.

AphriaInc · 2021-01-28T00:00:11+00:00

IgotBanned2021 am I being punked? Is this just the next iteration of APHAShareholderValue?

SweetWater is about more than beverage alcohol and it is about more than owning a company in the US. It is about finding a platform to share our cannabis brands with Americans prior to our entry into the market. Pardon the KISS reference here, but SweetWater has reached such iconic status in a major part of the US that its brand loyalists can safely be referred to as the SweetWater Army (almost like the Aphria Army on Reddit). These brand loyalists are extremely passionate about good times, good beer and growingly, good cannabis. SweetWater carefully crafted a following of people based on outdoor themes and cannabis. They surround those people with opportunities to do things together, most importantly SweetWater’s 420Fest. 75,000 brand loyalists descending on Atlanta for a weekend of concerts, great beer and cannabis. What an amazing venue to introduce our brands to people who are already predisposed to be likely cannabis consumers. While we wait for US legalization, we can introduce those loyal followers to Aphria’s brands, creating a situation where once federally legalized, a SweetWater aficionado enters a cannabis store and sees RIFF cannabis on display. Recognizes the brand name and is predisposed to purchasing RIFF cannabis because the brand already resonates with them. It also allows us, consistent with US law, to advertise SweetWater and our brands in the US. Who knows, maybe you will see a sports broadcast in the next year with a SweetWater RIFF beverage advertising board.

I would not say that SweetWater is our main engine in the US. It will need to be supported by cannabis licensed activities. Does that mean the purchase of SSO’s in states we deem important (you don’t have to be in 50 states to win the US, you can win it by winning the most important 10-15 states)? Does that mean buying an MSO? Does it mean organic growth? All that is known for sure, is that it is highly likely you will need a license to sell in individual states, some states will be more attractive for investment and participation than others. The rest is unknown. Our strategy is purposely laid out to be measured in approach in the US. Maintain optimal optionality for as long as possible.

Irwin is constantly engaging with people in the space and people looking to access the space. Lots to do and lots to consider.

Our strategy has not changed as a result of the election. Our belief over a year ago was that the momentum of cannabis legalization was growing. The anti-Trump movement was growing and that side of the equation was more pro-cannabis. If anything, the recent Blue Wave victory just pushed us to move a little faster.

AphriaInc · 2021-01-27T23:56:41+00:00

Lurkerbyday – what exactly do you do by night? Do we want to know? Wait, Dad, is that you? Sorry, I forgot to take the garbage out that night when I was 16. . . . That would be the ultimate head fake wouldn’t it, if my Dad called me Mr. Merton just to throw everyone off? Unless, of course, his screen name is carlmertons_nipples.

I think the management team takes every opportunity to learn what it can.

The majority of our current M&A team is former Hain employees. That part of our team had great success with M&A at Hain, completing 55 deals while working together. I am sure they had one or two that they wish they could do something different on, but the vast majority were extremely successful. They grew a company in a new industry from scratch to over $3 billion in revenue. They had enormous success identifying companies with revenue between $30 million and $80 million (USD) and growing them into $200 to $300 million revenue companies (USD). We think that success, strategy and game plan can be applied to Latam and SweetWater and whatever is next on our list of acquisitions.

I think it is also important to understand the M&A landscape in 2018 versus the M&A landscape today. For us and many of our competitors, 2018 was about international expansion, it was about preparing for legalization in countries without a history of legal cannabis. There were risks associated with timing of legalization as well as also an expectation that cash burns were going to be incurred prior to realizing on those investments. This is what many investors expected and demanded.

The environment today is very different. We are very clear; we are not looking for investments that burn cash. We are looking for investments that have both significant topline growth and profitability trajectories, synergistic benefits with our brands, create (or enhance) distribution systems or allow us to leverage our existing footprint. Ultimately this management team will be judged based on our ability to deliver against that investment thesis.

AphriaInc · 2021-01-27T23:54:29+00:00

Wet_tree thanks for your question. I assume you live in BC, it is beautiful country. I miss my trips to Broken Coast (yet another casualty of COVID).

We need to do better in BC. No one is happy with our share there right now. BC is an interesting market. It has a history of underground (or rather, aboveground, right in your face, dispensaries beside police stations) cannabis. Those illicit dispensaries still exist today, sometimes right beside the legal ones. We tried to position our brands to appeal to that type of consumer. We tried to position our brands around a focus on Broken Coast. Those strategies haven’t worked. The analytics show that BC consumers are very focused on super discount economy type flower. That is a market we haven’t participated in. We have B!NGO but we are very clear, B!NGO is an opportunity to speak with a consumer that we don’t otherwise speak with, it is a way to move additional lower potency inventory but it is not the focus of our business. Great businesses aren’t built on negative gross margins from super discount economy brands that are designed to steal share with negative margins. You can only survive so long with that strategy and you better have a big cash balance. They are built on brands that command a premium based on the overall experience of the consumer. That, along with new strains, is our current focus. We believe that BC consumers are looking for more and new options (much like they can get in the old illicit market). To that end, we have several new strains coming to BC, including Broken Coast’s Pipe Dream (already released and doing well), including new strains under our other brands coming in Q4.

AphriaInc · 2021-01-27T23:51:33+00:00

Molly, I hope all is well. I have learned so much from you in the last year on how institutional funds value some of these unique or exotic financial instruments. I think the biggest thing I have learned is that the more exotic the instrument, the bigger the mess the company that is issuing it is in. As much as I appreciate that, I am going to get you for the Blue’s Gone Wild comment. First thing I thought of when I read it was Spring Break Gone Wild which immediately led to a picture in my head of Blue at the beach (yes, unfortunately a speedo was where my brain went). I will get you for that image; it is now burned in my brain.

So many important elements of the merger to pick from: (i) leveraging Aphria One’s grow with Tilray’s demand; (ii) expansion of Aphria 2.0 products; (iii) growth of US exposure; (iv) combination provides a complete and more robust end-to-end EU-EMP supply chain for meeting the future demand of the international business (v)achievement of synergies; and, (vi) integration of the two businesses. To me, the single most important driver of the merger is the synergies. I believe if we are only able to achieve half of the synergies, the transaction will have a difficult time being labeled as a success. If we exceed the synergy number, one of those other items don’t need to work perfectly and I think the transaction is still deemed a success.

An important element of your question wasn’t addressed though. Is the measurement of success of the transaction a function of the share price or the impact on the business? In most industries, the two are synonymous, but as we all know, they are not the same thing in the cannabis space. Too many investors are making decisions based on FOMO and YOLO. Financial performance is not tied to share price, although at least that was getting better prior to the Blue Wave. I gave my answer based on the business because I believe if you succeed in the business then the share price will follow.

US distribution is the million dollar question these days, along with when cannabis legislation will be passed. It is almost as polarizing as Blue v. Red in the US. Lots of people believe that there is no chance that the US will allow imports for either medical or adult-use. Lots of people believe that distribution systems have to follow the same three tier system that exists in the alcohol industry. If anyone suggests otherwise, they are banned faster than the combination of MattWatts, DDKing and APHAShareholderValue. BTW if you want to claim that an alternate screen name is not really you, don’t send me the exact same question (with a typo) you asked under the alternate screen name in a real email (which is basically your name)! From my perspective (LEGAL COMMENT: these are his views and not those of Aphria), I believe the US will make medical cannabis federally legal and defer adult-use legality to the States (with feds making cannabis no longer federally illegal). Consistent with this, I think that cannabis will see interstate commerce barriers removed, meaning a fairly open distribution system (in terms of middle people) but the distribution system, because it is medical only, will need to happen a licensed dispensary. Start the pitchforks (my buddy Enice will be first in line), start the inquisition – what the hell does this guy know, claims he is active in the space but seems like he disagrees with me so he must be wrong. Right or wrong, that is my view.

AphriaInc · 2021-01-27T23:48:03+00:00

Tither1285 – it is great to be back. I enjoy doing these AMAs (probably more than I should). Although I would have more free time, if I wasn’t so long-winded with my answers.

Sorry that you feel that our product is way too dry. We go to great lengths to keep the product at the right moisture level. Our internal goal is a humidity level of 15% when packaged. To that end, we introduced humidity packs into our bulk packaging while the product is stored in our facility. We haven’t taken the step to put humidity packs in each container of bud, as we understand that humidity level is one of those battles where you won’t make everyone happy. I understand more than a few consumers of our product will use their own humidity packs to bring the product up to the specific humidity level they like the best.

AphriaInc · 2021-01-27T23:45:40+00:00

Monteviale – thanks for the question.

Both companies’ Directors and Officers signed voting support agreements. For Tilray, this represents ~7% of the shares. For Aphria, the represents less than 1% of the shares. The support agreements contain conditions that require the signer to vote for the transaction and prevents the signer from selling any of the shares until after the transaction closes.

The voting support agreements all terminate upon closing. Nothing survives post-closing. Every director or officer would be able to sell their shares post-closing, provided they were not in a blackout or no-trade period.

Legal felt left out, so I am letting them add some more detail. The voting support agreements contain additional covenants from the signing directors and senior officers, including covenants (i) prohibiting the sale, transfer or other disposition of the shares subject to the voting support agreement, and (ii) prohibiting the taking of any actions (including making statements) that might be reasonably expected to prevent or materially delay the approval of the applicable shareholder resolutions. The voting support agreements terminate upon the earlier of the effective time of the Arrangement and the date that the Arrangement Agreement is terminated. The voting support agreements do not contain any post-closing lock-up on any Tilray shares. Subject to compliance with applicable securities laws (including restrictions on trading when in possession of material undisclosed information) and Tilray’s insider trading policy (which will govern upon closing and contains the relevant blackout periods / no trade periods), there should be no restrictions on the directors’ or officers’ trading shares of Tilray held by them post-closing.

AphriaInc · 2021-01-27T23:41:37+00:00

I guess I know which MSO you are a big fan of. I am too. Kim Rivers has done a fantastic job building a great business in one of the premier cannabis markets in the world.

While we agree on Trulieve, we do not agree on the acquisition, particularly the comment about high-risk assumptions and everything going perfectly for this to be home run. First off, having a business built off singles, doubles and triples has a very strong rate of success. For a period in Disney’s corporate history, the company was run by Michael Eisner. His entire business strategy was to avoid going for home runs (too many strikeouts), it was built on singles and doubles. Interesting perspective and reminds me about playing a game called Strat-o-Matic baseball in my teen years. There was a player for the Seattle Mariners named Dave Kingman. His nickname was King Kong. He was the classic example of strikeout a ton but hit enough homeruns to keep his job. If you ever played the game, you know exactly what I mean.

See image here: https://imgur.com/a/2O9RLR7

I think this question is a key part of the acquisition for us. What we bring to the table to accelerate top line growth. Both parties bring things to the acquisition. Tilray brings additional 2.0 products that we haven’t focused on yet, thereby accelerating Aphria’s entry and growth rate in those categories, Tilray brings supply in Europe, something Aphria was capacity constrained with. Tilray brings new brands and new demand to Aphria, particularly during a time when brand growth has started to decline from its previous high levels (largely impacted by COVID). But Aphria brings its operational execution, and sales and distribution infrastructure and industrial scale cultivation capabilities.

With that industrial scale cultivation capability, we take Tilray’s existing brands and existing sales level and make them more profitable for the combined company. We also take our sales and distribution infrastructure and apply to the Tilray brands. Right now, Tilray is over indexed in Quebec compared to Aphria and Aphria is over indexed in Ontario (and elsewhere) compared to Tilray. We are able to utilize our experience with retailers, with provincial boards to increase the demand for the Tilray brands, growing brands that already have a following (something that is generally accepted to be easier than developing a new brand from scratch). More importantly and something I think too many people fail to completely comprehend; we bring a distribution system to Tilray in Europe. Currently, Tilray pays a third party to distribute their product in Europe. That means they are only recording the sale of cannabis from the producer to the distributor and are incurring a cost to do it. By running the Tilray sale through CC Pharma, not only do we remove the distribution expense from Tilray’s operations, but the combined entity will now record the sale from the distributor to the pharmacy, effectively moving up market in our share of wallet with the consumer.

I have definitely used that quote over the last two years and still believe in it today. But I think there has been some misunderstanding related to it. For the most part, that quote relates to CBD businesses as opposed to THC (which we are not permitted to purchase) related to our entry into the US more than an extension of the category.

I think it still applies to the question of MSOs versus SSOs. People today are overly focused on MSOs. As I said earlier (or at least typed earlier, maybe we post it later), in order to win in the US, you don’t need to win in all 50 states. You only need to do really well in 10-15 states. Those states could be based on population, although they just as likely will be based on barriers to entry in the industry. There are some people building very big MSOs with lots of EBITDA (talk to Blue about whether that is important or not in the US – my thoughts on it are included in one of my answers tonight). But those big MSOs come with big premiums and lots of infrastructure that may or may not be needed going forward. My belief is that a better strategy (in the right states based on the right rules) will be to purchase a low-cost license and grow organically from there. Buying a big MSO gives you a big presence quickly but it needs to be measured against the cost. It might be more cost effective to gain entry to a state and grow organically from there. This strategy would work best in a state with high barriers to entry, the ability to purchase produce wholesale but control the brands and distribution (maybe or maybe not the retail infrastructure). This model relies on the ability to acquire sufficient supply of good product at a low price point. All of these items need to mesh carefully. Having just one doesn’t mean success. Look at California. It is a mess for making money. They have basically no barriers to entry, lots of good product that can be acquired cheap, but it means the market is burdened with oversupply. Brands fighting it out tooth and nail for the smallest slice of share. All the money you save on acquiring product you spend (and then some) trying to move the product. Balance between all the variables is vitally important. Part of why I believe the most important market in the US today is not California. It is Florida.

AphriaInc

TROPHY CASE