Tilray, Inc. (TLRY) Q2 2019 Earnings Call Transcript

Motley Fool Transcription, The Motley Fool
Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Tilray, Inc. (NASDAQ: TLRY)
Q2 2019 Earnings Call
Aug. 13, 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 Tilray's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone needs assistance during the conference, please press * then 0 on your touchtone telephone to reach an operator. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference Ms. Rachel Perkins. Ma'am, please go ahead.

Rachel Perkins -- Investor Relations

Good afternoon and thank you for joining us on Tilray's Second 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 than 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 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 -- President and Chief Executive Officer

Thank you, Rachel. Good afternoon, everyone, and thanks for joining us. Today, I will provide an overview of the progress we've made on our global growth strategy. Mark will then review our second-quarter 2019 financial results in more detail and discuss our long-term financial targets. After that, we will open the call for your questions.

The global paradigm shift with regard to cannabis is still in its early stages. Tilray currently serves tens of thousands of patients and consumers in 13 countries spanning five continents. We aspire to be the world's most trusted cannabis company. And to do that, we're building a global platform to be a multi-billion-dollar consumer packaged goods company with a portfolio of world-class brands supported by a multi-national supply chain. We're taking decisive actions in order to create an infrastructure that can be scaled around the world and are committed to deploying capital in a way that creates shareholder value over the long-term.

We are pleased with our second-quarter results which included the first full quarter of Manitoba Harvest sales. Revenue increased 371% year over year to $45.9 million and total kg equivalent sold increased both sequentially and on a year over year basis to 5,588 kg. Adult-use revenue nearly doubled from the first quarter to the second quarter with revenue of $15 million. In the next 12 to 18 months we believe there could be a supply balance in Canada as the market finds an equilibrium between supply and demand. While the industry continues to ramp up production, we have seen improved performance across LPs and we've signed long-term wholesale supply agreements to support our cultivation asset-light model and enable us to focus on the cannabis value chain further downstream.

We expect to be ready for the second phase of Adult Use cannabis in Canada later this year with a broad-based portfolio of brands and new innovative cannabis products and formats including vapes, edibles, oral strips, topicals, and beverages as regulations allow. And as we've previously announced, we're investing $32.6 million across three of our five Canadian facilities to increase our production capacity to support this. The investments are focused on Tilray's Canada production space in Nanaimo, British Columbia, High Park Garden's production space in Leamington, Ontario, and the High Park Processing facility in London, Ontario. The High Park Processing facility is ready to manufacture the new form factors. The other two expansion projects are on track.

We have expanded our international export capacity with a standard manufacturing license and GMP certification for our EU campus in Portugal that allows us to manufacture and export GMP certified dried cannabis for medicinal products. We expect to receive two additional GMP certifications in the second half of this year which will enable us to scale in international markets particularly Europe. Just last week, we also announced our definitive agreement with Esporao, one of the largest and most sophisticated agricultural businesses in Portugal. This agreement increases our international export capacity with an additional 20 hectares of outdoor cultivation space in Alentejo, Portugal. We will grow, harvest, and dry medical cannabis materials at the new site and then transport it to our EU campus for processing, manufacturing, and distribution across Europe and other international markets. The entire outdoor cultivation site was successfully planted and harvest is expected in fall 2019.

We expect a significant ramp in international revenue on top of the strong growth we have already seen. Our global growth strategy remains focused on six top-line performance drivers that we expect to generate strong returns as the business continues to grow.

First, 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 a rigorous focus on quality as we scale. Third, partner with established distributors and retailers to scale the distribution of our products further and faster. 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 governance. And sixth, pioneer the future of our industry by investing in innovation, research and development, and clinical research.

We expect our strategic partnerships and acquisitions to accelerate our growth. Our strategic partnership with Authentic Brands Group which we announced in Q1 continues to build momentum with our first product launch planned for the second half of the year in the United States. The ABG partnership is the first of its kind deal leveraging ABG's portfolio of more than 50 of the world's more iconic brands for the global CBD market. We continue to make progress on our research partnerships with AB InBev on non-alcohol cannabinoid-infused beverages. We will be ready to launch beverages in Canada as the regulations allow later this year.

As we have more supply available for international markets, we expect to add additional new countries in the second half of this year working with Sandoz and our other large in-country pharmaceutical companies depending on the market. Our acquisition of Manitoba Harvest earlier this year provides an immense opportunity in North America. Late in the second quarter, we launched a broad-spectrum hemp extract line that is generally recognized as safe in the US marking Tilray's first entry into the US CBD market under the Manitoba Harvest brand. Our products are thoroughly tested for quality, consistency, and safety and we have ensured all the products are FDA compliant. We are starting to execute against our thesis of taking a trusted brand and supply chain in hemp foods and leveraging this asset to deliver CBD products.

On July 11th, we also acquired Smith & Sinclair which crafts edible candies, cocktails, and fragrances in the United Kingdom and enables Tilray to develop CBD infused edibles for distribution in the United States and other markets as regulations permit. This acquisition reflects our focus on expanding our consumer brand portfolio with exciting brands known for disruptive innovation.

We expect the United States and Europe will be two of the largest cannabis markets long-term which is why we continue to invest in our global operations, particularly in those markets. 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 mergers and acquisitions that opens new territories, increases our capacity, increases our brand offerings through innovation from factors, brings us research and development technologies, provides access to strategic retail distribution channels.

Our strategy to capitalize on the estimated $22 billion hemp-derived CBD industry in the United States is centered on building a portfolio of trusted brands. With Manitoba Harvest as our foundation, we will continue to add to our portfolio whether it be via acquisitions such as Smith & Sinclair, partnerships such as Authentic Brands Group, or by building our own brands. Our products in the United States will not include any THC until it is federally legal.

Turning to Europe. As I mentioned earlier, we have expanded our international export capacity with our EU campus located in Cantanhede, Portugal, which will be our international hub for operations. The facility includes indoor, outdoor, and greenhouse cultivation sites as well as research labs, processing, packaging, and distribution sites for medical products. We have begun shipping some product already under our current manufacturing license and as we are awaiting the next phase of GMP certification to utilize the full capacity of the facility later this year, we will continue to build our inventory.

In the second quarter, we imported wholesale supply of medical cannabis oil solutions into the United Kingdom to provide authorized patients with a locally maintained supply. We currently have six medical cannabis products approved for medical use in the United Kingdom and as demand ramps up we are well-positioned to be a leading supplier of products. In July, we announced that we have successfully imported GMP certified finished medical cannabis oil solutions into Ireland. This makes Ireland the 13th country with Tilray medical cannabis products. The cannabis oil solution is intended for nationwide distribution in the second half of this year under the cannabis access program.

Additionally, as I mentioned earlier, our definitive agreement with Esporao adds 20 hectares or outdoor cultivation space to our EU campuses existing 5 hectares of indoor and outdoor cultivation and 6,500 square meters of manufacturing, processing, and research space.

The Canadian market remains challenged with a lack of quality supply and a limited number of retail outlets today. But we are excited about the launch of the next phase of Adult Use cannabis products across Canada as the regulations allow in mid-December. The second wave of legalization allows consumers to choose more of their preferred formats while we deliver the best possible experiences. In addition to High Park launching a number of new and innovative cannabis form factors across various brands including vapes, edibles, oral strips, topicals, and beverages, Tilray is at the forefront of clinical research in the medical cannabis field. There is a serious need for more data in the industry and we believe clinical research will help foster mainstream acceptance within the medical community and governance.

In the second quarter, we announced our support of two new clinical studies in Australia and Canada. And just last week we announced our participation in two clinical trials led by the NYU School of Medicine for patients with alcohol use disorders and post-traumatic stress disorder with alcohol use disorder. We already received approval from the US government and successfully imported an initial shipment of medical cannabinoids into the US to support the two new trials at NYU.

For the balance of the year and into 2020, we anticipate a continued expansion in the markets we already serve and entering new ones, continuing investment in clinical trials, and additional strategic partnerships and transactions that will enable us to drive global growth. 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, increasing the capacity of our facility in Portugal, and obtaining additional GMP certifications in Portugal in the second half of this year. Further expanding the Nanaimo in Leamington and obtaining production in sales licenses for High Park's processing facility in London, Ontario. Initiating additional clinical trials, we added two during the second quarter and two already in the third quarter. Recruiting additional executives from outside the industry to further strengthen our management team. We added several during the second quarter. Announcing a final agreement with privateer holdings for the downstream merger which we expect to close before the end of the year. And finally, adding strategic partnerships that enable us to further accelerate our growth.

Now, before I hand the call over to Mark, I can say in summary that our team continues to execute on our strategic growth initiatives, firing on all cylinders. I'm pleased with the progress we have made to date and expect our growth to further accelerate in the back half of this year and into next year. We have multiple avenues for growth and are confident we can drive strong, long-term shareholder value.

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 today's call and webcast. It is a pleasure speaking with you today. Please note all the financial information we discuss today is prepared in accordance with US GAAP and in US dollars unless otherwise indicated.

We had a strong start to the year and believe we will continue to gain momentum in the second half of this year. Focusing on our 2Q results in more detail, 2Q revenue more than tripled to $45.9 million or CAD$60.9 million compared to the second quarter of last year. Excluding excise taxes, revenue was $42 million. These results exceeded our internal estimates due to improved output from our cultivation facilities which allowed us to ship more Adult Use product. Revenue growth compared to the prior year was primarily driven by the Manitoba Harvest acquisition, the legalization of the Canadian Adult-Use markets and growth in international medical markets.

Extract products represented 15% of non-hemp food revenue for the second quarter of 2019 compared to 46% of revenue for the same period last year. The reduction in extract products is primarily due to significant growth in the Adult-Use markets in Canada, which was driven by flower and pre-rolls.

We're pleased with the performance of the Canadian Adult Use market so far which represents 33% of revenue for the second quarter. Adult Use revenues grew approximately 91% sequentially from Q1 to Q2. We only have a limited number of products available due to regulations. In the second half of this year, we expect Adult Use revenue to continue to ramp with additional retail distribution and new form factors becoming available later in the fourth quarter. On the hemp food side, this was the first full quarter of Manitoba Harvest being included in our results. As we expected, Manitoba Harvest contributed approximately $20 million in Q2.

On the international side, our revenues more than tripled to $1.9 million from $477,000 in the prior year. Growth was driven primarily by Germany and Australia. We expect our international sales to accelerate for the second half of this year as our EU Campus in Portugal begins to export products to our international markets.

Moving on to operational metrics, excluding hemp foods, total kilogram equivalents sold more than tripled to 5,588 kilograms from 1,514 kilograms in the same quarter of last year. The overall average net selling price per gram was $4.61 or CAD$6.12 and $3.92 or CAD$5.20 excluding excise tax. This compares to $6.38 in the prior year's first quarter.

Price per gram decreased compared to the prior year due to a reduced mix of higher-priced extract products and a greater mix of Adult Use revenues, which are at low prices per gram compared to other channels. Gross margin for the second quarter increased sequentially to 27%, up from 23% in the first quarter, and 20% in the fourth quarter. Gross margin was slightly ahead of our internal plans due to improved productivity.

Gross margin continues to be impacted by increased costs and the ramping up of our cultivation facilities, as well as high-cost third-party supply. In addition, hemp food margins were impacted by approximately $1.4 million non-cash charge related to purchase accounting for fair value of inventory. We expect gross margin to continue to increase sequentially for the second half of this year as we gain scale as a result of our Portugal facility coming online, with full GMP certification, and the ability to sell higher value-added products in Canada Adult-Use markets.

Total operating expenses increased to $44.8 million, which includes $7.6 million in non-cash stock compensation and $2.5 million of acquisition-related expenses. Excluding these items operating expenses increased by $25.2 million compared to the prior year's second quarter, which is primarily comprised of an increase of G&A of $11.1 million and an increase in sales and marketing of $11.1 million. The increase was driven by increased headcount related to growth activities, public company costs and operating costs added through our recent acquisitions.

Net loss for the quarter was $35.1 million or $0.36 per share, compared to a loss of $12.8 million or $0.17 per share in the second quarter of 2018. The non-GAAP adjusted net loss for the quarter was $31.2 million or $0.32 per share for the second of 2019. The adjustments to net loss are non-recurring acquisition-related charges and a non-recurring non-cash charge related to purchase accounting for the fair value of inventory.

We reported adjusted net loss of $17.9 million compared to a loss of $4.7 million in the second quarter of last year. The increase in net loss and adjusted EBITDA was probably due to an increase in operating expenses related to growth initiatives, interest expense from convertible notes and the addition of Manitoba Harvest and Natura businesses, and the expansion of international teams.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents and short-term investments of approximately $221 million. We continue to believe that we have sufficient capital to execute on our growth plans for the 12 plus months. We continue to believe we have significant growth opportunities with multiple paths for value creation and expect to achieve strong growth for years to come.

Long-term, we continue to expect to capture a sizable share of the global cannabis market, with estimated gross margins of 50% plus and adjusted EBITDA margins of 25% to 30%. The EBITDA margins are based on legal markets that exist today. And as new markets are added, we will invest to develop those markets, which may have a short-term impact on EBITDA margins, but also provides for greater future revenue upside.

In summary, we are very pleased with our results for the second quarter. We continue to make investments in order to position the company for long-term profitable growth and are consistent in executing our strategy.

This concludes our prepared remarks. Brendan and I are now open to take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question at this time, please press the * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again that's * then 1 if you'd like to ask a question at this time.

Our first question comes from the line of Vivien Azer with Cowen. Your line is now open.

Vivien Azer -- Cowen -- Analyst

Hi. Good afternoon.

Brendan Kennedy -- President and Chief Executive Officer

Hey, Vivien.

Mark Castaneda -- Chief Financial Officer

Hi, Vivien.

Vivien Azer -- Cowen -- Analyst

So, a terrifically strong quarter from a revenue perspective. A little better than we were looking for, in particular on the Adult Use. And so, as we think about that in the back half of the year, can you guys to just offer a little bit more color about how we should think about the phasing of the first commercial shipments? Do you anticipate there being like pretty meaningful channel load in the fourth quarter, or will be a little bit more balanced between 4Q and 1Q? Thanks.

Mark Castaneda -- Chief Financial Officer

Yes, originally Vivien, as you know that the original plan was that we're going to start selling in the October timeframe. So, we thought would be very strong shipments in Q4. With now the regulations talking about mid-December as the timeframe, we expect most of that the shift to Q1 as we don't think the Crown corporations are going to carry a lot of inventory going into the holidays.

Vivien Azer -- Cowen -- Analyst

Okay, that seems reasonable enough. On the international side, that was a little bit light, but it sounds like you guys had a lot of pieces in place to meaningfully improve that revenue generation in the back half and then going into 2020 with two new GMP certifications. So, how should we think about the ramp there? Given that you now even have more capacity, what is ultimate like revenue opportunity just from those Portugal assets? Thanks.

Mark Castaneda -- Chief Financial Officer

Yes, so to be clear, in the first half, or in the first two quarters, we reported none of those sales were from Portugal. Portugal was not turned on or fully GMP certified. We do have a certification, one of three that we're looking for now. And we'll be able to start seeing some sales. So, you will see a nice little step-change in the EU sales in Q3 and in Q4. So, a big improvement. All the products we've sold so far today has been produced from Canada.

Vivien Azer -- Cowen -- Analyst

Understood. That's really helpful. Thank you. And just a follow up to that and I'll jump back in the queue. One of the things that I think all been waiting for is to see how the expanded Sandoz relationship materializes after having announced that back in December I believe. And so, I'm just wondering whether it's really this scaling of the Portugal facility that's prevented you guys from coming to terms with the relationship with Sandoz in say market like Germany, Brendan?

Brendan Kennedy -- President and Chief Executive Officer

We added two countries in the quarter, so we now have six products available at our pharmaceutical wholesale distributor in the UK and we have a wholesale supply in Ireland. And so, the suppliers in Ireland will start to see revenue in the second half of the year and we still expect to add four to six additional countries in the second half of the year. Depending on the country, Sandoz may or may not be the sort of distribution sales and marketing branding partner. Based on some of the conversations that we've been having, we may go with other distributors that have had a better footprint in certain countries for example in Latin America.

Vivien Azer -- Cowen -- Analyst

That's helpful. Thank you so much.

Operator

Our next question comes from Michael Lavery with Piper Jaffray. Your line is now open.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you. Good evening.

Mark Castaneda -- Chief Financial Officer

Hey, Michael.

Michael Lavery -- Piper Jaffray -- Analyst

Could you just clarify specifically on Portugal? You said you have one of three EU GMP certifications. Is that by a portion of the building? What's the right way to think about, you have some you can ship but it sounds like maybe it's small, could you just elaborate there just a little bit more?

Brendan Kennedy -- President and Chief Executive Officer

So, there are two parts of GMP. Part 2 is for an API, so an active pharmaceutical ingredient API. Part 1 is for a finished pharmaceutical product. Currently, we have a Part 2 certification essentially for an active pharmaceutical ingredient, API, for the whole flower. We're awaiting a Part 1, the whole flower GMP certification and then parts 1 and parts 2 for oil but those will come together. And it's not really for a portion of building, it's really for a type of product.

Michael Lavery -- Piper Jaffray -- Analyst

That makes sense. And just back to the outlook for capacity relative to demand, can you give a little sense of maybe exactly what are you expecting there and some amount of how you might adapt and adjust? And you've obviously mentioned ways you could be an opportunistic buyer, would you potentially adjust your own capacity if it looks like the industry has too much? How do you think about the next 12 or maybe 18 months?

Brendan Kennedy -- President and Chief Executive Officer

In order to think about that you can't really look at it holistically. I think you need to separate out Canada from the rest of world. And so, in Canada, we've made relatively small investments, $32 million in increasing capacity. A lot of that increased capacity, that's across three different facilities. A lot that increased capacity is about processing space. Two of the facilities, it's mostly about processing space. At the third facility in Leamington, it is about some additional cultivation capacity. But in Canada despite those or that investment, we are seeing some third-party supply quality, third-party supply come online. And so, we expect to hopefully see more and more of our supply come from third-party farmers.

And we've seen it feels like a slight easing of supply over the last six to eight weeks. We announced one supply deal, and hope to announce several more where essentially, we'll buy from farmers. That's the situation for Canada. For the rest of the world, we will continue to invest in building global supply. There is a severe lack of global supply outside of Canada.

And so, we tripled our cultivation, manufacturing, and processing space really over the last two quarters. We've gone from about 1.1 million square feet at the start of the year to about 3.4 million square feet today. A lot of that's outdoors. And so, we have about one location in Portugal with 20 hectares, so 50 acres outdoor. At another facility, another location we have 4 hectares or 10 acres outdoor. So, 60 acres of outdoor. We continue to invest heavily in Portugal. We will build additional greenhouse space there and in addition to the 1 hectare that we have, will build an additional greenhouse and indoor capacity in Portugal. And expect to continue to invest heavily in Portugal in the coming quarters and years.

We're building supply there. We're building inventory as we await those GMP licenses, and we'll continue to harvest on a weekly and monthly basis and build inventory until we have those additional GMP certifications.

Michael Lavery -- Piper Jaffray -- Analyst

And can you give us a sense of how big that inventory build is? And how quickly you could sell it once you get the green light?

Mark Castaneda -- Chief Financial Officer

Yes. So, from a cost standpoint, and because we're US GAAP, we're reporting costs, we don't markup our inventory. So, from a cost standpoint, we have about $4 million at the end of Q2 of inventory in Portugal. And as you know, inventory or product in the EU sells at a much higher rate than it does in Canada. So, you can do the math on what value it is for revenue value.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you very much.

Operator

Our next question comes from Mike Hickey with Benchmark Company. Your line is now open.

Mike Hickey -- Benchmark Company -- Analyst

Hey, Brendan, Mark, thanks for taking my questions and great job on sales for the quarter. I guess just maybe looking at the Canadian market from a little higher view. What's your estimate now as we approach sort of one year in the legalization, what percentage of the sort of flower market or what the legalized is going through legal channels versus illegal channels? And sort of how you expect that to trend? And then I'm sort of curious on the retail. Obviously, retail on the dispensary side has been unlimited. I'm curious how many stores are opened in Canada where that goes in '19, where that goes in '20 if you can, I am sure you've done it? And how many legal stores are you sort of continuing with, just looking sort of broad brushstrokes on the market as that develops?

Brendan Kennedy -- President and Chief Executive Officer

I think there's a severe distribution constraint in Canada. Some of the provinces have more retail locations opened than others. Alberta, for example, continues to source at a fairly fast clip. But on Ontario, and Quebec certainly doesn't have as many stores opened as one would expect. In Washington State, there are more than 450 stores. Ontario, which is larger I think has less than 100 opened today. And so, I think that's one big constraint in Canada that is constricting. It's really doing two things. It's restricting the growth of retail revenue. And I think the other thing that it's doing is continuing to fuel the illicit market in Canada. And different sources estimate that the illicit market in Canada is still in the $6 billion range. And so, that would suggest that the legal market has captured somewhere between 15% and 20% of the overall market. We do expect that number to continue to grow, not the illicit market but the legal market, as new products and form factors come online.

One other factor that is different between the legal market and the illicit market is that you have a full range of products from flower and pre-rolls to oils and concentrates and vapes and edibles and beverages. All those products are already available in the illicit market.

Mike Hickey -- Benchmark Company -- Analyst

Thanks. That's helpful. Obviously, in the States, there are some states that have less retail, maybe even California relative obviously the size of the population there. But on the Adult Use side some of the tension on distributions and alleviated through delivery services. Obviously, I think in Canada, on the medical side, you can ship directly to your patients. But do you expect any sort of potential relief in terms of an ability to deliver Adult Use product or deliver it directly from the dispensary to the consumer?

Brendan Kennedy -- President and Chief Executive Officer

Yes, I think one of the things that's really different about the Canadian market is that, looking at two provinces, Ontario and Quebec, the OCS in Ontario and the SQDC in Quebec, both have online stores where Adult Use consumers can go online and purchase cannabis from their provincial government, which is really different from the United States. Now those products, assuming you placed an order today, they are packaged and shipped within 24 to 48 hours. And so, you would get the product essentially in 72 to 96 hours after you've ordered, which is there is no model like that in the United States today.

What doesn't really exist in Canada today is sort of an immediate delivery like you see if you order a pizza or like you see in some of the US states. There are some companies in some provinces that are trying to do it, but we don't have that sort of place an order and receive it from some sort of delivery driver within an hour or two like you see in US states. I expect you will see that at some point in Canada, but there are few exceptions but that doesn't really exist today on the legal market. There are lots of such services that are available for that illicit product.

Mike Hickey -- Benchmark Company -- Analyst

Thanks, guys. Last question. Just I was curious on the Cannabis 2.0 edibles, seems like maybe it's being over-regulated, curious your view on that? But maybe the low hanging fruit is sort of vape. So, I was hoping maybe you could dig into new vape strategy, hardware, etcetera. That would be helpful? Thank you.

Brendan Kennedy -- President and Chief Executive Officer

We expect to distribute a number of different vape products under multiple brands. I would sort of segment the vape products into sort of three broad categories by form factor, not by the brand on this call, but by form factor, we expect to have a full line of products available that are a disposable vape. It would be the first category. The second category would be an interchangeable 510 thread like you see in most US states. And then the third category would be essentially some sort of cartridge that fits into someone else's proprietary delivery system. Also, like you see in some US states. So, we expect to have a full product line across those three different form factors available whenever the regulations allow us to sell those products. We've been stockpiling oil for vapes beginning this quarter and we will continue to be building that inventory in preparation for the end of the year.

Mike Hickey -- Benchmark Company -- Analyst

Great. Thanks a lot.

Operator

Our next question comes from Rupesh Parikh with Oppenheimer. Your line is now open.

Rupesh Parikh -- Oppenheimer -- Analyst

Good afternoon and thanks for taking my question. So, I wanted to touch a little bit more on the US CBD market. So, I was just curious if you guys can provide more color on in terms of how you see the ramp in the back half of the year on the CBD front? And also, on the Manitoba Harvest CBD launch, I was also curious in terms of how much distribution you've gotten so far?

Brendan Kennedy -- President and Chief Executive Officer

Currently, the Manitoba Harvest food products, the hemp food products are available in about 16,000 stores in North America so in the US. 13,000 stores in the US today. Their broad spectrum of hemp extract products, their CBD products we've launched those products this quarter in Q2, and they're in nearly 1,000 stores today. We expect that number to continue to grow significantly in the second half of this year. I think we're all looking forward to clarification and regulation from the FDA on CBD products and broad-spectrum and extract products.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay. Great. And I was just also hoping for potentially more color in terms of how you guys see the ramp on the CBD side in the US in the back half of the year?

Mark Castaneda -- Chief Financial Officer

So, the ramp will be somewhat dependent upon how much clarity the FDA does give. We do see a lot of the major retailers holding off, especially on the ingestible products until they have more clarity. As that clarity comes in the second half, we see a significant ramp in the second half of the year. If it does not, we see a much slower ramp on the CBD side, for again, on the ingestible side.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay. Great. And then maybe just one housekeeping question. So, Mark, I was hoping to see if you can provide more color in terms of how you guys are thinking about G&A expenses and sales and marketing in the back half of the year? It looks like at least on the sales and marketing front, it's leveled off at about 30% of sales. So just curious if there's any additional color you can provide on either line item?

Mark Castaneda -- Chief Financial Officer

Yes, so on the sales and marketing, this quarter, you saw a little bit of a bump. And a lot of that was because of the Manitoba Harvest, or a big portion of that bump was Manitoba Harvest having it in there for the full quarter. From a percent of sales, you'll see that come down as a percent of sales slightly. But that's pretty small ticks down for the second half of the year.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay. Great. Thank you very much.

Operator

Our next question comes from Mike Grondahl with Northland Securities. Your line is now open.

Mike Grondahl -- Northland Securities -- Analyst

Yeah. Thanks, guys. On the Authentic Brands, you talked about a first product. Any insight into kind of what that product is going to be and what does the pipeline look like for other products in the back half?

Brendan Kennedy -- President and Chief Executive Officer

We haven't announced it yet. The first line of products and the first brand will be a set of topical products. We haven't announced the brand yet. But I would expect I guess in the next three months to announce the brand and it's about, I can't remember, it's five or six product SKUs that will launch. But we'll make that announcement in conjunction with the partners at Authentic Brands Group.

Mike Grondahl -- Northland Securities -- Analyst

And just the pipeline, Brendan, for other products?

Brendan Kennedy -- President and Chief Executive Officer

So have a pipeline with ABG on the product and branding side and then the team at Manitoba Harvest on the product innovation and form factors side. As well as we made an acquisition, a small acquisition this quarter of a company called Smith & Sinclair. We expect to bring additional products, brands, form factors to market in the US CBD space.

Mike Grondahl -- Northland Securities -- Analyst

Got it. Okay. Thanks, guys.

Operator

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

Tamy Chen -- BMO Capital Markets -- Analyst

Yes, thanks. The first question is, I'm just trying to understand what really drove the notable increase in sales volumes this quarter into the recreational channel, considering in the past several quarters have had more modest volume. So, was it just a function of you had been constrained on your own production and now you're really turning the corner there? Or was it that heading into Q2 you managed to procure more third-party supply? Or was it that in previous quarters, you were prioritizing production to take advantage of good LP wholesale pricing before?

Mark Castaneda -- Chief Financial Officer

So, Tammy it's been a combination of many things. But as you pointed out, it is, getting some third-party supply as well as ramping our own cultivation. You saw the amount we harvested was up almost 40% this quarter versus last. So, we're continuing to ramp our own cultivation, as well as we're continuing to provide more sources for quality third-party supply.

So, I think if you look at kind of us versus some of the competitors we're probably one of the biggest increases in Q2 for sales for Adult Use in the industry.

Tamy Chen -- BMO Capital Markets -- Analyst

And I'm wondering, could you break down the other channel for cannabis, so the non-recreational channel, I believe it's $9.1 million of gross revenue. How much of that was direct to medical patients versus continuing to sell to other licensed producers?

Mark Castaneda -- Chief Financial Officer

So about $2.5 million was direct to other medical patients.

Tamy Chen -- BMO Capital Markets -- Analyst

And the rest was to other licensed producers?

Mark Castaneda -- Chief Financial Officer

That's correct.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. And just a housekeeping item. I was wondering Mark, if you could provide this, your gross average selling price, specifically for the recreational channel? I'm just trying to understand how the pricing and the different channels worked out because you did have a decline in total average selling prices?

Mark Castaneda -- Chief Financial Officer

Yes. So, the Adult Use price per gram overall was $5.17 or about CAD$7.00. Is that what you're looking for, Tamy?

Tamy Chen -- BMO Capital Markets -- Analyst

Yes. And that's gross?

Mark Castaneda -- Chief Financial Officer

That's correct.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. And I just have one last question. This is on Manitoba Harvest, the Broad-Spectrum Hemp Extract. First, I'm just wondering, like, why is it branded that way versus being named or called CBD oil? And secondly, you were talking about, the FDA issues there. So, are you currently just selling in terms of products the topicals or do you have some sort of ingestible that you are selling right now?

Brendan Kennedy -- President and Chief Executive Officer

So currently there are I believe four different product types. There's an extract product that's in a dropper bottle. There is a gel cap product. There's a spray, and then there's a protein powder. And Tammy, it is CBD oil. CBD is one of the ingredients, and you will see that on the package, so it is CBD.

One of the reasons we marketed it as a broad-spectrum abstract product is that Manitoba Harvest is a hemp brand. They're, like I mentioned, in over 16,000 retailers in the US, and so we wanted to continue that language. And when we did some consumer testing, it was really important in our market research that consumers were interested in broad-spectrum hemp extracts as opposed to CBD isolate. And there is certainly uncertainty with what the FDA is going to do around CBD isolate based on the GW Epidiolex product authorization in the US. And so, we were much more comfortable with the broad-spectrum hemp extract language based on the product that's in those individual form factors.

The other thing that's important in how we distinguish that product a lot of the other CBD products that are in the market is that the Manitoba Harvest team has attained self-affirmed GRAS, generally regarded as safe status. And so that makes Manitoba Harvest the first company, to our knowledge, to achieve that distinction. It demonstrates our commitment to compliance and building consumer trust.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. Got it. Thanks. That's all for me.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Aaron Grey with Alliance Global Partners. Your line is now open.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi. Thanks for the questions. Nice to see the improvement in gross margin sequentially. Just any color you could provide on how much the gross margin should trend in the back half just as utilization improves? And then as we look to next year with increased sales in the international markets with carry higher margins, as well as novel form factors coming online. Just how best to think about gross margins over the next 18 months? Thank you.

Mark Castaneda -- Chief Financial Officer

So, as we talked about on the last call, we did expect to see gross margins improve, about 300 basis points. We're actually ahead of that this quarter. We expect probably another 300 basis points through the back half of this year. So, we do expect to be in the 30% plus range for gross margins by the end of the year. For next year, we do expect to see expansion as we get into other form factors, and have more product available for international markets, which do carry higher margins. So, you will see us getting probably starting in the mid-30s and getting mid-40s by the end of the year and potentially even higher.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Great. Thank you. And then just overall thinking about EBITDA. Any sense you could provide on how best to think about moving closer to breakeven and then profitability just as thinking about SG&A along with what you just provided on gross margins as you look into potentially spin out the marketing with some form factors come online to the US with CBD enter marketing around that. Just how best to think about overall EBITDA. Thank you.

Mark Castaneda -- Chief Financial Officer

For overall EBITDA, I think as you look at the levels that we're at this quarter, we'll probably see something similar for next quarter and then start to see some improvement in Q4. And then some improvements going forward. If the world were to stop and there were no new countries to invest in, we do believe that we'd be positive EBITDA by the end of next year. As far as other new markets, we want to be successful in the US, and we will continue to invest in the US markets.

Brendan Kennedy -- President and Chief Executive Officer

I'll just pipe in here. If your company is a small to midsize LP in Canada or an MSO in the United States that can't export to other countries then I think those companies should be focused on profitability. But you only see an opportunity like this once in your lifetime. And if you're trying to dominate a global industry, you'd be constraining yourself if you were focusing entirely on profitability at this point. Globally, it's very early in the emergence of a $200 billion industry. And globally, if now is not the time to invest, I don't know when is.

Aaron Grey -- Alliance Global Partners -- Analyst

That's helpful. Thank you.

Operator

Our next question comes from Graeme Kreindler with Eight Capital. Your line is now open.

Graeme Kreindler -- Eight Capital -- Analyst

Hi. Good afternoon and thanks for taking my questions here. The first question, I had just a follow-up on the comments earlier on the call about seeing a supply balance in Canada in the next 12 to 18 months. Understanding that to potentially get the supply balance there. How does the company think about how much of that supply could be of the necessary quality that it would be something they'd look to actually source and put their own label and brand on that?

Brendan Kennedy -- President and Chief Executive Officer

I think that's a big difference really in the last six to eight weeks. The last time we did this call, I was really frustrated with the lack of quality supply. We announced one supply agreement over the last month or so. And we were pleased with the quality of that product. And I know that our sourcing team has a few more similar agreements that they've been working on with similar quality suppliers. And so, I don't want to sound too optimistic. But I am certainly more optimistic today than I have been that quality supply will continue to come online in Canada. And that's a pretty big difference from what we were talking about 90 days ago.

Graeme Kreindler -- Eight Capital -- Analyst

Okay. Got it. I appreciate the color there. And then just on another note here with respect to the average selling price seen in the quarter with the sequential decrease quarter over quarter. Is there any sort of thoughts on how that might trend in the long-term? Obviously, there's more supply and quality supply that could be coming into the market, and also partially offset by the introduction of derivatives. So just curious in terms of where the company sees that heading in the medium-term.

Mark Castaneda -- Chief Financial Officer

So, Graeme, let me give you a little bit more color on that as well. So, some of that is mix. If you look at our product mix this quarter, extract products for Adult Use was really 1% of sales. It was much higher in the past. So, our pricing actually hasn't come down, it's been more a function of mix into which provinces that we're selling in. We do expect pricing to from a mix standpoint as Adult Use becomes a higher percentage of the mix in the second half of the year, we do expect to have some pressure on pricing. Offsetting that is 2020 where we do think pricing will go up from an overall mix standpoint with other novel form factors. Also, international will be taking a bigger portion of the mix, which helps on the overall pricing. But if you're looking purely at Canadian Adult Use pricing, yes, that will be down primarily because of just the mix.

Graeme Kreindler -- Eight Capital -- Analyst

Got it. And lastly to follow up there, Mark. In terms of the mix in the quarter where you said the extracts for Adult Use. Was that because of what was happening on the provincial supplier side of things and in terms of what they wanted, or is it that that has to do with taking any capacity offline to stockpile inventory, or processing oil ahead of the derivatives launch?

Mark Castaneda -- Chief Financial Officer

It's actually a combination of both. But mostly, the provinces are looking for flower and they're looking for primarily for flower and less for extracts today.

Graeme Kreindler -- Eight Capital -- Analyst

Got it. Okay. Thanks for that color. I appreciate it. That's it for me.

Operator

Our next question comes from Andrew Carter with Stifel. Your line is open.

Andrew Carter -- Stifel -- Analyst

Hi. Good afternoon. Just a quick question. Just to understand the revenue potential that's out there in the second half of the year. Just kind of want to understand, you've obviously alluded to the fact that the second wave is going to start in the first quarter next year. So, I want to understand how you're balancing your ability to supply the market right now, what you have to hold back. Should it be a meaningful revenue acceleration? Help me understand if it's constrained, or there's a lot of opportunity for the second half of the year.

Brendan Kennedy -- President and Chief Executive Officer

So, it really depends on the channel. So, as we look at the international channel, we see some pretty significant increases on the revenue side. From the Canadian Adult Use channel, we do see the growth from here to be a little bit more muted as it will be heavily flower related and as the buyer starts shifting their inventory mix to getting ready for Q1, which will have the other form factors. So, the stores aren't getting any bigger, they're just going to be changing the mix in the stores. We expect to see some muted orders over the next couple quarters except for new retail locations by the crown corporations.

So, I guess revenue from the back half, you'll see growth. You won't see the doubling of growth like we have this past quarter. You'll see a much more muted growth into the channel for Adult Use.

Andrew Carter -- Stifel -- Analyst

Great. And then just a last question. Now that we have the Health Canada regulation fully out there, I guess I want to get your perspective on the approval processes that remain outstanding. How you view any risks of getting the product to market from here?

Brendan Kennedy -- President and Chief Executive Officer

Andrew, are you talking specifically around the cannabis 2.0 form factor?

Andrew Carter -- Stifel -- Analyst

Yes, sorry. What I was kind of getting at, I know that they've thrown a 60-day window. I've heard conflicting things about how strict that's going to be. Is it expiration you can start shipping? Can you shift before? That's kind of what I'm trying to understand here.

Brendan Kennedy -- President and Chief Executive Officer

Yes, we expect to be able to ship those products sometime on or before December 19th. What's really unknown is not really the Health Canada regulations, but whether or not the crown corporations are going to be willing to place significant orders at the end of November, December, just as they are going through their end of the year and the holidays, or whether some of them might just hit pause on the new form factors and place those orders in January. I've sort of given up on trying to predict how these entities will act.

Andrew Carter -- Stifel -- Analyst

Makes sense. Thank you for that.

Operator

Our next question comes from the line of Brett Hundley with Seaport Global. Your line is now open.

Brett Hundley -- Seaport Global -- Analyst

Hey. Good afternoon. Thanks for the questions So, I just wanted to follow-up on the discussion regarding additional third-party supply in Canada. So, as you guys look to potentially sign up more third parties supply agreements, going forward. The entities that are willing to sign up for these supply agreements, would you characterize them as larger peers, or would you more so characterize them as small entities?

Brendan Kennedy -- President and Chief Executive Officer

It's a mix. Some of the smaller ones are entirely focused on one or two strains, and we've seen some high-quality products out of some of those craft cannabis farmers. On the other hand, we announced a large supply agreement with Zenabis, and they were in need of capital. And rather than do around the capital or go to markets at an unfavorable time, we were able to structure a deal that made a whole lot of sense for us and guaranteed us a supply of high-quality products at an aggressive price.

Brett Hundley -- Seaport Global -- Analyst

And then I also wanted to revisit a discussion about CBD in the US. So, I guess on the supply chain side, when you look at hemp and broad-spectrum cannabinoids in the US, prices have really been declining year to date in the States. We will see what happens as we get out of harvest this year and how much hemp makes it out of the field and onto store shelves. But I wanted to better understand your own supply chain at this point in time. I mean, I understand this could change if and as you guys conduct M&A or partnerships ahead. But can you just update us on your hemp and CBD supply chain approach in the States at this point in time right now?

Brendan Kennedy -- President and Chief Executive Officer

We've announced a couple of different agreements with farmers and I guess collectors of farmers in the US. We've procured supply from a company in Montana, called the LiveWell. And that's some supply for Tilray and for the Authentic Brands Group products. We've also, through Manitoba Harvest, signed a supply agreement for high potency CBD hemp from a group of farmers out of Oregon. And the name of that group is slipping in my mind right now, so I can't name it.

Brett Hundley -- Seaport Global -- Analyst

I appreciate that. And then just last from me, I just wanted to revisit the profitability discussion. I personally agree with what you guys are saying in so far as building for the long-term. And I think we've seen examples within the space where maybe that leniency hasn't been there on some of your peers, at least from their owners' side. And then, of course, you just have views that seem to change across the broader marketplace from the investment community. Maybe just looking at profitability differently. Can you characterize how important it might be for you guys to get free cash flow positive within the next, let's say, three to five years? But let's look out longer.

I mean, do you think that you have enough leeway from your ownership and the broader market to continue running at negative cash flow for longer periods of time in order to position your platform for that longer-term size and success? Can you just talk about that a little bit as it relates to your ownership and your views of the broader market, and its acceptance of what you're trying to build long-term?

Mark Castaneda -- Chief Financial Officer

So, from an ownership standpoint, we do have concentrated ownership, which we think is an advantage, because the ownership start taking a long view of this opportunity. And investors are looking at it and rewarding us for that long view. When you look at the multiples in the market, we're one of the highest multiple stocks. So, I think people that have the long view are taking the ride with us. Obviously, there are companies that are taking a much shorter view. So, our approach in the next three to five years, yes, we do expect to be cash-flow positive during that timeframe. But you know we're looking at today as kind of day one. So really maybe a year from the day we've gone IPO, so we're really a couple of year into it. It's still such early days and we are building this thing to be one of the leaders, in the space globally. We're not looking to just be the biggest company or one of the biggest in Canada. So, I agree with your thoughts that long-term we do have patient investors and we have people that are betting on us.

Brett Hundley -- Seaport Global -- Analyst

All right. Thanks, Mark.

Operator

And that will conclude today's question-and-answer session. I'd like to turn the call back to Mr. Kennedy for closing remarks.

Brendan Kennedy -- President and Chief Executive Officer

Thank you, everyone. I want to thank more than 1,300 employees at Tilray for their dedication and extraordinary efforts in building our company, and for improving the lives of patients and consumers through cannabis. We appreciate everyone's questions and participation on today's call. Have a great evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.

Duration: 69 minutes

Call participants:

Rachel Perkins -- Investor Relations

Brendan Kennedy -- President and Chief Executive Officer

Mark Castaneda -- Chief Financial Officer

Vivien Azer -- Cowen -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Mike Hickey -- Benchmark Company -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

Tamy Chen -- BMO Capital Markets -- Analyst

Aaron Grey -- Alliance Global Partners -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

Andrew Carter -- Stifel -- Analyst

Brett Hundley -- Seaport Global -- Analyst

More TLRY analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.


Motley Fool Transcription has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com