Tilray Brands, Inc. (TLRY) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us to discuss today's announcements by Tilray Brands and HEXO. Hosting the call are Irwin Simon, Chairman and Chief Executive Officer of Tilray Brands; and Scott Cooper, President and CEO of HEXO. [Operator Instructions]. I will now turn the conference over to Berrin Noorata, Chief Corporate Affairs of Tilray Brands.

Thank you. By now, everyone should have access to the press release issued this morning, which is also available on the Investors section of our website at tilray.com. It was also filed with the Securities and Exchange Commission on Form 8-K by Tilray. During our call, we will be making forward-looking statements. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in these forward-looking statements. Please note the text in our press release for a discussion on the risks and uncertainties associated with such forward-looking statements, along with the disclaimers on our presentation deck. And now I'd like to turn the call over to Tilray Brands' Chairman and Chief Executive Officer, Irwin Simon.

Thank you very much, Berrin, and hello, everyone. We appreciate you joining us on short notice, and we will have a brief call to discuss how this strategic acquisition, which brings together Tilray and HEXO the #1 and #2 LPs in Canada, which provide tremendous benefits to both companies and should drive extraordinary value for shareholders and other stakeholders of our respective companies. With that in mind, we would now like to walk you through what it means for Tilray, and Scott Cooper will take you through what it means for HEXO. So for Tilray. First, this transaction launches a strategic partnership between Tilray and HEXO, the 2 leading Canadian LPs with complementary brand portfolios, dedicated to new product innovation and serving the needs of our consumers and patients. The benefits of partnering are product innovation help expand our European operations and one day, which we hope the soon, upon legalization, there are tremendous resources and learnings within both companies that we can tap into the U.S. and international markets. We have an opportunity to work together and work with the government to help enhance the cannabis industry and facilitate change, which is needed with education and medical research. Second, it provides a path for meaningful future equity ownership in HEXO in the event that we decide to convert the notes to equity. In the meantime, the notes are accretive to Tilray as the notes accrue interest of 10% per annum contributing almost $20 million a year in the first year net income before taxes based on our current share count. Third, we have an opportunity to participate in HEXO's share price appreciation as it executes its strategic growth initiatives, which Scott will talk about today, if we decide to convert the notes to equity and every $1 of HEXO increase with share price worth over $200 million to Tilray and, of course, pays for itself and our investment. Fourth, it facilitates commercial and operating efficiency savings of up to $50 million within 2 years, which each company will share equally. The ability for both companies to share in these savings will help us to continue to be those low-cost producer. It also allows us to leverage best practices in our respective supply chains for the benefit of both our companies, which ultimately benefits the consumer. For both of us, this strategic partnerships leverage our joint product category expertise and scale to drive savings, operational efficiencies. And as I said before, we are absolutely looking to how to benefit the consumer. As you're all surely aware, the cannabis market in Canada is consolidating as it matures. Of course, the greatest volume growth opportunities in the consumer segment which makes and it's having a strong brand portfolio and supply chain more important than ever. In fact, the diverse demographics of the Canadian consumer support having a strong foothold in multiple product categories. And we're seeing change, and we will bring these opportunities to the consumers and patients. We also view the continued elimination of the illicit market as a further avenue for growth. And as we said before, we see the medical market as a tremendous opportunity. In terms of the specific deals of the transaction, we will be acquiring Tilray, the outstanding HEXO senior secured notes from HT Investments for 95% of current outstanding principal balance of the notes. While the current noteholder may continue to redeem the notes pursuant to their terms in no event show the principally less than $182 million at closing. As of March 2, the conversion price implies that Tilray has the rights to convert to 37% of HEXO's outstanding shares. Prior to closing, Tilray and HEXO will amend the terms of the notes. Notable among these terms is a 3-year term extension to the term of the notes to May 1, 2026, and a revised interest rate of 10% paid in cash in the first year and half of the cash and half of the payment in kind equity thereafter. We will also enter into some definitive agreements related to mutually-agreed commercial transactions in the area of cultivation, processing services, a certain 2.0 product such as pre-rolls, so that we can both maintain our low cost of production and achieve optimal profitability. We will also establish a joint venture to provide shared services to both companies. As I said before, the total savings of these commercial transactions are expected to be up to $50 million within a 2-year period, which will be shared equally among each company. Of course, the transaction is subject to various conditions, including further due diligence, shareholder approval on HEXO's part and a voting support agreement from key HEXO stakeholders, a committed equity line available to HEXO for up to $180 million on terms that are acceptable to both of us and the Board's exchange and approvals. With that, I will turn now the presentation over to Scott Cooper, President and CEO of HEXO, who will review the transaction from their perspective and the significant strides that HEXO is made in the company in executing upon their strategic plans. Scott?

Thanks, Irwin. Let me first express our enthusiasm for the transaction, and we look forward to working with the Tilray team for the mutual benefit of both businesses. When I joined HEXO in November of last year, 2 things were clear to me. First, there's tremendous potential in the HEXO business to unlock shareholder value in both the near and long term. And secondly, the company's own balance sheet was its greatest obstacle to doing so. And as a result, resolving the ongoing overhang associated with the notes, option of monthly redemption became critical to ensuring that HEXO would have sufficient financial and operating flexibility to execute on its new strategic direction, The Path Forward. In doing so, we identified several key goals: deleveraging the balance sheet to a more sustainable level, raising sufficient liquidity to fund the business plan, preserving value and minimizing dilution for existing HEXO shareholders; and fourth, targeting an optimal supportive investor base. After an exhaustive review of strategic alternatives over the past several months, I'm excited to announce today's transaction and strategic alliance with Tilray, which I believe furthers all of these goals. The transaction specifically provides HEXO with the following: first, deleveraging. Tilray will be purchasing the notes at $0.95 in the dollar, which is substantially lower than the approximately $1.20, which High Trail has been redeeming the notes at over the past 6 months. Secondly, more favorable debt terms. The notes have been amended on terms more favorable to HEXO, including a 3-year extension, adjustments to the financial covenants and critically, elimination of the monthly redemption feature and associated shareholder dilution. The latter posed going concern risk to HEXO given the constant threat of needing to deliver cash despite the company's previously restricted liquidity position. Third, that offers the company enhanced financial flexibility to execute on The Path Forward. The transaction substantially increases HEXO liquidity by unlocking USD 80 million of restricted cash that the company can now use to fund operations and other strategic growth initiatives. Fourth, continued support from existing shareholders. Related to my previous statement, the company's go-forward liquidity is also enhanced by the 3-year CAD 180 million equity backstop commitment provided by KAOS Capital and its partners. HEXO will have the option to draw on CAD 5 million per month as required by business needs. Not only does this agreement ensure that HEXO maintains access to the equity markets and can deleverage over time, it is also a strong showing of support for the company by certain key stakeholders. The transaction offers substantial savings. Tilray Brands and HEXO have entered into an agreement to form a strategic partnership, which as Irwin mentioned is expected to deliver up to CAD 50 million in annual pretax cost synergies within 2 years of the completion of the transaction. Both companies have been working together to evaluate cost saving synergies as well as other production efficiencies. This transaction increases the product breadth and our commitment to innovation. We can leverage -- we will leverage both companies' commitment innovation, focus on delighting consumers, brand building and operational efficiencies. Both companies will share expertise and know-how in order to strengthen market position and capitalize on opportunities for growth through a broadened product offering and new innovation. And overall, to facilitate this transaction, HEXO will be paying a 12% fee to High Trail Capital, which will be settled in HEXO shares. We believe this strategic alliance offers significant upside potential for our previously announced strategic plan, The Path Forward. We expect to realize incremental cash flow as a result of this partnership and continue to have conviction in our stated goal of achieving cash flow positivity over the next 4 quarters. As I stated at the beginning, fixing HEXO's balance sheet has been the biggest strategic priority for the company over the past several months. Today's announcement provides a line of sight to achieving that goal mean that management can now redirect its full attention towards executing on and achieving The Path Forward. I will now turn it back to Irwin.

Thank you, Scott. With that, I want to thank everybody for joining us on short notice. And with that, I also wanted to take us through that, again, you got to remember the Canadian market is the only market that is recreationally legal on a federal basis. It's about a $5 billion market today with the opportunities to grow to a $10 billion market. In doing this deal with HEXO, it puts Tilray in a position to get to our $4 billion plan that we laid out last year. There is tremendous learning on grow, there's tremendous learning on brands, there is tremendous research and development as I said before, that we can take into other markets as we put these 2 companies together from a shared services, from a shared grow and from a shared innovation. I'd like to thank a lot of people on both teams that helped make this happen. And with that, operator, I will now turn it over for questions and hopefully answers.

[Operator Instructions] Our first question today is coming from Vivien Azer of Cowen.

So very interesting announcement today. I can see the logic behind it, certainly from a cost savings perspective. Can you offer any incremental color on where there might be upside to that cost savings? And then from a sharing perspective, I mean, are you sharing kind of just the absolute cost savings or because of kind of shared cultivation opportunities, et cetera, for one company might it hit on gross margin versus SG&A on another?

So Vivien, we will share whether it's in growth, whether it's in distribution, whether it's in procurement of packaging, whether we move to some of our beverages to the HEXO, Molson facilities, same with edibles. So ultimately, what this is, it's saving in SG&A, it's savings in services, but ultimately the opportunities to bring on our overall cost. And that's where it benefits both companies. And for instance, if HEXO move to grow into our facility, well, they're going to get better pricing because of the grow that's coming out of there. And we're going to get better efficiencies with additional grow coming into our facilities. So it's a win-win for both. But it's important, both companies are still separate, independent public companies, and that's going to be important to make sure that we draw the line there, too.

And Vivien, I'd just add, yes, to build on what Irwin said, we'll be looking at each individual company's strengths where there's both capability and low cost, and we'll be leveraging that across the 2 companies.

And I think Vivien, what we've seen in the Canadian market and other markets, just the cost today in [indiscernible] cost both these companies close to $30 million a year. And what we can share and save just on that. So with the size of Canada, with the size of the market, just tremendous opportunities on support services and savings from the manufacturing from a grow and a processing standpoint and which allows each company to stay separate.

Our next question is coming from Owen Bennett of Jefferies.

I just want to see how you're thinking about potential free options of repayment of the debt conversion to an equity stake and even the possibility of control. So I mean, obviously, if you don't convert, you've arguably helped make a major competitor stronger whose share could have been not for grabs anyway near term, given the issues they're facing and potentially a lack of ability to invest properly. Also means the money can't be used for other assets, which is potentially in the U.S. And then if you convert just to keep an equity stake, you've arguably still made the competitor stronger in the state does not help you hit your target of 30% market share in Canada because you can't consolidate it. So I mean control does kind of really appear to be the outcome with the biggest upside in the strategic sense. So I just kind of wanted to get your thoughts around those 3 different options and how you're thinking about that over the next couple of years as this relationship develops.

So with that, I look at it in multiple ways. I think both of our companies being stronger helps the Canadian market, helps grow the Canadian market. And you heard what I said, there's $5 billion today, there's $10 billion. So I think there's enough round for strong companies. And I think that's what's really important in the Canadian market to have strong LPs, had strong retailers and bring more and more consumers over and having a bunch of companies out there that are not strong is not good for the Canadian market. So that's number one. Number two is, this gives us tremendous optionality. If we want to convert, we've bought in today at a really good price. If we don't want to convert in the stock, every dollar goes up, it's worth $200-plus million to Tilray. There is tremendous savings that will bring our cost structure down for both companies. And Owen, you never know what happens upon legalization here, if one day legalization and greenhouses can grow in Canada and ship in the U.S. So there's a lot of unknown. But I think as we looked at it today, and the Canadian market is very fragmented, a lot of change happening. And I think what we have to look at today is how we strengthen the Canadian market, how it's important for both companies. and not just sit there and sort of say, let these companies go away and just pick up the pieces. I think it's also very important to bring more and more consumers into this category. So I see tremendous upside on every aspect here for Tilray and I also do for HEXO.

Our next question is coming from Andrew Carter of Stifel.

So what I wanted to ask and kind of building on the questions here is you're kind of putting together this joint venture between the 2 companies. I mean how far could this joint venture go in terms of committing assets to it by either side. I mean I'm almost picturing like an infrastructure co, if you will, to do the shared services. Is that in the thoughts? And I mean, how far can you go and still being 2 stand-alone public companies?

Andrew, good morning. And Scott can jump in here. I think it can grow tremendously. I think one of the things that we see today as a public company, the cost of public company, the cost of insurance is tremendous in cannabis companies today. The cost, whether it's legal, whether it's auditing, there's tremendous cost as public companies as we grow today. The other big thing is as we look on research and development here. And then the biggest thing in Canada is pushing the Canadian government to change and allow us to educate consumers in Canada about the benefits of cannabis. And why cannabis is a product from recreational is safe and the whole safety about it. The other part of it is there's so much around medical. So if we're both investing into categories around medicine, and the benefits of that. There's tremendous intel in HEXO today, whether it's their pre-rolls or readies, et cetera, that we ultimately think upon legalization in Germany and Europe, and taking their technology and being able to take it there. So Andrew, it's tremendous length of where we can share services. and both operate as strong independent public companies.

And, Irwin, just a quick add. I think the question around how far could it go? And what really excites me about this alliance and this partnership is each company has strength and you can leverage. And we'll be looking at every possibility around, as I said, around cost, around quality, around capability, geographic footprint. So we're just at the very early stages of that, and I'd say that everything is on the table, if you look at that.

Sounds good. I guess one other question on the Tilray side, I think it's kind of [ annoying ] question. Does this take you off the table from doing other things. I know that they're building that diversified CPG platform, obviously, there's an opportunity cost. You put the new ATM in place. But do you see this like going down this route impeding any management bandwidth? Or is it just still full steam ahead on building kind of the diversified CPG platform?

Good question, Andrew. And I just want to step back for 1 second just on your question before. The cannabis industry in Canada is only 3 years old. And again, there is the legal market, there's an illicit market and then there's bringing new users in to educate them about the benefits of cannabis. So doing this with HEXO creates tremendous market share opportunities to bring in new consumers and to get out there and make sure the right message. And I think there's over 800 LPs, Canada going through COVID closedowns, [indiscernible] opening too many stores. There's lots of change that got to happen in the marketplace. And I think working together, we can make that happen. In regards to Tilray and what we're doing, Andrew, last July, we talked about a $4 billion plan. And that $4 billion plan is still out there that we're working towards. Yes, there's lots of things we can't do because of legalization not happening as quick as we thought. And that's why Tilray has to be out there on the cutting edge to do things to get to that $4 billion plan even if the U.S. doesn't legalize. So there's a ton of things that we're still looking at. We feel good about Germany legalizing, some things may slow down because of what's going on in Ukraine right now, but we think there's some big opportunities in Germany. We think legalization of medical could happen in Italy, could happen in France, could happen in other countries. And with that, we will continue, which we are very happy with, our both acquisitions in the spirits business, our beer business. We're looking at tremendous opportunities with CBD beverages right now, and we're really seeing a major emphasis on the hemp market and products derived from hemp in food, drinks and personal care products. So this does not take us out of the market at all as Scott and his team will be operating HEXO alone, but we have a team that will work together to get all the efficiencies of operations and get costs out of the business that sets our cost structure at a much lower base, which we all need in Canada.

The next question is coming from Matt Bottomley of Canaccord Genuity.

Congrats on the announcement here. I just had a question for Scott, maybe a bit of a follow-up on the capital or cash rather that becomes unlocked if this were to go through that was historically classified as restricted on your balance sheet, just kind of like the first uses of maybe what that could be utilized for as part of your path forward? And what are some of the challenges you've had in this path forward historically or hurdles that you think that alleviated cash balance might help throughout more than nearer term than not?

Matt, I mean, as I said, it opens up strategic opportunities, allows us to -- there's other debt in the business that we'll be looking in the relatively near term to just -- well, to have some conversations about how we deal with that. It frees up capital as we get to kind of more efficient footprint for the business. So I'd say on The Path Forward, it gives us just a bit more breathing room, it gives us the opportunity to invest in our brands, it gives us the opportunity to invest in innovation, it gives us -- it just really unlocks the path forward and accelerating the growth.

Got it. And then maybe a question just for Irwin here or both for that matter. On market share, we've seen a trend in the sector of a lot of market share reductions even for many of the leaders as there's been price compression at some of the -- especially lower-priced flower. With combining your know-how and innovations, what are the strategies you think or requirements in order to ensure that the sharing of this information is kind of incrementally accretive to both companies in order to try and ramp the market share as opposed to coming out at one hand and into the other just given the market dynamics we've seen as of late?

So I think a couple of things. Number one is, I'm a big believer in brands, brands, brands and getting out there and investing in marketing brands. And number two is, again, educating consumers about the differentiation in brands. Now we're focused on potency, we're focused on different strains and educating the consumer on flower, what strain, where it comes from, where the mother is, et cetera. So I think there's a lot of information we still as both companies. The big thing here also what we have to do is educate budtenders at retail stores. There's lots of change that has to happen in the way products are bought by the consumer, whether it's online, direct to the consumer, et cetera. And I think we both can help in shared services if we're going to have a direct-to-consumer business, how we could set that up ourselves. From a distribution standpoint, how we can consolidate distribution because we're both shipping to the same customers. And the good news or bad news is there's not -- I mean, we're shipping to those control boards. So there's not a lot of customers that we're shipping to. So there's tremendous learnings. There's tremendous sharing here. The other big thing here is what's the innovation. I think pre-rolls is going to get bigger and bigger. I think drinks are going to get bigger and bigger. I think edibles are going to get bigger and bigger. I think the opportunity that you walk into a bar one day in Canada, and you're able to order a THC beer or THC drink is out there. I think you're going to walk into a 7-Eleven and be able to buy in Canada. So that's where the market has to be ready and we have to have the manufacturing facilities in place, and we have to have the distribution in place to be able to supply that because that's what ultimately will drive the market, and that's what ultimately drives shares. As you see already, stores are starting to close but we've got to expand the market into bars, restaurants, convenience stores selling CBD, I mean we're having lots of discussions with regards to medical cannabis being sold in drugstores. So with all that happening and us out there lobbying for that, the opportunities are tremendous for us.

Yes. And Irwin, I would add to that. I think just the -- as you say, the opportunity, we're just really in the beginning stages of this market. And as we get better consumer insights and consumer understanding, we're better able to get the products to market that consumers want for specific occasions and needs. I think there's just tremendous opportunity in the market for both businesses to flourish. And obviously, we'll be competing, and we'll be bringing in that consumer insight and the brands to bear in different ways. For HEXO, this certainly gives us the ability to invest in those brands and drive accelerated growth. And then across the network, we'll be able to tap into the lowest-cost place to manufacture or grow, which will further create resources to build [indiscernible] at both businesses in a strong position.

The next question is coming from Tamy Chen of BMO Capital Markets.

First question I had, I think this is more for you, Irwin. So if I look back to when Aphria and Tilray merged, I think ultimately, it didn't sustain the market share the way we thought it would. And I think most of the legacy Tilray business has sort of gone away at this point. So I know at this point that the current transaction there isn't control, but if I think about down the path, Tilray does become in a position to take a controlling position or acquire HEXO outright. I mean, essentially, what I'm asking is why would such an arrangement be different than sort of what end up happening on the market share front with the Aphria-Tilray merger.

So first of all, it's not today. So I mean, I can't predict what will happen in the future and what will happen, Tamy. So that number one. I think, listen, as you look at the Tilray Aphria acquisition, why they came together. As we saw consolidation of brands as we saw consolidation of facilities and what were the strong brands. And that goes back to what I said before. We can't have 12 brands out there. We can't have multiple flower out there. We can't have multiple pre-rolls. And the market is changing tremendously. And that just leads into exactly why we're doing this. There's over 800 LPs, there are thousands and thousands of SKUs out there. And with that, you got to be that low-cost producer. What you forgot to mention though is when Tilray and Aphria came together, there was over $100 million of cost savings or close to $100 million of cost savings that come out of that. There's a big opportunity for us as we took over Tilray's facility in Europe, and our European business is growing tremendously. So it's not only just about the market share. It's about growing your strong brands. And there is some strong brands in Tilray, but they're strong brands here. So you can't look at it -- or we just going to -- if this happens, what happens to the market share of HEXO? HEXO right now as a strong independent company. And I got to commend the HEXO team for all that they've had going on that they still remain #2 within the marketplace. So there's -- you got to look at the total deal and what the total value you get out of that and the big picture and -- which I think you came back and what I said before, the opportunities which will arise one day when you can go into off-premise and buy THC drinks or buy edibles or what can happen and when you go into convenience stores, et cetera.

Got it. Okay. And I just had a quick follow-up. When I thought -- it's very interesting because you're talking about lobbying for different things such as -- because I know with the regulations in Canada, of course, things like marketing is very difficult. You're also talking about lobbying for standard distribution like medical cannabis, for example. I'm just very curious, it may be early days, but what sort of the list activity so far you're seeing from the federal government or even the provincial government with respect to your lobbying for these types of potential changes?

Listen, I think after 3 years, the Canadian government said they would come back and looked at the cannabis rules in that. I think like every country today, you need tax dollars and if you saw in the last 3 years, the cannabis industry contributed $18 billion of tax dollars to the Canadian economy, over 151,000 jobs and like $6 billion in infrastructure buildout. So it's a real industry within Canada, okay? And with that, I think now with the new -- with the government in place, I think they will be listening to us. And I think it's important and going in there with Tilray and HEXO and others that can't just do it alone, I think we'll get a voice at the table here. But it's incredible what's been done in 3 years in tax dollars, in job creation, in bringing consumers over from the illicit market into a legal market. Look how many stores now, there's got to be a settling out. And over the last 3 years, we've lived through -- 2.5 years, we lived through COVID where stores have been closed for half of those times. But I absolutely think we will have success with the Canadian government how we do these things. And it's only enhances consumers, enhances safety, it enhances more tax dollars and enhances an industry, and I give Canada a lot of credit for being the first country that has legalized cannabis at a federal level from a recreational standpoint.

The next question is coming from John Zamparo of CIBC.

Congrats on the deal. I wanted to start on the cost cuts. It's a significant number on its own. It's particularly significant given each company is already undergoing pretty material cost-cutting plans as a result of synergies from past deals. So I'm just wondering, can you give us a better sense of where these incremental cuts are coming from and why you have the confidence you can achieve them?

So Scott, I'll take that first. I think if you come back and look at it, and again, I come back and I look at the Tilray, Aphria coming together, as I've said, we're looking to take out $100 million there. That was 2 separate companies. We consolidated grow facilities, which were tremendous, we consolidated distribution facilities. When you're operating a 1.5 million square feet of facilities and if they're only running at a certain percentage in regards to what their capacity is, in regards to what are we all dealing with today in regards to supply chain issues, transportation, fuel prices, electric prices, okay, as I said, insurance prices in regards to that, getting labor. So Again, we're in a new world today after COVID with supply chain disruption and inflation. So even though we've got the savings, we're in a new ground today to get additional savings because of all the inflation that has hit us. And at the end of the day, I think -- and each LP went out and built these humongous grow facilities, that today are not growing at the capacity. And when you don't grow these grow facilities at the capacity and you've got to -- with electricity, with fuel, with water, with labor in that -- there's tremendous overheads unless you're getting multiple -- 100% utilization or 80% utilization. I think -- and as you've heard me talk before about insurance, which is one of my [ pet peeve ], is what we can do there. So there's tremendous savings as we get on the list here. And we have the model that we did with Tilray. Scott has worked with his team to get some of those direct costs out themselves. But on the other hand, what we have to be aware of, we're both separate public companies with separate shareholders that we got to make sure we protect out there.

And John, I'd add to that. I mean, absolutely for HEXO, we'll continue to go at the savings that we've identified within our system. But where this identifies new opportunities, Irwin talked about this and certainly around things like distribution, one of the big areas we've talked about is around co-manufacturing and each company has strengths and low-cost capability in some different areas. So that co-manufacturing ability to move across the network, the bigger with different capabilities is incremental. Irwin's talked a fair bit about the cultivation piece. And then the other piece is around procurement of services or materials, where the -- where we can pool all the purchasing power of the alliance and look for some savings there. So I think full steam ahead on the savings are identified within the individual companies, and absolutely some incremental opportunities as we would identify between the businesses as they work together.

And John, just let me come back for more -- a second here. I think the big thing here is these savings and they're onetime savings that reset your cost and base, but I cannot emphasize enough, the big thing here is how we grow the sales here and grow the industry here. And whether it's selling drinks on-premise, whether it's on a convenience store, or sell in medical drug stores, selling CBD, it's growing, that market is going to be the key for both of us here. I mean we'll get these costs over the next 2 years. But growth, growth, growth, growth is the key here.

Okay. That's helpful. And then I wanted to follow up on the earlier question and just better understand Tilray's comfort level in owning a minority stake. And have there been any conversations about what the more traditional combination of Tilray and HEXO might look like? Or is there a commitment to look at that at a later date?

So I think it puts -- it's in a great position here. I think, again, owning a minority stake that allows us to convert to a full stake if that happens one day. If that minority stake, we have owned over 200 million shares every dollar, it's worth a couple of hundred million dollars. There's an interest rate paid. There's tremendous shared services out there. And last but not least, there is the opportunity to come together one day. So there's lots of optionality out there in the way this is structured than just owning straight equity. And I think this is a phenomenal deal for both companies. And more importantly, it's a phenomenal deal for our shareholders, for HEXO shareholders and last but not least, the consumer because as you get these savings, it's passed down towards the consumer in regards to price. When you get the force of us getting new distribution where consumers have the ability to buy products, whether it's off-premise, whether it's convenience store, the benefit is to the consumer here at the end.

Okay. If I can sneak in just one more. It's a number of closing conditions that you do have to get through. Can you walk us through the cadence of those? And just describe your confidence you can get this achieved.

Listen, we got to get to definitive agreements. There's some future due diligence that has to be done in getting that done. At the end of the day, HEXO needs shareholder approval here in regards to getting approval with the $180 million backstop. That is the approvals we need. So hopefully, that takes about 90 days, and we get that behind us and we move forward. But I think as you look at it, as we do this, there is lots of learnings here, and there's lots of opportunities and the companies have worked well together. But on the other hand, we're #1 and 2, and we're competitors out there, and we can't forget that either. And I think the big thing is together, how do we rebuild the Canadian market? Because you heard me say before and what Tamy mentioned is losing market share because the consumer has been shut down from going to stores, the education that's got to happen with budtenders out there and bringing the consumer back to going in stores. Quebec was closed because of vaccination where you couldn't go to stores. We couldn't get shipments out because just of labor. So there's a lot that we have to do to get the industry back going again after COVID because Canada is basically, in many cases, closed down for almost 2 years and the cannabis industry has suffered from it.

The next question is coming from Pablo Zuanic of Cantor Fitzgerald.

Irwin, can you just maybe clarify for me a couple of points here. So assuming the HEXO share price was up today, right, close around CAD 0.70 and the conversion price is $0.90, you could be in a position to convert maybe in a couple of days, right? Is there anything that stops you from doing that? That's question one. Question two, once you're at 37%, is there anything in the agreement that stops you from, in 1 or 2 weeks, increasing your stake? Question 3, as per my math, you are buying about half of the debt? Why not all of it? Or what's the plan with the rest of that convertible debt?

Thank you, Pablo. So number one, the stock is up today. I can't convert until the deal closes. So after the deal closes, you're 100% right, I could 4 days later call them up and say, I'm converting all my debt to equity, I'm now your 37% shareholder. But why would I do that and give up my 10% interest rate and have a secured lean on all the assets basically within Tilray. Number 2 is if the stock went to $5 a share where it's been, it's worth $1 billion to Tilray shareholders, okay. On a partner, could I convert at any time after that? Yes, I can. Your other question was ...

About the rest of it, well, if there's any ...

So we bought -- Pablo, we bought 100% of the debt. It's about $212 million that are outstanding. HI can still sell down until this closes, but they can't sell down less than $182 million. We're buying all the debt.

Understood. And is there anything in the agreement that once you're at 37% would prevent you from going to 51%? I mean is there a period of time that you cannot increase your stake or you're going to increase your stake at any time later on?

There is nothing in the agreement that stops us from going to 51% or 100%.

Okay. And if I can add just one more for Scott. If you can just give a very brief update. We don't have your January results yet, but just a brief update in terms of state of the business, right? The [indiscernible] date and other tools show continued share loss. Yes, Redecan looks like a great asset, but it's been losing share. Just a brief update on the state of the business right now.

Pablo, yes, we've got our Q2 earnings coming out in 2 weeks, so I'm going to defer that one, and we'll have a robust update in a couple of weeks.

Pablo, I think just from both companies and you get data out there, I think share has been all over the place. We've lost share. But as I said before, I think we have to restart the cannabis category in Canada. The share has moved around to a lot of different LPs, a lot of consumers couldn't go to stores because of vaccination or you had to order online. So with that, I think what we have to look at is Cannabis 2.0, Cannabis 3.0, 4.0 now that everything is lifted, stores in Ontario are all open, the markets open in Ontario, vaccination in a lot of the different provinces -- not vaccinations, you don't have to show your cards to go into stores. So I think that's the big thing, how we go forward here. and how we get consumers back buying branded products and how we both got to grow share. And I think, as I said before, the savings here are great. Getting investors to buy into the profitability of both companies and not burning cash, but at the end of the day, that's all done by growing sales, and that's what the important part is.

And Pablo, I will add that just -- our focus on innovation and driving growth has continued unabated and you'll see that in the market in stores in the coming months. So I couldn't agree more around that focus on growth. And certainly, that's a huge focus for HEXO.

Our next question is coming from Aaron Grey of Alliance Global Partners.

So first one for me, you guys talked about different ways to utilize the 2 between the JV and cost capabilities, legal and otherwise and as well as distribution. But going back to the market share comment you guys talked about. Wanted to know in terms of sales force and potential opportunities there. And Irwin, in the past, you've talked about return to brick-and-mortar offering opportunities with sales force kind of getting in front of budtenders. So could this alliance also combine that effort in having the power of the 2 brands to leverage in the marketplace. I want to kind of get a sense in terms of, obviously, you guys still being competitors, as you just mentioned, but also having aligned interest.

So good question. Scott and I've talked about it. And if you look at liquor companies out there today, or spirit companies or beer companies. They are competitors, but they share sales organization. If you look at a lot of companies in the food business, they hire retail brokers that represent lines. And I think there is opportunities out there as we put boots in the streets and we have Southern Glazer's that is our boots on the street with regards to calling on stores. So I think there is opportunities from the sales side to go out there and be calling on budtenders. But I think what's also really important is the data and data is key here to be able to either share or data that we both going to be able to use out there. So we both have an independent sales organization on the street, and there is an opportunity there. And you heard what I said before in regards to direct-to-consumer. And having that ability to be shipping products directly to consumer, whether it's our own, whether it's through the control boards, et cetera, is big time for us. And last but not least, in the cannabis industry is not going to be different than food, clothing or any other industry today, how big direct-to-consumer is. And then being able for home delivery and stuff like that, we would be able to set something up as independent companies that we could do that and work with the control boards and work or work with the retailers to do that to make sure there is supply. So on all 3 of those, there's opportunities to work together with those. And when it comes to sales organization infrastructure, that's a big cost for both companies.

And Aaron, what I'd add there is I think the alliance really brings -- creates a clear industry leader. And from my CPG background and working with our customers and the retailers, having a perspective on what consumers need, what the shopper insights and needs are and being able to go with a shared view on how we can unlock opportunity for our customers that we can make it easier for consumers to shop, how we can bring more innovation to market and a clear framework. There's just so much opportunity in the Canada space. I think as we go to market, this alliance and having that leadership opportunity to really frame it up and unlock opportunities going to be critical. And yes, budtender education is going to be a key piece of that. And -- as I said, we're still independent company. So we're going to compete. In my opinion, having an independent sales force is an important part of that competition. But as I say, we'll be able to create a common framework, if you will, for industry leadership.

Okay. That's helpful. And then second question for me. Tilray have the JV with ABI, HEXO, you have the JV with Molson Coors. You guys talked about innovation, beverages was mentioned on the press release. Just wanted to know if there could potentially be any impact to your JV with Molson Coors if there was an equity stake and potential control interest taken by Tilray from HEXO, if you've had that type of a conversation with Molson Coors.

Yes. I mean that's a conversation we have in more detail with Molson Coores. There is -- in that contract, there is a change of control clause, so in the event that there was a change of control, again that will be a conversation we have to have. But this transaction is not a change of control.

Our last question is coming from Frederico Gomes of ATB Capital.

So just on the creation of a JV to provide services for both companies. Can you give more color on what -- exactly what kind of services that JV would be focused on? And would you need any funding?

So as I said before, and Scott, jump in here, it would be about growth, it would be about processing, it will be about procurement, whether it's packaging, whether it's ingredients, it's regards to support services, whether it's insurance, it's buying our medical insurances together, our product liability insurance together, it's transportation, it's distribution. So multiple, multiple areas that we're working on there. And then last but not least, how are we looking at our artificial intelligence and what are we looking at in regards to change the business, innovate the business. Take -- there's Cannabis 1.0, there's 2.0, 3.0, we're today looking at the future, and looking at 5.0. And that's what's important here. And again, the savings are important and it's key and to be able to get $25 million, $30 million or $50 million of savings. And we're both -- beyond that, we're both companies, we haven't stopped the savings. HEXO was still out there with a plan to take costs out of their business, which is direct with their people. Tilray is out there that has a plan in place between Tilray and Aphria that we're both focused on. So we're both focused on savings. These are additional savings on top of what we've already previously committed to. But the big picture here is how we grow both our top line numbers and grow our share.

Okay. And then you mentioned product innovation and sharing some consumer data potentially. So how should we think about investments in R&D? Would you share any new products or IP developed by other company? Do you have any thoughts on there? And if so, how would that happen?

So I think, again, there's proprietary information for both companies, and each company has its own R&D. But if there are certain things in R&D that HEXO is not able to do that they can share with us that we're able to do, and we'll do it in vice versa. So I think it's an area that we have to be cautious about in regards to sharing the secret sauce from both companies. But at the end of the day, if you go back and look at the pharmaceutical industry, the cost to develop drugs today is tremendous, and whether there's generic or branded, that's ultimately the way they go to market to get the scale and size. So if we're going to invest in something, and just one company has it, and if there's other ways we can use it is some of the stuff we're looking at. And a big thing in the R&D is the medical aspect of it that we would look to share too.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you, operator, and thank you, everybody, for joining today's call on a short notice. This is an exciting opportunity for both companies. It's not your normal structure, your normal deal out there, but what is normal in this world today. And I think that's the difference between Tilray and HEXO is we're looking to change an industry in Canada that's 3 years old. We're looking at an industry that does not have legalization in the U.S. and we're waiting. And the same with Europe, as we wait for adult use recreational legalization, but medical. And I've laid out there how we get to $4 billion. Not everything falls in place as the way originally thought it would be as we thought legalization would be much further ahead. And that's why as a company, you have to be nimble, you have to be flexible and you have to look at how you change to get there and play within the cannabis world, the consumer world and to grow in the industry. One thing I can reassure you, it's a $100 billion industry out there. And no different than technology, no different than bitcoin, no different than other industries out there. The cannabis industry will be a big industry one day. And if you come back and look from a Tilray standpoint, and I'll let Scott talk about HEXO in a second, today, we're in spirits, we're in beverages, we have a position within MedMen, one of the largest retailers in the U.S. that would convert to an equity position upon legalization. We have a good foothold in Europe. And with that, upon legalization, there's lots of things that will change within Tilray. With that, I'm going to turn it. I'm going to thank everybody for joining. I want to thank everybody for making this happen. And Scott, I'll turn it over to you for last words.

Thanks, Irwin. Let me just reiterate about how excited I am to be working with the team at Tilray. And just to kind of reiterate what this does for HEXO. And you talked about growth and HEXO is very focused on being the best cannabis company in the world. We've got incredible capability around a number of formats and will now be able to focus on those. And this transaction, as I mentioned off the top, helps deleverage our balance sheet, gives us sufficient liquidity to fund the business plan, preserves value, minimizes dilution for the existing shareholders and allows us to work with the key shareholders and all shareholders to grow this business and grow the value of the business. So as we pursue the, The Path Forward and the growth agenda for the business, I'm very excited to be announcing this transaction and look forward to working with the team to close the transaction.

Thank you, Scott. Thank you, everybody. Have a great day.

Thanks.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.