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Tilray Inc (NASDAQ:TLRY)
Q3 2019 Earnings Call
Nov 12, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Tilray Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

Now I would like to hand the conference over to your speaker today Ms. Rachel Perkins.

Rachel Perkins -- Investor Relations

Good afternoon, and thank you for joining us on Tilray's, Third Quarter 2019, Earnings Conference Call. On today's call are Brendan Kennedy, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer. Before we begin please remember that during the course of this call management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Tilray's reports filed from time to time with the Securities and Exchange Commission and Canadian securities regulators and its press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Finally please note on today's call management will refer to adjusted EBITDA and adjusted net loss which are non-GAAP financial measures. While the company believes adjusted EBITDA and adjusted net loss provide useful information for investors the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to net loss the most comparable measure prepared in accordance with GAAP.

Now I would like to turn the call over to Brendan.

Brendan Kennedy -- Chief Executive Officer

Thank you, Rachel. Good afternoon everyone and thanks for joining us. Today I will provide an update on the progress we continue to make on our strategy to be a leading cannabinoid based global consumer packaged good company with a portfolio of best-in-class brands supported by the multinational supply chain. In just a few moments Mark will review our third quarter 2019 financial results in some detail and discuss our long-term financial targets. But first I would like to provide some highlights. In the third quarter, our revenue increased 409% year-over-year to USD 51.1 million. And total kilogram equivalent sold nearly doubled sequentially to 10848 kilograms. With receipt of our first GMP certification for our Portugal facility revenue from international medical sales grew more than fivefold compared to the prior-year period. This is in line with the expectations we shared earlier this year that growth for our global businesses would accelerate in the second half of 2019 and into 2020.

While the cannabis industry is still in its early stages of development the global paradigm shift regarding the legalization and use of cannabis as medicine and mainstream consumer products continues to play out as anticipated. To capitalize on this opportunity we are prudently investing to build the global infrastructure required to drive long-term growth and shareholder value creation. Today our products are available in 20 countries spanning five continents. Over the next two to three years we expect a number of additional countries to legalize medical cannabis followed by adult-use and our global footprint puts us in an advantaged position to enter new markets when we are legally permitted to do so. Let me share some details. In Canada, over the next 12 months, we believe the market has the potential to reach a balance between supply and demand for raw materials including flower and oil. As such we remain confident in our cultivation asset-light model and ability to sign long-term wholesale supply agreements as we focus on the cannabis value chain further downstream. We view ourselves as builders of high-quality trusted brands, not farmers.

Consistent with this we are ready for the second phase of adult-use cannabis in Canada with a broad product portfolio set to launch over the course of the next two quarters as regulations permit. Our expanded portfolio and our High Park includes innovative cannabis products and formats such as CBD beverages edibles and baked products. We will launch new products under celebrated existing brands Marley Natural and Goodship as well as new brands The Batch Chowy Wowie and Remedy. Our popular existing Canadian brands Kennecott and DuPont will also broaden their product offerings. Across the board, we are committed to launching high-quality products that are safe for our consumers. We are eagerly awaiting the commercial launch of this next phase of legal cannabis products to address consumer's desires for our broader selection of legal products and form factors that are safe and tested to meet rigorous quality standards. Internationally during the third quarter, we continued to build inventory at our EU Campus in Portugal as we await additional GMP certifications. We are pleased to announce that we successfully exported our first shipment of medical cannabis from Portugal to Germany in September through a EUR3 million dollar agreement with Can Medical Pharma GmbH to supply patients. This represents a major milestone for Tilray as our EU Campus ramps up international export output through the end of this year.

We are waiting our finished product to GMP certification which we expect by the end of the year. And once received we expect a significant ramp in international revenue on top of the very strong growth we have already seen. As we discussed last quarter in addition to our own 10-acre outdoor crop we grew an outdoor crop with our cultivation partner Esporao on an additional 20 hectares which is the equivalent of roughly 50 acres. We are currently in the early stages of processing this harvest and we will determine yields in the coming weeks. As the progress in Canada and Europe of demonstrates our global growth strategy remains unchanged. First, selectively increase our production and manufacturing capacity to serve the rapidly growing global medical market as well as the adult-use market in Canada and other markets over time. Second, maintain our rigorous focus on quality as we scale. Third partner with established distributors retailers and consumer packaged good companies where relevant to scale distribution of our products further and faster in a capital-efficient manner. Fourth build a differentiated portfolio of brands and products that appeal to a diverse set of patients and consumers. Fifth expand the addressable medical market by fostering mainstream acceptance with the medical community and governments. And finally sixth Pioneer the future of our industry by investing in innovation R&D and clinical research.

As part of these pillars of growth, our strategic partnerships and acquisitions are important business drivers for us and I want to update you on our progress. Starting with our strategic partnership with Authentic Brands Group. We recently completed some initial pilot marketing with Nine West. We expect our first product launch to be in the United States in the near future. Tilray is also working with ABG to commercialize other brands in Europe by early 2020. We recently announced plans to distribute CBD Beverages in Canada once regulations allow through our joint venture with AB InBev named Fluent Beverage Company. Fluent intends to have CBD infused beverages available-for-sale to adult consumers in Canada as early as next month. We continue to conduct research related to nonalcohol cannabinoid-infused beverages containing THC. We continue to work collaboratively with our pharmaceutical partner Sandoz the generic drug business of Novartis to evaluate new markets to enter into together. Depending on the market, however, we may work with Sandoz and/or other large in-country pharmaceutical companies. We currently co-brand medical products in Canada with Sandoz and the Sandoz salesforce reps our products. Manitoba Harvest continues to perform well with branded revenue growing 4% year-to-date on an as-reported basis.

Excluding the impact of a one-time promotion in the prior year, the company has grown 10.5% year-to-date in branded product sales. We remain excited about the immense opportunity in North America as we look to expand the Manitoba Harvest product portfolio consistent with our thesis of taking a trusted brand and supply chain in hemp foods and leveraging it to deliver differentiated hemp food and CBD products. As we gain more regulatory clarity from the FDA we believe we are well-positioned to capitalize on the CBD market with our existing retail relationships. Through the acquisition of Smith & Sinclair which crafts edible candies fragrances and unique consumable products we are launching Pollen a new brand under Smith & Sinclair's umbrella of innovation in the CBD space. The brand is focusing on redefining wellness with a range of high-quality ingestible products for the initial launch which will be available in retail stores and online across the U.S. and the U.K. before the end of the year. We also partnered with Canfections Group a leader in the infused confectionery space to expedite innovation and new products to market for Phase II of Canadian adult-use legalization. The founders of Canfections hail from a legacy confectionery business with over 85 years of experience servicing legacy consumer packaged goods companies such as Nestle Hershey's and Mondelez. This past quarter we announced a definitive agreement to acquire FOUR20 an adult-use cannabis retail operator with eight operational retail stores in Alberta and licenses for 14 more.

The transaction is expected to close by the end of Q1 2020. In addition to FOUR20, we have made strategic minority investments in other Canadian and cannabis retailers including Inner Spirit Westleaf TRO and Firing Flour to both increase shelf space and gain key consumer insights. We believe our strategic global partnerships and acquisitions demonstrate our focus on the diversification of our global opportunities for long-term growth. Going forward we will continue to pursue strategic M&A in order to enter new markets increase capacity introduce new form factors and other technologies and enter new retail channels. Looking at our business geographically. The challenges in the Canadian market are ongoing with a limited number of retail locations and a supply/demand imbalance. That being said our team has executed on our strategy and we look forward to launching our new form factors which will allow consumers to safely choose more of their preferred formats. Even as we continue to capitalize on the opportunity we see in Canada we expect United States and Europe to be two of the largest cannabis markets long-term. Our strategy for the United States is all around building a portfolio of trusted CBD brands in the states we are legally permitted to do so.

And building strategic partnerships that will allow us to expedite our entry into the THC market when legally permitted to do so. While we have a foothold with Manitoba Harvest we will continue to build a platform of brands and products through acquisitions and partnerships such as Smith & Sinclair and Authentic Brands Group both of which we expect to launch CBD products by the end of the year. Turning to Europe. In July we announced that we had successfully exported GMP certified finished medical cannabinoid oil solutions from Canada to Ireland. And in September we exported our first shipment of medical cannabis from our EU Campus in Portugal to Germany. As I mentioned earlier we expect to significantly ramp our exports from our EU Campus very soon. We have built an incredible team in Portugal which will be our international hub for operations with indoor outdoor and greenhouse cultivation sites as well as research labs processing packaging and distribution sites for medical products. Our processing capacity is greater than our cultivation capacity. So we have ample run rate to grow scale and prepare finished goods with raw materials from third parties in addition to our own cultivation capacity. As we focus on becoming a leading global cannabis business clinical research remains a core focus. The industry is lacking data and we believe clinical research will help foster mainstream acceptance within the medical community and among governments. In the third quarter, we announced our participation in two clinical trials led by the NYU School of Medicine for patients with alcohol use disorder and posttraumatic stress disorder.

We have since announced that we have imported medical cannabis into the United States from Canada for a new clinical trial evaluating the efficacy of medical cannabis as a treatment for taxane-induced peripheral neuropathy or TIPN. TIPN affects more than 67% of women undergoing breast cancer treatment and we are excited to be part of this groundbreaking trial to find a new treatment option. That trial is being conducted by Columbia University. For the balance of the year and into 2020 we anticipate making disciplined strategic investments to drive continued expansion in the markets we already serve enter new ones and embark upon additional strategic partnerships and transactions that will enable us to drive global growth. Some highlights we anticipate include: Exporting Tilray medical products to new countries and expanding our medical cannabis product offerings in the international markets we currently serve; extending our pharmaceutical partnerships to additional countries and regions; completing the build out of our facility in Portugal and obtaining additional GMP certifications in Portugal; as well as further expanding our Nanaimo and Leamington facilities; launching additional form factors for adult-use in Canada; initiating additional clinical trials we added two during the third quarter and one already in the fourth quarter; closing the downstream merger with Privateer Holdings; and finally entering into strategic partnerships that enable us to further accelerate our growth.

With that, I would like to turn the call over to Mark.

Mark Castaneda -- Chief Financial Officer

Thanks, Brendan. Good afternoon to those of you joining us on the call today and webcast. It is a pleasure to be speaking with you today. Please note all the financial information we discuss today is prepared in accordance with U.S. GAAP and in U.S. dollars unless otherwise indicated. Our momentum for the first half of the year continued to the third quarter and we believe our strong growth will continue in Q4 and throughout next year. Focusing on our Q3 results in more detail. Q3 revenue grew more than fivefold to $51.1 million or CAD 67.8 million compared to the third quarter last year. To put this in perspective our Q3 revenue alone was 18% greater than our revenue for full year of 2018. Revenue growth is primarily driven by the Canadian adult-use market the Manitoba Harvest acquisition and growth of international medical markets as a result of our first GMP certification of our Portugal facility. Our performance in the Canadian adult-use market so far has been in line with our expectations. Adult-use represented 31% of revenue in the third quarter and increased sequentially from Q2 to Q3. With additional retail distribution and new form factors becoming available we expect adult-use revenue to continue to drive our growth. Additionally, the adult-use channel has driven our average selling price or ASP down compared to the prior year due to the two factors.

First a lower mix of higher value-added extract products which represented 17% of non-hemp revenue for the third quarter of 2019 compared to 52% of revenue in the same period last year. We expect the introduction of cannabis 2.0 products that ASPs will increase as edibles beverages and vapes all sale at higher prices overall. Additionally, we would likely transition our key operating metrics to focus on newness as grams become less relevant in 2.0 products. Secondly, we introduced a new value brand The Badge in response to consumer demand for lower-priced products which is important for new consumer trial. This introduction in Q3 resulted in higher mix of lower-priced products which brought down our average selling price during the quarter. Our average net selling price per gram for adult-use products decreased in Q3 to $2.88 per gram from $4.89 per gram in Q2. Pricing in our other SKUs are generally unchanged but there was a higher mix of sell in to this channel of this new value brand. Next, our hemp product revenue was $15.7 million in Q3. As a result, this revenue was from our Manitoba Harvest acquisition in February of this year. There is some seasonality to this business which is reflected in the results for the quarter which were down slightly from the prior quarter. U.S. CBD sales were minor as we began rolling out these products during the quarter.

We're currently are available in less than 1000 locations. And expect with FDA clarity we could be available in significantly more locations including major retailers. On the international front, our revenues grew more than 5x to $5.7 million in the third quarter from $950000 from the prior year. As a percentage of total sales international revenue increased to 11% versus 4% in the second quarter of this year. The growth is driven primarily by our first export of cannabis flower to Can Medical Pharma to supply patients in Germany which contributed over $3 million in the quarter. We expect our international sales to accelerate upon receipt of GMP one certification and as we ramp up our EU Campus in Portugal. We believe that supply inventory market from the EU is a significant competitive advantage and look forward to ramping our sales from this facility which have higher ASPs and higher margin than our Canadian adult-use business. Moving on to operational metrics excluding our hemp products. Total kilogram equivalent sold increased over sixfold to 10848 kilograms from 1613 kilograms in the same quarter last year.

The overall net selling price per gram was USD 3.25 or CAD 4.32 and USD 2.98 or CAD 3.96 excluding excise tax. This compares to USD 6.21 in the prior year's third quarter which is primarily direct-to-patient medical sales. Pricing was impacted by channel and product mix. Gross margin for Q3 increased sequentially to 31% from 27% in the second quarter and 23% in the first quarter as we expected. Compared to the prior year gross margins were flat. As we continue to expect gross margin to increase sequentially going forward as we bring greater scale and benefit from positive product and channel mix. As Brendan mentioned we expect that our Portugal facility will increase exports with full GMP certification. And beginning next month we will have the ability to sell higher value-added adult-use products in Canada. Onto expenses. Our total operating expenses increased to $39.2 million which includes $8.3 million noncash stock compensation. Excluding stock compensation expense operating expenses increased by $19.3 million compared to the prior year's third quarter which is primarily comprised of an increase in G&A of $13 million and an increase in sales and marketing of $13.5 million.

The increase was driven by increased headcount related to growth initiatives for the adult-use cannabis team in Canada and European leadership team in Portugal public company costs and operating costs added through our recent acquisitions. The increase in G&A from prior quarter was driven by third-party costs to implement systems and controls for upcoming Sarbanes Oxley access station which we believe result in highest levels of internal control processes. These increases in cost will continue for the next couple of quarters then it will start to decrease. In the sales and marketing side, we ramped up our investment in staffing to launch our U.S. CBD and international medical sale which are investments ahead of revenues that we expect to start providing returns in the coming quarters. Next, I'd like to explain our gain on acquisition related costs. Because we are in the early stages of this industry there's lots of uncertainty regarding forward revenue forecast which is why we structure our acquisitions with a large mix of earnouts and other performance-based metrics. As we gain more data points on the results we estimated that our Mature and Manitoba Harvest acquisitions will now achieve the full earnout. So in accordance with GAAP, we adjusted the earnout liability down which creat a gain in acquisition related activities.

The full earnout will be calculated over the next couple of quarters. The net loss for the quarter was $35.7 million $0.36 per share compared to a loss of $18.7 million or $0.20 per share in the third quarter 2018. We reported an adjusted EBITDA loss of $23.5 million compared to a loss of $7.4 million in the third quarter of last year. The increase in net loss and adjusted EBITDA was probably due to increases in operating expenses related to the growth initiatives expansion of international teams in addition to the Manitoba Harvest and Natura businesses. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of approximately $122.4 million. We continue to believe that we have sufficient capital and access to capital to execute our growth plan until we achieve positive EBITDA which we expect in Q4 of 2020. Our cash burn in Q3 included deferred payments for M&A as well as deposit for future inventory. We expect our quarterly cash burn will decrease each quarter going forward. We continue to actively explore opportunities for financing and will likely tap the debt market in the next coming quarters. Today we have over $300 million unsecured assets that we can leverage. Additionally, I'd a like to update investors on our inventory balances which during the quarter have increased. As we have reported we have been cultivating product and building inventory in our Portugal facility for almost a year.

And this quarter just began selling this inventory. We are in the process of a couple more GMP certifications for selling finished product and for extraction. Until we receive these certifications we will continue to add some inventory in Portugal. Additionally in Canada based on current regulations, we primarily sell flower and flower products which leaves byproducts for extraction in large supply and 2.0 products are not allowed to sell today. We expect this inventory imbalance to continue until we are able to convert this inventory to 2.0 products. We expect inventory levels to start to decrease throughout 2020. Long-term we continue to expect to capture a sizable share of the global cannabis market with estimated gross margin of 50% plus and adjusted EBITDA margins of 25% to 30%. As new markets are added we will invest to develop in those markets which may have a short-term impact to margins but also provide for greater long-term revenue upside. In summary, our third quarter results demonstrate that we are successfully executing on our strategy. We continue to believe we have a long run way for growth and multiple paths for shareholder value creation. This concludes our prepared remarks.

Brendan and I are available to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Vivien Azer with Cowen and Company. Your line is open.

Steve Schneiderman -- Cowen and Company -- Analyst

Good evening. This is Steve Schneiderman sitting in for Vivien tonight. Let's start off on Fluent. Can you talk a little bit more about the opportunity you are seeing with CBD Beverages specifically within the market? And in addition, can you provide any color regarding the delay on the rollout for THC beverages?

Brendan Kennedy -- Chief Executive Officer

Sure. Yes. So in the quarter, we announced the name Fluent as well as the CEO. And the team at Fluent has been working since we announced the partnership with AB InBev last December. They've been working on developing formulations form factors brands and packaging for the products that we will or they will launch in December. I believe that they will announce -- showcase their products before the end of the month. They've been outselling them to the various provincial buyers crown corporations throughout Canada. They've been showing the products to those buyers and expect -- we expect to ship those products December 17. The CBD beverages became a focus for them based on a lot of market research that they did. And so they'll launch those products for sale to adult consumers in Canada in December. They continue to do research on THC beverages and they expect to launch them sometime next year.

Steve Schneiderman -- Cowen and Company -- Analyst

Okay. That's great. Thanks very much, Brendan. On Portugal, I want to go back to this real quick. On the GMP certification staff, I understand that the finished manufacturing license you expect by the end of the year. Correct me if I'm mistaken but wasn't there another license you were waiting on in order to be able to have full access to adult product suite? And also based on what you are licensed for today versus what you hope to be licensed for by the end of the year what percentage of your product mix is available today versus what you're waiting on?

Brendan Kennedy -- Chief Executive Officer

Yes. So currently obviously we have been investing in Portugal since 2000 -- I made my first trip there in 2015. Signed an MOU with the government in 2016 and started buying property and designing a facility in 2017. We planted -- built up a building in 2018 and put our first plants in our greenhouse in November December of last year. And so we have been harvesting products for almost a year now. In Q3 we announced our first export it was an EUR3 million $3.3 million bulk export from Portugal to Germany. So it's always exciting to generate that first dollar revenue from a project like that and we are looking forward to significantly increasing revenue from Portugal in Q4 and throughout 2020. There are three -- like three main steps in the EU GMP certification. Those certifications are issued by a regulator in Portugal informant. The first was issued. So GMP part two which enables us -- well that's what enabled us to ship that GMP flower from Portugal in bulk. So think about roughly 50-kilo sized packages from Portugal to Germany.

So we have that first EU GMP part two certification. We are waiting EU GMP part one and that enables us to produce and package flower products and oil products in finished form factors. So actually in the end product package that a patient in Germany or any other EU country would actually receive from a pharmacist. Like you said we expect that certification before the end of the year. We actually expect it before the end of the month. And so we are waiting that. The final GMP certification that we are looking for is likely to come in Q1 and that would enable us to extract oil from flower and byproduct at our Portugal facility. And that one is going to take a little bit longer because we have produced the -- I believe we have produced the test batches but that will -- that won't happen to Q1.

Steve Schneiderman -- Cowen and Company -- Analyst

Okay, thanks for clarifying on that one. And last one for me. Can you provide an update on how they rollout CBD offerings through ABG? It sounds like you're going to be able to get something out by the end of the year. Was there any additional detail that you can offer beyond that?

Brendan Kennedy -- Chief Executive Officer

Yes. So we -- obviously we completed the acquisition of Manitoba Harvest in Q1 and launched those products at the end of May start of June. And those products are currently in about 1000 -- a little over 1000 retailers in the U.S. We have developed the first product set through the ABG partnership. And those products that have been produced they have been introduced in a very small rollout and expect them to be in market before the end of the year. In addition in terms of U.S. CBD, we acquired Smith & Sinclair in Q3 and expect to launch those products their CBD products in the U.S. before year end.

Steve Schneiderman -- Cowen and Company -- Analyst

Great, thank you very much.

Operator

Thank you. Our next question comes from Doug Meacham with RBC Capital Markets. Please go ahead.

Doug Meacham -- RBC Capital Markets -- Analyst

Good afternoon. A couple of questions starting with EU. Could you may be frame what you see the opportunity is? You talked about the increase in revenues in Q4 and then into next year. But I'm guessing that this is going to be really tied to that GMP part 1. And could you provide us a few metrics around how you see that market developing for you over the next several quarters?

Brendan Kennedy -- Chief Executive Officer

Sure. So we had -- Tilray was the first company to ever legally export medical cannabis from North America. And that was an export we did from Canada in June of 2016 to the EU. Since then we have exported to -- our products are in 13 countries. A handful of them about six I think in the EU. So we have exported to Australia and New Zealand Latin America South Africa the U.S. for clinical trials and then I think six EU countries. Our products are now in Ireland in the U.K. Germany Croatia Czech Republic Cyprus and we continue to look to new countries to export our products to. And we will likely add one before the end of the year and one either before the end of the year or just at the start of Q2. And when we look at the patient and prescription count in Germany it's actually very similar to the old ACMPR patient model in Canada in terms of patient ramp.

And so we are encouraged by the number of patients that are getting prescriptions in Germany. And so when we look at what we built in Portugal we expect to not only significantly increase revenue through bulk exports to Germany and other EU countries. But with this final GMP or the next GMP certification, we will be able to ship the finished package product. And that will really have two effects. It will one increase overall revenue because the revenue for our finished packaged product per gram is significantly higher than a bulk export per gram. And then secondly it will increase our profit margin because the profit margin on the finished packaged product is also significantly higher than a bulk export.

Doug Meacham -- RBC Capital Markets -- Analyst

Okay. And then just to wrap up. With respect to the consumer insights that you noted based on some of the agreements that you have in place could you speak to that? And then also may be Mark could speak to the B2B market what you're seeing there in terms of pricing and the quality of product? And then I'll leave it there.

Brendan Kennedy -- Chief Executive Officer

So when we have done -- performed market research on Canadian consumers we have seen increased interest from older demographics around CBD and there's certainly -- there's obviously a lot of interest around CBD. And if you look at Google search results for CBD in the U.S. you see significant growth over quarter-over-quarter. We see the same interest in Canada. And so we have done some segmentation of the consumer base there. And we will introduce not only new form factors edibles vapes for that demographic in Canada but also the beverage brands and products that we will launch in December. We will target the consumer segments that we identified in that research. We are actually doing some work with Deloitte on consumer segmentation in Canada and we will publish some of those results in 2020. And so we will use that data as well as other data we have access to to not only develop new brands and products but refine the brands and products within our existing portfolio.

Mark Castaneda -- Chief Financial Officer

And the second part of the question was the bulk market and what the spot market looks like in Canada. And so what we have -- we still cannot find high-quality or high potency flower in the market really almost at any price. It's very rare to find. There is more and more lower potency product on the market and pricing is coming down for that bulk market and there's also a lot of byproduct on the market that people are using for extraction. So the pricing and byproduct and low potency is continuing to come down but there is this whole end market for trying to buy some high potency product.

Doug Meacham -- RBC Capital Markets -- Analyst

Perfect. Thank you.

Operator

Thank you. And our next question is from Andrew Carter with Stifel. Please go ahead.

Andrew Carter -- Stifel -- Analyst

Hey, thanks. Good evening. I wanted to understand kind of the commentary around expecting a continued acceleration in the fourth quarter and some of the channels you have there starting with medical. I think kind of at that level should we expect that as you kind of potentially get the GMP certification coming up? And then from the adult-use are you thinking January or December shipments of adult-use products in Canada?

Mark Castaneda -- Chief Financial Officer

So we do expect a small amount of shipments in Q4. But the bulk of it will be shipped in Q1. So there will be a small amount but not a material amount in Q4 for the adult-use 2.0 products. We do expect our adult-use revenues to be up versus Q3 on just the flower products. And going around to the other channel as Brendan mentioned our medical -- international medical we expect to see continued strong growth. As we have prefaced on the first half of the year that we thought there will be some nice step changes in that market and that is playing out as we expected. On the Canadian medical and the Canadian -- we group Canadian medical and Canadian both together. The bulk portion of that will come down. There's just less opportunities for us and we are keeping all that byproduct or oil that we have been selling. So it will be kind of a mix. You'll see some strength in Canadian adult-use and strength in international medical

Andrew Carter -- Stifel -- Analyst

Got it. And kind of second question. I want to step back and ask about The Batch kind of the discount offering you and another competitor kind of put something out there. Just kind of the -- to step back from that and with kind of some the restrictions you have in Canada limited retail availability and really kind of a limited ability to kind of communicate that to consumer do you think you'll be able to get this offering to the intended user which can convert to illicit market users? And also just one other follow-on would this product be incremental -- or be accretive to your gross margin long-term guidance?

Brendan Kennedy -- Chief Executive Officer

Maybe I'll talk about the first part and Mark will answer the second part of that second question. When we looked out and surveyed the various products in various provincial retail stores it seems like there was a gap and that there weren't a whole lot of brands focused on the value consumer. And certainly, when we look at U.S. states you do see products that target that consumer segment. And so we have launched that product and that brand in Canada and we were very pleased with the results. A lot of that product is typically a product that we wouldn't sell under our existing higher quality higher priced brands. And so these products give us an opportunity to generate revenue from product that otherwise would have either been sold to another LP or extracted. And so it was -- it gives us the opportunity to generate additional revenue.

Mark Castaneda -- Chief Financial Officer

Yes. And from a margin standpoint, the margin on that is slightly lower than our overall averages of margins. But as we get into 2.0 we do expect there to be higher margins from the 2.0 products.

Andrew Carter -- Stifel -- Analyst

Thank you. I'll pass it on.

Operator

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

Tamy Chen -- BMO Capital Markets -- Analyst

Yes, thanks. First question is very quick clarification. Mark, did you say that guidance you're expecting positive EBITDA by the fourth quarter of 2020?

Mark Castaneda -- Chief Financial Officer

That is correct. We expect to be positive fourth quarter 2020.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. So I just wanted to understand how you're getting there given that you mentioned you have this new value product. You have been talking that you expect that 2.0 will be margin accretive. But I just wanted to get a sense of kind of a sensitivity toward that because presumably there will be a ramp associated with the ramp 2.0 and it's a totally different ramp around cultivation this is a lot more manufacturing now. So maybe have you thought about what the potential I guess risks could be associated with that ramp? Could that in the interim further pressure your margins before things get better. So I just wanted to better understand how you're seeing that trajectory of positive EBITDA by fourth quarter of 2020?

Mark Castaneda -- Chief Financial Officer

So Tamy as you saw this quarter despite having sell in of The Batch product which is at lower cost and at lower margin our actually gross margins were up 200 basis points. So as our facilities as we put more product through our facilities any factory that you start running at a fuller capacity you cover more of your fixed costs so it brings down the overall cost and expands your margins. Additionally with our international business international medical is by far the highest margin part of the mix. And we expect significant increases in that business to offset any kind of risk on the Canadian adult-use side. So I think having that extra leg of growth at high margin is a good hedge against the -- some of the risk in the Canadian adult-use market. And so yes the way we get there is we do see for the full year over 40% margins in 2020. We do see our expenses from an overall expense kind of averaging around $45 million a quarter to lower -- and the earlier part is a little bit higher than the later quarters. And with revenue ramp, you get to a gross margin that covers your operating expenses. So that's how we get to positive EBITDA in Q4.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. And on the cash side here you said that you're expecting the quarterly cash burn will come down in each quarter. But I'm wondering net working capital, for example, is one area as well as capex. How should we think about that going forward? Because again there is the ramp 2.0 aspect that's coming down the pipeline. So how do you think of -- can we get more color on that guidance you're giving for cash burn to decline over the coming quarters?

Mark Castaneda -- Chief Financial Officer

Yes. So if you think about this quarter and next quarter we will probably peak in inventory at least for some time. And inventory as you saw with around $110 million we also have about $60 million in deposits which are primarily prepaid inventory. We expect that number this time next year or at the end of next year to be around $100 million. So we expect the benefit on the working capital side of around $70 million. So that kind of helps with negating some of the cash burn going forward. We effectively prepaid for a lot of our cost of sales. So when you look at the operating expenses from a cash burn standpoint you're looking at around $65 million in cash burn over the next four quarters. And so that's negated by kind of the working capital benefit. So then we add interest expense of around $25 million and capex between $25 million and $35 million which gets you to $50 million to $60 million in net usage against our $120 million cash.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. And sorry if I could squeeze in one more here. When you talk about you're likely to tap that debt market you're talking about because you mentioned also assets on the book about $300 million if I heard that right. So are you talking about credit facility? And just wondering why you said it's likely you'll tap that? By your math, the current cash you have on hand you believe will be sufficient until you get to EBITDA positive?

Mark Castaneda -- Chief Financial Officer

Yes. We will likely tap it. I didn't say that we would for sure tap the markets. But we want to make sure we had plenty of cushion in our operating plan. And as you know in running business working capital fluctuates within a quarter and within a month. So you need some of that cushion sometimes to help absorb some of those seasonality or movements around working capital during the month.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Aaron Grey with Alliance Global. Please go ahead.

Aaron Grey -- Alliance Global -- Analyst

Thanks for the questions. Just wanted to dive back again in to kind of the assumptions to get to this 4Q EBITDA positive. Just in terms of the revenue ramp can you talk a little more to the sensitivity on that? Just given the strong things that are out of your control in terms of just increased brick-and-mortar in Canada and then also U.S. with CBD and regulations coming from the FDA. What kind of sensitivity have in terms of any kind of delay or ramp up in brick-and-mortar in Canada?

Brendan Kennedy -- Chief Executive Officer

Yes. Looking at the revenue ramp for really more 2020 there's very little CBD -- U.S. CBD in those numbers. So that would primarily be upside. On the Canadian side, we do expect that 2.0 products in more locations. We do expect around 1000 locations by the end of next year. The sensitivity goes from 800 to 1000. So we think even at 800 locations we will be positive on EBITDA in Q4. So that -- there's a sensitivity. If there is no new locations that could put us into jeopardy. I don't think that's going to be the case. But if there is no new Canadian locations that could put positive EBITDA out may be another quarter. So those are the two -- like I said the offset is international medical which is high margins and significantly high-growth.

Aaron Grey -- Alliance Global -- Analyst

All right. Great. Thanks. That's helpful. And then just on price per gram, we have seen that kind of fall again sequentially. Just how best to think about the puts and takes of that as we kind of go forward? And as we have international kind of sales coming online and then also cannabis 2.0 products which will have a higher ASP when should we best expect that to ramp up? And also as we begin to offset to it kind of a balance in terms of supply demand you talked about in the next 12 months do you expect to see pricing pressure overall? Or just have a say about price per gram going forward.

Mark Castaneda -- Chief Financial Officer

Yes. We do expect price per gram to be going up probably going up from here. Primarily because international medical will be a bigger mix of the overall revenues as well as the 2.0 products will be a bigger mix of the overall revenues. Less impact in Q4 more impact in 2020. So with those higher priced items, you'll see ASPs go up. And what was the second part of the question?

Aaron Grey -- Alliance Global -- Analyst

Just in terms of supply demand equilibrium you talked about on the next 12 months and impact that would have.

Brendan Kennedy -- Chief Executive Officer

Yes. So supply demand is a little tricky because there's so many subcategories of the products. So I would say we are getting close to supply demand balance on low quality byproduct and for low potency product. But for high potency products and products that consumers want, there's just not enough supply. I think we will see the same thing in the 2.0 products especially as we start out of the box. It will be pretty lumpy as people ramp up their manufacturing processes. But may be within the year we might be within a good supply demand balance in Canada at least.

Great. Thanks. I'll jump back in a Queue.

Operator

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

Graeme Kerindler -- Eight Capital -- Analyst

Yeah, hi, thanks for taking my questions here. I just wanted to follow up with respect to the the hemp CBD in the U.S. market. You correctly early on the call you said you're in about 1000 stores right now I was just wondering if you have any targets or milestones with respect to what you're looking for in terms of increasing that distribution over time as you ramp up the supply chain as well as introducing more brands and products?

Brendan Kennedy -- Chief Executive Officer

Yes. It's something that we are focused on building -- continuing to build out the team that will execute on that strategy. There's still a lot of retailers in the U.S. that will not -- they want to buy or they don't want to sell they won't stock products that are -- that contain CBD and are edible digestible. And so nutritional supplements dietary supplements. They're waiting for some clarification from the FDA. And that's where a large part of the market in the U.S. is right now in terms of digestible products. And so they're sort of at the starting block waiting to be able to sell those products. On the other hand, there are retailers who are interested in selling topical products that contain CBD. It's why with the ABG agreement the first product that we are introducing there are topicals. And then generally the smaller retailers in the U.S. some of the smaller sort of health and wellness focused grocery retailers are stocking some digestible edible CBD products. But it's still growing gradually. And so we are out meeting with those buyers and introducing them to the ABG and Manitoba Harvest and Smith & Sinclair products. But even they are waiting a bit to see what sort clarification comes from the FDA.

Graeme Kerindler -- Eight Capital -- Analyst

Okay. Thanks. And then on an unrelated note just going back to the mention of the prepaid inventory balances the prepaid supply agreements there. Just wondering given the comments on what you're seeing in the wholesale market in terms of product being available but may be not necessarily the type of product you want to source just what's involved in terms of managing the counterparty risk there and making sure that ultimately the product that you're going to be getting in those agreements is going to be something you'll be able to place either in the delivery of product or potentially in that category of high-quality flower that you see a shortage of?

Brendan Kennedy -- Chief Executive Officer

So we went out and we met with the partners the suppliers. And they're suppliers and partners that we have used in the past. And so we are familiar with them we are familiar with the facilities we are familiar with their quality and their potency. However, we do continue to monitor them. So it's not -- this isn't -- this is not an industry where you sign a contract and then wait for the product to be shipped to you. We believe in trust but verify. And so we send people out to regularly inspect the crops that we are buying. And within the supply contract, there are mechanisms. There's potency ranges in the contract that determine the price we ultimately pay for the finished product.

Graeme Kerindler -- Eight Capital -- Analyst

Okay, thanks. And just one final follow-up with respect to the potency range and the prices that you pay. Is there further mechanism that adjusts the band of pricing depending on what's seen in a larger market as that can be looking at it is quite volatile in the short amount of time?

Mark Castaneda -- Chief Financial Officer

There are not -- it's hard to get an accurate spot price unlike a lot of -- unlike corn or other products like that there's not necessarily a market price on a daily basis that you can point to. At some point, we may have a contract like that. But what we have done is for these contracts that we have prepaid the price is so far below the current spot price that we are comfortable that they're -- the spot price is just never going to get to -- certainly not in the lifetime of these contracts. The spot price is just never going to approach the price that we have negotiated for these contracts.

Graeme Kerindler -- Eight Capital -- Analyst

Okay, very helpful. Thank you very much.

Mark Castaneda -- Chief Financial Officer

Thank you.

Brendan Kennedy -- Chief Executive Officer

We have time for about one more question because I guess we are running out of time.

Operator

Yes, sir. And we have a question from Michael Lavery with Piper Jaffray. Please go ahead.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you. Good evening. Can you just touch on the hemp Manitoba Harvest business a little bit and help us understand what drove the sequential declines from last quarter to this one?

Brendan Kennedy -- Chief Executive Officer

Yes. Actually when we are performing due diligence a year ago when we went back and looked at their historical revenue one of the things that surprised us was that there is an element of seasonality cyclicality in their revenue numbers. And it happened every Q3 historically. And when we looked at it the rationale is that a lot of their products are consumed on a sort of daily ritual routine basis whether it's breakfast lunch or dinner. And during the summer months when children are on vacation those daily routines get -- they get disrupted. And so that's the real reason behind the Q3 decline. And we talked about it a lot at the time of the acquisition probably haven't talked about it -- at the time of the acquisition, we sort of talked and discussed this issue with analysts that this typically happens. It's probably something we should continue to keep everyone informed that this does happen on a Q3 basis annually.

Mark Castaneda -- Chief Financial Officer

Yes. And I will add that Q1 and Q2 are the strongest quarters. Q1 is everyone wants to eat healthier and this is viewed as kind of a healthy healthier diet type of product.

Michael Lavery -- Piper Jaffray -- Analyst

Is the 3Q number up versus last year's?

Mark Castaneda -- Chief Financial Officer

Actually last year they did a special with one of the large retailers of a discount. So it is slightly down. But excluding that special discount, the overall branded products are up.

Michael Lavery -- Piper Jaffray -- Analyst

And how much contribution did you have from the -- it looks like if I'm reading it right you renamed it from food products last quarter to hemp products this quarter. I assume that's to reflect the teachers and the broader portfolio? How much did that contribute? And what is so even just downward year-over-year because of the comparison with the promotion?

Brendan Kennedy -- Chief Executive Officer

Yes. The promotion made a big difference year-over-year. The CBD or full broad spectrum products have just launched in this quarter and it's still very early so it's relatively small portion of the overall revenues for the quarter.

Michael Lavery -- Piper Jaffray -- Analyst

Okay. And can you just give a sense of your thinking of your brand approach? I guess part of the question is what is the Pollen brand add? Why put that on top of the one you already have? How do you think about what those mean differently and how to go to the consumer in the U.S?

Brendan Kennedy -- Chief Executive Officer

Yes. When we first started having conversations with Smith & Sinclair that acquisition was really about a number of different things. It's about the management team the founder and the chief formulator that they have. They have innovative products that are clever and the like in the U.K. And so when we were meeting with them and saw the products that she wanted to introduce into the U.S. and into the U.K. they were different from everything that we had seen out there. And what we like we like the brand we like the products. And so that's what justified the acquisition in our opinion. And the brand is different and the products are differentiated from our existing product set.

Mark Castaneda -- Chief Financial Officer

And they may be filled in different channels as well. So it's a broader coverage for consumers.

Michael Lavery -- Piper Jaffray -- Analyst

No that's great. That's all very helpful. Just to add it all up what should we be thinking about modeling this segment looking ahead into next year? And how much momentum now better recognizing the seasonality what on top of that do we -- should we be expecting in terms of a growth profile or run rate?

Mark Castaneda -- Chief Financial Officer

Yes. So on just the -- we kind of bifurcate the food versus the CBD. And the CBD internally our models are pretty conservative just because we are waiting for the FDA. And we do believe that with FDA clearance that will be a step change. We just can't -- we don't know what that timing is. So we are working on modeling pretty conservatively for 2020 for U.S. CBD. Until we have that regulatory change we are not going to adjust our numbers up. So the Manitoba Harvest business we are looking at that. Last year was around kind of a full year USD 75 million business and we see 10% plus improve or increases in the revenue on that just on the food side.

Operator

And now I would like to hand the call over to management for their final remarks.

Brendan Kennedy -- Chief Executive Officer

Thank you. I want to thank our more than 1400 employees and team members for all of their hard work improving patients and consumers lives through cannabis. We appreciate everyone's questions and participation on today's call. Have a great evening.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Rachel Perkins -- Investor Relations

Brendan Kennedy -- Chief Executive Officer

Mark Castaneda -- Chief Financial Officer

Steve Schneiderman -- Cowen and Company -- Analyst

Doug Meacham -- RBC Capital Markets -- Analyst

Andrew Carter -- Stifel -- Analyst

Tamy Chen -- BMO Capital Markets -- Analyst

Aaron Grey -- Alliance Global -- Analyst

Graeme Kerindler -- Eight Capital -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

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