Q3 2019 Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the <unk> third quarter 2019 earnings Conference call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during that section you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
Required any third or fish assistance spreads start in cereal.
I would like to have the conference over to your speaker today. These Rachel parking.
Good afternoon, and thank you for joining us on Korea third quarter 2019 earnings Conference call on today's call are running Kennedy, President and Chief Executive Officer, and Mark has seen a chief financial officer before we begin please remember that during the course of this call management may make forward looking statements within the meaning the federal Securities laws. These statements there.
Based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those ascribe any forward looking statements. Please refer to tell raise reports filed from time to time, the Securities Exchange Commission and Canadian Securities regulators.
Yes release issued today for a detailed discussion the risks that could cause actual results could 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 provides useful information for investors. The presentation. This information is not intended to be considered an isolation or as a substitute for that financial information presented in accordance with gap. Please refer.
For today's press release for a reconciliation of adjusted EBITDA, It's not law. The most comparable measures prepared in accordance with gap now I would like to turn the call over to Brenda.
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 could have annoyed based global consumer package goods company.
With a portfolio best in class brands supported by multinational supply chain.
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'd like to provide some highlights in the third quarter, our revenue increased 409% year over year to 51.1 million U.S. doors and total coal Graham equivalent sold nearly doubled sequentially to 10848.
Grams.
With receipt of our first GMP certification for our Portugal facility revenue from International Medical sales grew more than five fold 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.
Well the canvas 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're 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 spending five continents over the next two to three years, we expect a number of additional countries to legalize medical Canada's followed by adult use and our global footprint puts us in advantage 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 bounce 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're 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 few quarters as regulations permit.
Our expanded portfolio under Hyde Park includes innovative cannabis products in formats, such as CBD beverages, edibles and they products.
We will launch new products under celebrated existing brands Marley natural and good ship as well as new brands, the batch Charlie wildly and remedy.
Our popular existing Canadian brands cannot get and Dupont will also broaden their product offerings across the board and we're committed to launching high quality products that are safe for our consumers.
We're eagerly awaiting the commercial launch of this next phase that we go cannabis products to address consumers' desires for a broader selection of we go 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 E U campus in Portugal, as we await additional GMP certifications.
We're pleased to announce that we successfully exported our first shipment of medical canvas from Portugal to Germany in September through a 3 million Euro dollar agreement with Cantor Medical Pharma Gmbh to supply patients. This represents a major milestone for till right as our new campus ramps up international export out.
Through the ended this year.
We are waiting or finished product GMP certification, which we expect by the end of year and once free once received we expect a significant ramp in international revenue on top of the very strong growth we've 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 Esperanza on an additional 20 actors, which is the equivalent of roughly 50 acres. We're currently in the early stages and processing this harvest and we'll determine yields in the coming weeks.
As a progress in Canada, and Europe demonstrates our global growth strategy remains unchanged.
First selectively increase our production in manufacturing capacity to serve the rapidly growing global medical market as well as the adult use market in Canada and other markets overtime.
Second maintain a rigorous focus on quality as we scale.
Third partner with established distributors retailers and consumer package goods 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 in governments.
And finally, six pioneer the future of our industry by investing in innovation R&D in 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 or progress.
Starting with our strategic partnership with authentic brands group. We recently completed some initial pilot marketing with nine West we expect a first product launch to be in the United States in the near future.
Pillar is also working with SBG to commercialize other brands in Europe by early 2020.
We recently announced plans to distribute CBD beverages in Canada them once regulations allow through our joint venture with AB Inbev named fluent beverage company.
Wouldn't tends to have CBD infused beverages available for sale to adult consumers in Canada as early as next month, we continued to conduct research relating to non alcohol cannabinoid infuse beverages containing THC.
We continue to work collaboratively with our pharmaceutical partner Sandoz, the generic drug business at Novartis to evaluate new markets to enter into together depending on the market. However, we may work with Sandoz.
And or other large and country pharmaceutical companies. We currently co brand medical products in Canada, with Sandoz and the Sandal sales force reps are products.
Manitoba harvest continues to perform well with branded revenue growing 4% year to date.
As reported basis, excluding the impact of onetime promotion in the prior year. The company has grown 10.5% year to date and 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 truck.
Hi, good brand and supply chain and have foods and the leveraging it to deliver differentiated hemp food and CBD products.
As we gain more regulatory clarity from the FDA, we believe we're well positioned to capitalize on the CBD market with our existing retail relationships.
Through our acquisition of Stephens Sinclair witchcraft edible candies fragrance fragrances and unique consumable products, we're launching Poland and new brand and their smithson Sinclair as umbrella of innovation in the CBD space. The brand is focusing on redefining wellness with a range of high quality.
Just a little products for the initial launch which will be available in retail stores and online across the U.S. and UK before the end the year.
We also partnered with Confections group.
Leader in the infused confectionary space to expedite innovation and new products to market for phase two Canadian adult use legalization.
The founders of confections hail from a legacy confectionary business with over 85 years of experience servicing legacy consumer packaged goods companies such as Nestle Hershey's Amanda leaves.
This past quarter, we announced a definitive agreement to acquire for 20 and 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 420, we have made strategic minority investments and other Canadian cannabis retailers, including inner spirit West leaf chiaro and fire and flower to both increased 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 increased capacity introduce new form factors and other technologies and enter new retail channels.
Looking at our business geographically the challenges in the Canadian market, our ongoing with a limited number of retail locations and the 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 see if we choose more.
Their preferred formats.
Even as we continue to capitalize on the opportunity we see in Canada, We expect the United States in 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 states, where legally permitted to do so and building strategic partnerships that will allow us to expedite our entry into the THC market when the 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 smithson's Sinclair and authentic brands group, both of which we expect to launch CBD products by the end of year.
Turning to Europe .
In July we announced that we had successfully exported GMP certified finished medical cannabis oil solutions from Canada to Ireland and in September we exported our first shipment of medical cannabis firmer you campus in Portugal to Germany.
As I mentioned earlier, we expect to significantly ramp our exports from our EU campus very soon we.
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 runway 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 into clinical trials led by the end why you school of medicine for patients with alcohol use disorder and posttraumatic stress disorder.
We had since announced that we have important medical cannabis into the United States from Canada for new clinical trial evaluating the efficacy of medical cannabis as treatment for taxane induced peripheral neuropathy or T IP and.
The IPO in affects more than 67% of women undergoing breast cancer treatment and we're 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 to re 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 buildout of our facility in Portugal, and obtaining additional GMP certifications and Portugal as well as further expanding our non GMO and Leamington facilities.
Launching additional form factors for adult U.S and 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.
Thanks, Brendan good afternoon to those of you joining us on the call today and webcast and it's a pleasure to be speaking with you today.
Please note all the financial information, we discuss todays prepared in accordance with U.S. GAAP and an in us dollars unless otherwise indicated.
Our momentum from the first half of the year continue through 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 five full to $51.1 million or 67.8 million Canadian dollars compared to the third quarter last year.
To put this in perspective, our Q3 revenue alone was 18% greater than a revenue for full year 2018.
Revenue growth is primarily driven by the Canadian adult used market, the Manitoba harvest acquisition and growth in international medical market as a result of our first GMP certification of our Portugal facility.
Our performance in a Canadian adult used markets. So far has been inline with our expectations.
Don't use represented 31% of revenue in the third quarter, an increase 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 factors.
First a lower mix of higher value added extract products, which represented 17% of non-GAAP revenue for the third quarter 2019, compared to 52% of revenue in the same period last year.
We expect the introduction of cannabis 2.0 products that ASP will increase as edibles beverages, and faves wholesale at higher prices overall.
Additionally, we will likely transition our key operating metrics to focus on unit as grams become less relevant and 2.0 products.
Secondly, we introduced a new value brand the batch 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 on our average selling price during the quarter.
Our average net selling price per gram per adult use products decreased in Q3 to $2 at 88 cents per gram from $4.89 per Gram in Q2.
Pricing in our other skews that generally unchanged, but there was a high mix of sell into the channel of this new value brand.
Next our have 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 was reflected in our results for the quarter, which were down slightly from the prior quarter.
You as CBD sales were minor as we began rolling out these products during the quarter.
We currently are available in less than a thousand locations and expect with FDA clarity, we could be available significantly more locations, including major retailers.
On the international side.
Revenues grew more than five times, the $5.7 million in the third quarter from $950000 to the prior year.
As a percentage of total sales international revenue increased to 11% versus 4% in the second quarter. This year.
The growth is driven primarily by our first export cannabis flower to kind of medical pharma to supply patients in Germany with 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 he you campus in Portugal.
We believe the supplying the German 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 middle East business.
Moving on to operational metrics, excluding or have products.
Total kilogram equivalence sold increased over six fold the 10848 kilograms from 1613 kilograms in the same quarter last year.
The overall net selling price per Gram of $3.25, you us or $4 in 32, Canadian dollars and $2, a 98 cents us dollars or $3, a 96 Canadian dollars, excluding excise tax.
This compares to 6021 cents us dollars in the prior years 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 benefited from positive product and channel mix.
As Brendan mentioned, we expect that our Portugal facility with increased exports with full GMP certification and beginning next month, we'll 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 a noncash stock compensation.
Excluding stock compensation expense operating expenses increased by $19.3 million compared to the prior years third quarter.
Which is primarily comprised of an increase of gionee of $13 million, an increase in sales and marketing a $13.5 million.
The increase is driven by increased headcount related to growth initiatives for the adult use cannabis team in Canada and European leadership team in Portugal.
The company costs and operating costs and through a recent acquisitions.
The increase in Jna from prior quarter was driven by third party third party costs to implement systems and controls for uptick coming Sarbanes Oxley attestation, which we believe results in highest levels at internal control processes.
These increases in cost will continue for the next couple quarters, then we will start to decrease.
And the sales and marketing side, we wrapped up our investment in staffing to watch for you with CBD International Medical sales, which are investments ahead of revenues that we expect a separate finding 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 mentioned earn out and other performance based metrics.
As we gain more data points on the result, we estimated that are mature and Manitoba harvest acquisitions will not achieve the fuel earn out.
In accordance with gap, we adjusted the earn out liability down, which create again and acquisition related activities.
Or not will be calculated over the next couple of quarters.
The net loss for the quarter was $35.7 million.36 per share compared to a loss of $18.7 million at 20 cents per share to 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 last year.
The increase in net loss at adjusted EBITDA was probably due to increases in operating expenses related to the growth initiatives expansive international team. In addition, Manitoba harvest mature 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 2020.
Our cash burn in Q3 included deferred payments for M&A as well as deposits for future inventory.
We expect our quarterly cash burn will decrease each quarter going forward.
We continue to actively for opportunities for financing financing and will likely tap the debt markets in the next coming quarters.
Today, we have over 300 million an unsecured assets that we can leverage.
Additionally, I'd 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 a fortune facility for almost a year.
And this quarter just began selling bus inventory.
We are in the process of a couple of more GMP certification for selling finished product and for extraction.
Until we receive these certifications will continue to add some inventory and Portugal.
Additionally, in Canada based on current regulations, we primarily south flour and flower products, which leaves byproduct for extraction and large supply and 2.0 products are not allowed to sell today.
We expect this inventory and balance to continue until we are able to confer 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 that markets, 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 runway for growth and multiple path for shareholder value creation.
This concludes our prepared remarks, Brendan and I are now available take your questions operator.
Thank you ladies and gentlemen, if you have a question at this time just press star in the number one keogh touched on telephone. If your question have seen answer you wish to remove yourself from the Q press the pound key.
Again, if you have a question just press Star then one.
And our first question is from the the NSR with Cowen and company. Your line is open.
Good evening this is Steve schneiderman pinch hitting for Vivien Tonight.
Hi, Steve.
Hi, guys.
Let's start off on fluid can you talk a little bit more about the opportunity you are seeing with CBD beverages, specifically within the market. And addition can you provide any color regarding the delay on the rollout for THC beverages.
Sure, yes, so in the quarter, we announced the the name fluent.
As well as the CEO and the team at fluent has been working.
Since we announced a partnership with AB Inbev last December they've been working on.
Helping.
Formulations.
Form factors.
Brand and packaging.
For the products that we will or they will launch.
In in December .
I believe that they will.
And now the showcase their products.
Before the end of the month.
They have been out.
Selling them to the various provincial.
Buyers.
Corporations.
Throughout Canada.
They've been showing the products those buyers and expect to we expect to ship.
Those products.
December 17th.
The.
The CBD beverages.
Became a focus for them based on a lot of market research that that they did.
And so the launch those products for sale to adult consumers in Canada.
In December .
They continue to do research on.
See beverages.
And expect to.
Launch them.
Sometime.
Next year.
Okay, that's great thanks very much.
On Portugal, I want all Abaxis real quick.
On the GMP certification staff I understand that.
Finish manufacturing license you expect by every year correct me, if I'm mistaken, but wasn't there a.
Our licensees will waiting on.
In order to be able to have full access to sell before product suite.
And also based on what you are license for today versus what you hope to be license for by end the year.
What percentage of your product mix.
Level today versus what you're waiting on.
Yes, so currently.
Obviously, we've been investing in Portugal since 2000, I made my first trip there in 2013.
Signed an Mou with the government 2016 started buying property and designing the facility in 2017.
Planted.
Built out the building in 2018 and put our first plant.
Our Green House in November December of last year, and so we've been harvesting product.
Almost almost a year now.
In Q3, we announced our first export it was that 3 million Euro 3.3 million dollar.
Bulk export from Portugal to Germany, those exciting to generate that first.
Dollar of revenue.
From a from a project like that and we're looking forward to.
Significantly increasing.
Revenue from Portugal in Q4 and throughout.
2020, a there are three really three main steps in the you GMP certification those certifications are issued by our regulator in Portugal in permit 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 key low.
Sized packages from Portugal, two to Germany. So we have that first you GMP part two certification we are waiting you GMP part one and that enables us to.
Produce and package.
Flower.
Products and oil products in a finished form factor so actually in the end.
Product package that a patient in Germany, or any other you country would actually receive from a pharmacist.
Like you said, we expect that.
Certification for the end of year, we actually expected medium before the end of the month.
So we are waiting that the final GMP certification that we're looking for.
Is that is likely to come in Q1 and that would enable us to.
Extract.
Oil.
From.
From flower and byproduct.
At our Portugal facility.
And that when it's going to take a little bit longer because.
Weve produced the I believe we produce the test patches, but.
That one that won't happen to Q1.
Okay. Thanks for clarifying on that one last one for me.
Can you provide an update on how they rollout of CBD offerings through.
It sounds like you're going to be able to get something out by the year was there any additional detail that you can offer beyond that.
Yes, so we.
Obviously, we completed the acquisition of Manitoba harvest in Q1 and launch.
Those products at the end of May started June .
Those products are currently in about 1000 over 1000 retailers in.
In the U.S., we have developed the first.
Products that.
Through the ABG partnership.
And.
Those those products had been produced.
They've been.
They've been introduced in the in a very small rollout.
And expect them to be in market.
Before the end of the year.
In addition in terms of.
You asked CBD.
We acquired Smithen Sinclair in Q3 and expect to launch those products.
Their CBD products in the U.S. before year end.
Great. Thank you very much.
Thank you. Our next question comes from Doug Miehm with RBC capital markets. Please go ahead.
Good afternoon.
Couple of questions starting with you could you maybe frame.
What you see the opportunities you talk about increasing revenues in Q4, and then into next year, but.
I'm guessing that this is going to be really tied to that GMP per Warren and could you provide us a few metrics around how you see that market developing for you over the next several quarters.
Sure.
We had toll roads first company to ever Weagley 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've exported to.
Our products are in 13 countries.
Handful of them about six I think in the EU. So we've exported to.
It's really in 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 in the UK.
Germany.
Croatia, Czech Republic Cypress.
And we continue to look to new countries too.
Export products too and we'll likely ad.
One.
Before the end of year, one other before the end of year or just at the start of Q2 and when we look at them.
When we look at the patient and prescription count in Germany.
It's actually very similar to the.
The old CMP, our patient model in Canada in terms of patient.
Patient ramp.
So we're encouraged by the.
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 in other countries, but with this final GMP.
The next GMP certification.
We'll be able to ship finished packaged product and that will really have to affect it will.
One increase overall revenue because the revenue for finish package product per Gram is significantly higher than the bulk.
Export program.
And then secondly, it will increase our profit margin because the profit margin on the finished package product is also significantly higher than the.
Bulk export.
Okay, and then just to wrap up.
With respect to.
The consumer insights that you noted based on some agreements that you Havent place could you speak to that and also maybe mark could speak too.
BTB market, what you're seeing there in terms of pricing and the quality of product and I'll leave it there thanks very much.
So when we when we.
When we've done performed market research on Canadian consumers.
We we've seen increased interest from older demographics.
Around CBD and it certainly.
There's obviously a lot of interest around CBD and if you look at Google search results for CBD in the U.S.
Significant growth.
Over.
Quarter over quarter.
The same interest in Canada, and so we've done some segmentation of the consumer base there.
And we'll.
Introduce not only and.
New form factors.
Edibles based for that demographic in Canada, but also the beverage.
Brands and products that we will launch in December .
We will target.
The consumers segments that we identified in in that that research.
We're actually doing some work with.
With to avoid.
On consumer segmentation in Canada, and we'll publish some of those results in 2020, and so we use that data.
The other data we have access to to.
Not only develop.
New brands and products, but refine the brands and products within our existing portfolio.
And the second part of the.
Question was the bulk market and what that spot market looks like in Canada, and so what we've we still cannot find high quality or high potency flower and the market really almost at any price, it's very rare to find.
There is there is more and more lower potency product on the market on pricing is coming down for that both market and there's also a lot of byproduct on the market.
People are using for extraction, so the pricing a byproduct and low potency is continuing to come down but there is this whole and the market, we're trying to buy some higher put into product.
Perfect. Thank you.
Thank you and our next question is from Andrew Gardiner with Stifel. Please go ahead.
Hey, Thanks, good evening, so 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 surface certification coming up and then from the adult use our youth are you thinking January or December shipments of adult use products in Canada.
So we do expect a small amount of shipments in Q4, but the bulk of it will be shipped in Q1, so there'll be a small amount, but not a material amount in Q4 for they don't use 2.0 products. We do expect our don't use revenues to be up versus Q3.
Just a 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. The first half of the year that we thought there'd be some nice step changes in that market and that is playing out as we expected on.
The Canadian medical and the Canadian week, we group Canadian medical and Canadian bulk together.
The bulk portion of that will come down there's just less opportunities for us and we're keeping all that byproduct or oil that we've been selling so it'd be kind of a mix.
See some strength and they Canadian adult use and strengthen.
International Medical.
Got it and then kind of a second question one step back and ask about the batch kind of the discount offering you. Another competitor of kind of put something out there I just the just kind of to step back from that in with kind of some of the restrictions you haven't Canada limited retail availability and really kind of a limited ability to kind of communicate that to consumer.
Do you think you'll be do you think you'll be able to get this offering to the intended user which can convert that elicit market users and also just one other follow on with this product be incremental to our be accretive to your gross margin long term guidance.
Maybe I'll talk about first part Mark will answer the second part of the question.
When we looked out and surveyed the various products in.
Various provincial retail stores it seemed like there was a.
A gap in that there were in a whole lot of.
Brand 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've launched that.
That product and that brand in Canada and.
We were very pleased with the with the results.
A lot of that product.
Is typically product that.
We wouldn't sell under our existing higher.
Higher quality higher price.
Brands and so this this.
These products gave us an opportunity to.
Generate revenue from.
From product that otherwise.
Would have either been sold to another LP or extracted and so it was.
And it gives the opportunity to generate additional revenue.
Yeah and from a margin standpoint. The March then that is slightly lower than our overall averages the margins.
But as we get into 2.0, we do expect there to be higher margins from the 2.0 products.
Thank you I'll pass it on.
Thank you. Our next question comes from timing chain with BMO capital markets. Your line is helping.
Yes. Thanks.
Yes.
Quick clarification market.
Guidance.
Okay.
By the fourth quarter of 22.
That is correct, we expect to be positive.
Fourth quarter 2020.
Okay.
So I just wanted to understand how you're getting there.
You mentioned you have.
Yeah.
You have been talking to that you SEK 2.0.
I just wanted to get.
On the kind of the sensitivity.
Presumably there will be.
Two point.
And it's a totally different ran from cultivation, if there's a lot more manufacturing now so.
What about you know what the potential I guess.
Okay.
In the interim further pressure your margins before things get better.
So just wanted to that.
Trajectory.
Yes.
Fourth quarter of 2020.
Yes, so so tammy as you saw this quarter despite having.
Fell in the batch product, which is at lower cost than at lower margin are actually gross margins were up 200 basis points.
So as our facilities as we put more product to our facilities any factory that you start running at full capacity cover more you fixed costs. So it brings down the overall costs an expansion 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 use market.
So yeah the way we get there as 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 lower in the and the earlier quarters little bit higher in the later quarters.
With revenue ramp you get to gross margin that covers your operating expenses. So that's how we get to.
Positive EBITDA in Q4.
Okay.
And on that.
Right.
He said that you're expecting the quarterly cash.
Each quarter.
I'm wondering networking capital for example.
Yeah.
How should we think of that going forward because again.
2.0.
That's coming down the pipeline.
How do you think.
To give more color.
Guidance, you're giving for cash.
Over the coming quarters.
Yes. So if you think about this quarter and next quarter will probably peak and inventory at least for some time.
Inventory as you saw what the run a 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, we expected benefit on the working capital side around 70 million.
So that kind of helps with some with negating some of the cash burn going forward, we effectively prepaid for a lot of our cost of sale.
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 thats negated by kind of the working capital benefit. So then we have interest expense of around 25 million in Capex between 25 and 35.
Which gets you to 50 to 60 million.
And that usage against our 120.
Million cash.
Okay.
Perfect.
When you talk about your likely.
Got.
You mentioned also.
Yeah.
Yeah.
So are you talking about.
<unk>.
Just wondering.
Hi.
You will.
Cash you have.
We will be sufficient.
Okay positive.
Yes, we we will likely to happen I Didnt say that we would for sure cap the markets, but we want to make sure we have plenty of cushion.
And our operating plan and as you know and running businesses working capital fluctuate within a quarter and within a month. So you need some of that cushion sometimes two to absorb some of those.
Seasonality or movement around working capital during the month.
Okay. Thank you.
Thank you Sir our next question comes from Aaron Gray with Alliance Global. Please go ahead.
Thanks for the questions just wanted to dive back again to kind of the assumptions to get to the Fourq EBITDA positive just in terms of revenue ramp can you talk a little more in terms of sensitivity on that I'm, just given there's something going out of your control in terms of.
Just increased brick and mortar in Canada, and then also you asked with CBD and regulations coming from the FDA, what kind of specific you have in terms of any kinds of delay or ramp up in brick and mortar in Canada. Thank you.
Yes, so and looking at the revenue ramp for really more 2020.
Theres very little CBD U.S. CBD.
And those numbers, so that would primarily be upside on the Canadian side, we do expect that 2.0 products and more locations and we do expect around a thousand locations by the end of next year sensitivities Goto from 802.
Thousands so we think even at 800 locations will be positive on EBITDA in Q4.
So that there is a sensitivity if theres no new locations that could put that into jeopardy, I don't think thats going to be the case.
But if there was no new Canadian locations, they could but positive EBITDA out maybe another quarter.
So those those are the two like I said the offset is.
International Medical which is high margins and significantly high growth.
Alright, great. Thanks, Thats helpful. And then just on price per Gram assumed that kind of fall again sequentially, just how best to think about the puts and takes that as we kind of go forward as we have international.
Okay sales coming online and then also kind of was 2.0 products will have a higher ASP when should we expect that to ramp up and also as we can see that offset to what kind of a balance in terms of supply demand you talked about in the next 12 months do you expect see pricing pressure overall, so just how the thing about price program going forward.
Yes, we do expect price program can be going up.
Probably going up from here, primarily because of international medical will be a bigger mix of the overall revenues.
As well as the 2.0 products to be bigger mix of the overall revenues less impact in Q4 more impact in 2020, so with those higher priced items, you'll see a asps go up.
And what was the second part of the question.
Just in terms of supply demand equilibrium, we talked on the next 12 months and impact I would have.
Yes, so supply demand is.
Is a little tricky because there's so many subcategories of the products. So I would say, we're getting close to apply demand balance on a low quality.
Byproduct and for low potency product, but for high potency product then products to consumers want Theres just not enough supply I think we'll see the same thing and the 2.0 products, especially as we start out of the box it'll be pretty lumpy as people ramp up their manufacturing processes.
But maybe within the year, we might be within a good supply demand balance and Canada at least.
Great. Thanks, I'll jump back in the Q.
Thank you and our next question is from Grand cleaner with <unk> capital. Your line is open.
Yes, hi, thanks for taking my questions here I just wanted to follow up with respect to.
We have CBD and the U.S. market quite correctly earlier on the call you said, there and about a thousand stores right. Now I was just wondering if you haven't 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. Thanks.
Yes, it's something that.
That we're focused on and building continuing to build up team.
That will execute on on that strategy.
There is still there so a lot of retailers in the U.S. that will not.
They will not buyer that won't sell.
They want stock products that are contained CBD and our animal digestible and so the nutritional supplements dietary supplements there they're waiting for some clarification from the FDA.
And that that's where a large part of the market in the U.S. is right now in terms of digestible products and so there theres sort about the starting block waiting waiting to be allowed to sell those products.
On the other hand, there are there are retailers who are interested in.
As selling a topical products that contain CBD, it's why.
The Abbey LPG agreement the first products that we're introducing there are a topical.
And then then.
Generally the smaller.
Retailers in the U.S. some 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're out meeting with those those buyers and introducing them to.
The a BG and Manitoba harvest and Smithen Sinclair products.
But.
The even they are waiting a bit to see what.
What sort of clarification comes from the FDA.
Okay. Thanks, and then on an unrelated note just going back to dimension of the prepaid inventory balances the prepaid supply agreement there just wondering given the comments on.
What you're seeing in the wholesale market in terms of product being available, but maybe not necessarily the type of price one source.
Just what's involved in terms of managing the counterparty risk, there and making sure that ultimately the products that you're going to be getting.
In those agreements is going to be something you'll be able to place either.
Delivery of product or potentially in that category is high quality far that there seems to be a shortage of.
Thanks.
Yes. So so we went out and we met with the the partners the suppliers and.
Their suppliers and partners that Weve used in the path and so we are familiar with them, we're familiar with their facilities, we're familiar with their quality and their potency.
However, we do continue to.
We do continue to monitor them.
That.
This is not an industry where.
You signed the contract and then wait for the product to be shipped to.
We believe in Trust trust, but verify and so we send people out to regularly inspect.
The crop that we're buying.
And within.
Within the.
The pipe supply contract.
There are.
Mechanism Theres potency ranges in the contract that determine the.
The price, we ultimately pay for the finished product.
Okay. Thanks, and just one final final follow up with respect to the point you engines in the prices that you pay no further mechanism that.
Josh the bands of pricing depending on what soon.
And your market as that can be looking like it's quite wall tile.
Right.
And.
There are not then it's hard to get an accurate.
Spot price unlike a lot of.
Mike.
Corn or other products like that does not necessarily a.
Market price on a daily basis.
That you can point to at some point, we may have a contracts like that.
But.
What we've done is.
For these contracts that we prepaid the prices so far below the current spot price that we're we're comfortable the there.
The spot prices, just never going to get to certainly not not in the lifetime of these contracts the spot prices just never going to approach.
The price that we've negotiated for these contracts.
Okay very helpful. Thank you very much.
Thank you.
We have time for type one more question. This was we're running out of time, yes, Sir.
We have a question from Michael every with Piper Jaffray. Please go ahead.
Thank you good evening.
Can you just touch on the.
Manitoba harvest business, a little bit and.
Help us understand what drove the sequential declines from last quarter to this one.
Yeah actually.
When we were performing due diligence a year ago, when we went back and looked at there.
Our historical revenue.
One of the things that surprised us surprised us was that there is an element of seasonality cyclicality in in there.
In their revenue numbers and it happened every Q3.
Historically and.
When we when we looked at it.
The rationale is that.
A lot of their products are consumed.
On the.
The daily ritual routine basis.
Whether its breakfast lunch or dinner.
And during the summer months when children are on vacation those those daily routines get.
[laughter], they get disrupted and so.
That's that's the real reason behind the 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.
Pocs and discuss this issue with analysts that that does typically happens is probably something.
So we should continue to keep everyone informed that this does happen on the on acuity Q3 basis annually.
Yeah, and I will add that Q1 in Q2 other strongest quarters Q1 is everyone wants to eat healthier and this is viewed as a kind of a healthy healthier diet product.
It is the Threeq number up versus last years.
Actually last year, they did a special with one of the large retailers have a discount.
So it is slightly down, but excluding that special discount the overall branded products are up.
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 him products. This quarter I assume that's reflected the teachers and broader portfolio.
How much that contribute and.
Would it still even.
Down year over year because of the comparison with the promotion.
Yes promotion made a big difference year over year, the CBD or full a broad spectrum products just launched in this quarter and it's still very early so it was relatively small portion of the overall revenue for the quarter.
And can you just give a sense of your thinking on the brand approach I guess part of the question is what is the pollen brand and why.
You put that in 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 us.
Yes when.
When we first started having conversations with Smith in Sinclair.
Yes that acquisition was.
Really about.
Number two different things is about the the the management team the founder and Chief.
Formulator.
And that they have they have innovative products that.
Our clever and like in.
The UK and so when when we were meeting with them and saw the the product set that.
She wanted to introduce into the the U.S. and into the UK and there were different from.
Everything that we had seen out there and what we liked we like the brand we like the products.
And so.
Thats, what justified the acquisition in and in our opinion.
And the the brand is different in products a differentiated.
From our existing products that.
And then b cells, and some different channel as well so with a broader coverage for consumers.
No thats great Thats, all very helpful and then just.
Add it all up which would be thinking about modeling. This segment looking ahead into next year and and how much momentum.
Now better recognizing the seasonality what on top of that we.
Should we be expecting in terms of a growth profile or run rate.
Yes, so on just the kind of we kind of bifurcate the foods versus the CBD.
And the CBD and internally our models are pretty conservative just because we're waiting for the FDA.
And we do believe that with FDA clearance that will be a step change. We just can't time, we don't know what that timing is so work and modeling pretty conservatively for 2020 for U.S. CBD until until we have that that regulatory change, where we're not going to adjust our numbers.
So the Manitoba harvest business.
We're looking at that.
Last year was around a kind of full year $75 million business you us.
And we see 10, 10% plus improve or increases in revenue on that just on the food side.
And now I would like to hand, the call over to management for their final remarks.
Thank you.
I want to think are more than 1400 employees and team members for all of their hard work improving patients and consumer lives through cannabis. We appreciate everyone's questions and participation on today's call have agreed evening.
And with that ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect have a wonderful evening.