Q2 2020 Earnings Call
[music].
Good morning, and welcome back so quite second quarter fiscal 2020, <unk> earnings call. All lines have been placed on mute to prevent any background noise. After the presentation. We will conduct a question answer session. He would like to ask a question. During this time simply press Star then the number one on your telephone keypad fuel.
I'd like to withdraw your question. Please press the star followed by the queue. Thank you. Please note that this call is being recorded today March Thirtyth 2020 at 830 am Eastern time.
I'd now like to turn the color I'll call over to Jennifer Smith Director of Investor Relations at Hexcel Court MS. Smith you May proceed.
Thank you just got good morning under Smith director of Investor Relations for had no Corp. Thank you all for joining US. This morning for 2020 Q2 earnings call. We will start with a presentation by our CEO Sebastian family.
Followed by a recap of our Q2 results.
By our CFO, Stephen Byrd wash before opening the floor I've two questions from our financial analysts.
Before we begin.
I would like to remind you that today's presentation. These forward looking statements involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations.
Forward looking statements are based upon and include the Companys internal estimates plans expectations opinions forecasts projections target guidance or other statements that are not statements about.
Any statements contained herein are discussed during the presentation that are not statements of historical facts, maybe deemed to be forward looking statements such statements can often be but not always be identified by the use of forward looking terminology and other similar words and expressions that our predictive or indicate indicative of future events and future trends, including negative.
And grammatical variations there in a statement that certain events or conditions may or will happen well they discussion strategy.
These statements should not be let us assurances of future performance or results such statements involve known and unknown risks and uncertainties and other factors that may cause actual results performance or achievements be materially different from those implied by such statements. Those risks or uncertainties include but are not limited to those relating to the company's ability to execute it.
This is glenn renew required permits and licenses and related regulatory compliance matters implemented strategies to maintain financing on acceptable terms, maintaining renewed required licenses maintain good business relationships with customers distributors other strategic partners keep pace with changing consumer preferences.
Intellectual properties managing integrate ex acquisition retained three key personnel and related to the company's competitive advantages the development of new products products formats, where the companys products changes in laws rules regulations in the absence of materially adverse changes in the industry a global economy.
A more complete discussion of the risks and uncertainties facing the company appear in the company's anyone's a nation warm in the company's management's discussion and analysis.
Well the six month period ended January 31st 2020.
Which are available under the company's profile on Peter.
Although the company.
These forward looking statement on assumptions, but it believes are reasonable cautions readers that the actual results and developments, including the company's results of operations financial conditions liquidity in the development of the industry, which the company operates.
May differ materially from those NATO suggested by the forward looking information contained herein a number of factors could cause actual events performance or results to differ materially from what is projected in the forward. Looking statements. You are cautioned not to place undue reliance on these forward looking statements, which speak only as if the data. This presentation the company disclaims any intention or obligation.
Nation, except to the extent required by law to update or revise any forward looking statements as a result of the new information or future events for Glenn either reason.
Any forward looking statement contained herein or discussed during today's session is expected to be qualified in its entirety by the above cautionary statement I'll now turn the floor over to Sebastian RCR RC CEO.
Thank you Jennifer good morning, everybody.
There's no way we can begin this conference call without discussing cobot 19 as virus is having an enormous impact on humanity, it'll certainly have an impact on the global economy, the dramatic steps taken by our federal and provincial governments, along with most other nations of the world over the past few weeks are presented significant challenges for all businesses.
Ours is no different.
As for our press release of March 24th for Canada sector has been deemed into central service in Quebec and Ontario.
While we're fortunate enough to keep operating our business. We've created a set of priorities that will guide our actions during this difficult period.
Number one is to protect the health and safety of our employees number two to continue to supply high quality candidates store customers and number three for operational effectiveness strategic priority to focus on our near term goal of EBITDA positive.
It's difficult in these early days of social distancing itself isolation to know the long term impact on our business as long as we can keep our people healthy we're confident in our ability to produce the biggest challenge will be in our ability to forecast near and medium term demand as that'll be impacted by the retail store environment.
Canopy is closed their corporate owned retail stores and many others have moved to a click and collect model at the moment demands remains strong, but the impact of significant job losses in our economy may affect the size of the market until this pandemic has abated.
A key component of our expansion plans would be expected increase in retail stores in Ontario. However that is uncertain at this time, we're vigilant in monitoring the market, but we expect uncertainty to remain present for an extended period of time, it'll certainly be weeks, but it could be much.
Now I'd like to move on and discuss our financial results for the second quarter fiscal 2020.
Two quarters ago, we noted challenging conditions that were contributing to a slower rollout of the legal adult use market. Our primary concern centered on the delayed licensing and build out of retail stores in both Ontario, and Qubec combined with the delay in launching the 2.0 products.
These issues have significantly contributed to limiting access to the consumer for Canadian license producers.
Our company along with many of our peers had built or organizations on the assumption that retail channel will be licensed and built on quicker timelines.
During the past 12 months, we've also seen a dramatic shift in the capital markets and the ability of candidates companies to issue equity considering these factors we've rationalized our operations in a number of ways.
We're completing capital projects that are necessary for us to become a leader in the Canadian marketplace.
We're introducing automation and implementing processes and procedures to drive efficiencies in those operations.
We're using new analytical tools to produce and sell products with current consumer demand in mind.
We're reducing our cash operating expenses and we continue to drive towards adjusted EBITDA and cash flow positive operations in Canada as soon as possible.
I'm very pleased to see that were already beginning to see the results of that hard work in Q2. We saw net revenue grew 17% achieved gross margins of 33% and we decreased our operating expenses by 21%.
As we previously stated.
That we were taking an aggressive stance on pricing to increase our adult used market share in Canada through the introduction of original stash. The first value brand on the Canadian market. We saw 57% increase in kilograms sold primarily in response to the successful launch of original stash, we're continuing this aggressive pricing strategy across our other products.
To reduce product returns and drive consumer sell through.
In order for the Canadian legal kind of as market to continue to develop we need to continue disrupting the illicit market original stash proves that we can do that and do that profitably.
Several of our competitors have now entered the space with our own value lines, but we continue to believe that we will maintain a strong market share based on our operating cost and quality.
We've maintained our position as the market leader in Quebec commanding over a third of the sales within the province and from disposition, we're looking forward to strengthening our distribution across the country and just stablex ourselves as one of the top market leaders in Canada.
Aside from driving growth to our top line, we've been focused on rationalizing our operations.
In October we were one of the first companies to make the hard decision to scale back our workforce and expenditures on items, such as marketing, we had scaled our operations to surface or market much larger than what's currently available to us and our license producer peers.
These reductions resulted in a decrease of operating expenses of 25% in Q1 and 21% in Q2.
Although we've made structural changes to our business our operations continued to gain efficiencies and improve output in Q2, we produced 22000 kilograms of dried Graham equivalent that's a 38% improvement from previous quarter.
We've also improve the amount of dried flower, we produce compared to trim from each kilo harvested.
We're developing products that can consume more of that trim and alleviate the buildup of inventory we should see the results of that work in the next few quarters.
Key to continued improvement in our cost structure and our ability to serve the market is our bellville manufacturing facility.
Using advanced automation in our manufacturing and processing supply chain will allow us to increase output, while decreasing costs and will reduce our reliance on outsourcing.
We've received a license for the first phase of the facility and are continuing construction on the second phase we submitted our animals licensing amendment and are looking forward debating production at the facility upon receipt in the short term, we're preparing to launch our 2.0 products from our got no pilot facility, which received its license in October.
I'm pleased to announce we've just shipped our first shipments of original stash cash to Ontario, which should be which have been on store shelves at and have actually sold up very quickly for shipments and Weve reloaded, we're very pleased with that our shipments to come back and other provinces are following soon.
We're looking forward to announcing the release of more new products that they ups concentrates chocolates gummies over the next few months.
We believe these changes to our cost structure as well as delivering products through our three brands and the introduction of 2.0 products will allow us to achieve long term portfolio wide gross margins in the low 40%.
Together with our partner Molson Coors, we've made significant progress towards launching beverages in Canada, we're looking forward to making more announcements regarding service as specific size, we get closer to the launch date.
Beverages will be sold under several different brands in a variety of flavors. They taste great include THC CBD and other formulations.
And we look forward to bringing that to market.
Our decision on new strike and to curtail operations at the Niagara facility were mostly related to our opening comments on the current size of the Canadian market.
A number of our license producer peers have also halted construction or close certain facilities to rationalize operations, we decided to focus our attention on optimizing the operations in that gets you know in our methanol facility to meet current demand and we'll revisit Niagara once the Ontario, and Qubec retail Buildout as advanced and we.
Need that increased production.
To summarize Hacksaws main strategic objectives, despite a very challenging global environment remain alive and well.
So to summarize those to be a market share leader in Canada is well in our focus and very achievable. In fact, we continue to dominate in qubec market and prove out that hexcel is a top national adults use market share player.
From an operational excellence point of view I'm thrilled with our ability to post a 33% gross margin.
Including onetime costs, so the normalized margin should be higher and including original stash a product thats. Our that's our value brand. We've also demonstrated an ability to reduce operational expenses and we're very confident that near term will be EBITDA positive.
Our third strategic priority has been innovation and innovative products and we've had another rousing success with original stash cash and we look forward to rolling that out nationally the quality of hexcel products came to keeps being well received and we're thrilled with the response from our customers.
With that I'd like to handle floor over to our CFO, Steve Byrne wash to discuss our second quarter results.
Thank you Sebastian Hello, everybody.
We'd like to go through our Q Tartar corner results and.
Im happy to report that there's been some positive moment for hexcel.
I'm sorry in the revenue area.
Total gross revenue was 23.8 million for the quarter, which is an increase of 23% over Q1 gross revenue is net of 200 K in price concessions as we continue to assess our pricing to drive sales volumes and sell through.
Our return provision of 1.2 million and provide for possible unsold inventory supply chain.
Net revenue was up 17% to 17 million compared with 14.5 million in the last quarter.
I don't you sales volume volume increased 57% 6.5 tons from 4.2 tons. In Q1. This increase was primarily driven by the expanded distribution of original stash during the quarter.
Due to the success of the results that we are continuing to expanded distribution of it.
It's now lifted in Qubec, Ontario, BC, Alberta, Nova Scotia and development.
We achieved adult use net revenue per gram of $2 and 47 then.
A decrease of 77 cents over the prior period.
This decrease is primarily the result of increased sales mix Oh, yes.
We've been making changes to the strains we're growing with a focus on the ones with THC content greater than 18%.
As more of these harvest become available for sale that should drive increased volumes in the products sold under our hexcel and up brands that along with the expansion of our geographical distribution and introducing introduction of our new 2.0 products.
Sales in a positive shift in revenue per Gram and gross margin over the next few quarters.
I'll give sale increased 14% to 11.3 million compared to 9.9 million in Q1.
As a result of increase in the volumes sold which was offset by decreased in the cash cost per gram related to changes in yields.
Process improvement and a reduction of certain costs such as irradiation.
The fair value adjustment on the sale of inventory was $5.4 million decreased from 6.7 million. In Q1. This is due to the compression the fair value of guide Bart felt flower in the market, which was offset by the volume sold.
The unrealized gain on changes in fair value of biological assets was negative 7.9 million compared with negative 7.1 billion. In Q1. This is as a result of an increase in estimate yield production rate at the got no facility as well as a reduction in the cash cost per Gram as previously mentioned.
This results in a higher fair value adjustments.
Company recorded a write down on inventory of 16.1 million in the quarter compared to 23 million in the prior quarter.
11.8 of this impairment relates to an impairment on concentrated bolt purchased inventory.
The company is currently undergoing litigation related to this play agreement as we believe it is an onerous contract that was negotiated about Kate.
3.1 million of the write off due to an excess supply of trim on hand, when compared with our short term demand.
We are closely monitoring our inventory levels as well as assessing application for inventory in our 2.0 products.
And we'll continue to keep you updated on a quarter by quarter basis regarding any future impairments that may be required.
Gross margin before about your fair value adjustments for Q2, 20, 25.7 million or 33% compared with net revenue from sale of goods.
This compares to $4.6 million in the prior quarter or 31%.
This increase as a result reduction in the cost per Gram as a result of significant improvement in yields that are cultivation facilities.
We expect margins to improve in the long term through the launch of higher THC product.
Expanded Canadian distribution and the introduction of 2.0 products.
Gross margin after fair value adjustment and impairment was a negative 97.9 billion compared with a negative 20.9 month in Q1.
Operating expenses were 281.5 million in Q2. However, these included a number of nonrecurring expenses came about as a result changes in conditions of the Canadian market.
That reason, we look at our operating expenses in two segments par and nonrecurring.
For our core operating expenses, we saw a decrease of about 21% 21 28.1 million in Q2 35.1 million in Q1.
As noted earlier, we had proactively works to reduce our cash operating expenses. We had started to see demonstrate a bubble reduction in these overhead costs. Our opex cash costs decreased to 16 million in Q2 from 24 million in Q1, that's the 33% decrease.
In our DNA, we decreased to 14 point Fourmillion. Some 16 million in Q1. This is the result of reduced payroll and travel costs.
In marketing and promotion, we decreased 2.4 million from 6.2 million in Q1 2020. This is the directories ultimate decision to reduce our promotional spending in headcount.
It's also an over accrual based on a contract that we re negotiated in Q2 to allow us to reverse that accrual.
Research and development decreased to 1.2 million from 1.7 million in Q1, as a result of reduction in headcount and consulting fees.
Now I'll look at our nonrecurring expenses.
There was an additional $300000 in restructuring thoughts related Rightsizing, we began in Q1.
Secondly, there was impairments of property plant and equipment as well as intangible assets of 138 point Threemillion.
Came about after we completed a strategic review of our cultivation assets and deciding.
Opus on driving operational improvement and yield got no facility to reduce cost and to lift Niagara for sale.
On an impairment of goodwill under than 11 million 0.9.
After performing an indicator impairment test.
And an additional 3 million realization of an onerous contract related to a supply agreement that is currently the subject of litigation.
Losses from operations.
In Q2, our losses from operations were 289.4 million compared with 60.6 million in Q1 2020. The increase is primarily related to the nonrecurring expenses I mentioned.
Which is offset by a decrease in operating expense of 7 million.
Combined with a decrease in the impairment loss and write off of inventory in biological assets of 11 million.
We are still focusing on reducing operating expenses and streamlining operations with a focus on becoming adjusted EBITDA positive.
At the end of Q2, 2020, [noise], you had $81.4 million in cash cash equivalents and short term investments.
We will require additional capitalization in order to meet the companys obligations commitments and budgeted expenditures through 20 through January 31st 2021, we're considering a number of options and we hope to launch at the market financing in the near future.
Thank you very much and they will now turn the call back over to Jennifer.
We will now take questions from analysts just a large number of animals plenty of steady.
You didn't limit your questions to two at a time, you're welcome to rejoin the queue. After that thank you.
Thank you ladies and gentlemen, we will now begin the question and answer session. Since you have a question. Please press the star followed by the one on your Touchtone phone you hear a three to prompt acknowledging you request and your questions will be pulled in the order. They are received should you wish to decline from the pulling process.
Please press the star followed by the two if you're using speakerphone. Please refer to handset before pressing any keys.
First question comes from David Hi, Deco without the quick please go ahead.
Thank you very much so busy doing things hitting on behalf of baby.
Based upon the congrats on the quarter.
Just wanted to know more to go do it wasn't being removed the guidance, but it wouldn't be it wouldn't be room, but instead. It was the it wouldn't be was going to New York estimated both unbilled revenue coming but I'm gonna was good or too im going to go into him onboard Angel growth model do you weren't expecting to it to do.
Thank you we are expecting to improve the amount of products that are coming from 2.01 derivatives and that that's the fundamental problem for all for our whole industry right now how much revenue can regenerate from trim, which is effectively a byproduct production.
In order to get the best portfolio margin available. So we're not giving specific numbers in our forecast. We can tell you will be improving.
In terms of a portfolio gross margin, we're targeting 40%.
Okay. Thank you very much.
Your next question comes from hearing Grand Alliance Global Partners. Please go ahead.
Good morning, and thanks for the question first just wanted to touch back again on gross margin, it's nice to see sequential improvement during the quarter teach it was it more you know what in terms what drove that I know you mentioned you know the change in yields but also heard you mentioned a onetime costs are you not should go away. So.
And then what you could kind of quantify that.
And then also going forward in terms of once the Bell No license. You know is received how that helps to improve the gross margin as well in terms of like.
The automation as well so just any kind of coloring top quantifying the one time.
During the quarter, how that should be normalize. Thanks.
Thanks, Aaron so they so it's not just yield it's across the organization, we've taken that funnily enough. We found opportunity amidst this this coal good thing we've had a renewed focus on health and safety, which is really driven efficiencies. So that that's been a that's been a huge success when when I say onetime costs I mean.
In the purchases in the quarter, some onerous contracts et cetera. So if you normalize and if we only had sold in the quarter or at only needed to take into account current cost of our product current manufacturing costs. We can see the 40% right now and I remind everybody on the call, that's including original stash, which accounts for.
A large portion of our sales so very very bullish on our ability to drive long term portfolio margin at 40% that once we get these onetime issues out of the way.
Okay. Thanks, that's helpful. And then just second won't just be just touching on terms of market share for Quebec.
And the strong share again during the quarter, just let me tell kind of quantify you know the market share and how it's kind of comparing quarter over quarter for Quebec, and let me take rates in kind of.
Quarter to date, just with you know kind of oil pipeline people, so and anticipation of living in isolation recall. The my team and then also just any color you could provide in Ontario. We also good launch original stash than what you've seen in terms of market share trends are there as well. Thank you.
We're still completely dominant into back we've chosen to share the 33% number as we think Thats a.
That's a good sustainable conservative number some of the monthly data just blew that out of the water quite frankly, but we're waiting for that to normalize in any consumer packaged goods business, it's highly unlikely almost impossible than any brand will maintain above 40% market share.
And so so we're we're being conservative there, but we're definitely number one and not going anywhere in terms of Ontario the.
The introduction of some new products have worked very well, but we've really focused in our attention on a on servicing to come back market fully the other markets in Canada. We're really focused on 2.0 until we can properly serviced them with a flower so as a full line offering so.
Total national Marketshare, where amongst the top if you look at adult use market share you compare us to any of the top five names we're right in striking distance and we're quite pleased with those results and we anticipate that to continue.
Great. Thanks.
Your next question comes from the past Perry. Please open the line. Please go ahead.
Good morning, Thanks for taking my questions. So I guess first Sebastian getting back to the comments on getting to positive EBITDA near term.
Any any more granularity you can Brian in terms of timing of achieving that target.
Right now we're still we're we're shooting for for within the next couple of quarters, but in terms of giving a precise window given all the uncertainty in the market no rupesh, we're not giving more appropriate guidance. There what I can tell you is that at a with continuing increase in sales quarter over quarter.
And with a 40% gross margin and that ability to reduce opex.
It.
It's it gets very certain a pretty soon.
Okay, Great and then on the operating expense Brian is there any more color you can find here is how you guys are things that gene I sequentially in marketing I, just Q3 Q4 and.
Yes, just Wanna get a sense of what type of dollars, we should be thinking about going forward.
Absolutely one of I think what are the biggest successes to come out of a of our acquisition of new strike. We certainly had our challenges and you saw this quarter with impairments, but one one of the greatest successes with the brand and we've come up with new marketing initiatives that are.
Actually quite low cost and so we're very confident in our ability to keep those cost under control go forward, a while continuing to deploy it was brands a nationally in getting residents. The brand will always rely on two things distribution first and then product innovation second that's what's going to build I believe a long term brand success.
And so on top of that we have great banners like original stash up and heck. So to put this technology under and we're having great success in that with things like launch of our original ash.
Great. Thank you.
Next question comes from any Chen with BMO capital markets. Please go ahead.
Yeah. Thanks first question is actually just wanted to touch back R&D gross and the volume sold seen this quarter. So my understanding is most of it came from sequential growth in Quebec regulation or Sosh think the sell integration mustaches somebody other product provinces. This quarter, it's a bit less than what I thought I just wanted to understand is.
Function of just timing for when you launched into those provinces and at this point now are these other provinces are they now meaningfully increasing their ordering of original sosh.
Well one of the challenges outside to back and I want to congratulate.
The the Sgc for how they manage their supply relationships are there one of the few that don't have this issue, but one of the issues is as Lps shale into retail networks.
So into other provinces outside of Qubec as those provinces load up the retail channel.
Some of the if theres any price adjustment or concessions need to be made or margin concession need to be made in the future those concessions don't flow through to the retailer and don't flow through to the consumer. So what that ends up doing is it ends up jamming the store with a bunch of inventory and then we can't reload. So in certain cases, we have.
Retail stores choosing to take a different manufacturer suggested retail price. So instead of taking a hexcel suggested price for original stash, they're taking prices that effective loss city and then in turn when we go to adjust than the province itself will present the price adjustment. So we are getting better on those things and we're learning more.
Our but that's causing that the slowdown outside of Qubec.
Okay. So we'll just be a continued they did a challenge for the next couple of quarters or is there something that can be addressed.
I think I'm just trying to street, yes, it's I think it's an industry wide challenge for the next for the next couple of months at least but we are seeing meaningful improvement.
In all provinces.
Okay. Thanks, and my second question Ed. Thank you adjusted some of the covenants and your term loan one of the ones mentioned was there some EBITDA related criteria within the covenants I'm just wondering your sand a if that has changed because I think in the prior credit agreement there were certain covenants related to EBITDA.
That we're going to come in at a certain point. So I just wanted to understand if you could kind of claims watch if Steve EBITDA covenant that they changed or what they are in the new Covent clinically Matt. Thanks.
We're in full compliance of all our bank covenants and we're working very closely with our banking partners there Super supportive both CRB CMO been fantastic to work with.
Thanks.
Your next question comes from a win Bennett with Jefferies. Please go ahead.
Good morning, guys and your first question is just on the requirement for additional funding over the next 12 months I was just hoping you could give it a bit more specifics around not assuming you hit.
The timeline for EBITDA positive how much costs, you think you're actually going to need and then second well.
It's just around or and pack. So those problems could you give any kind of color on the sales or market share trends that we're seeing today to bottom specifically thank you.
Thanks on from a cash need perspective, we certainly know what our wish list is versus the hard requirement from a wish list perspective, you'll recall I used to talk about for a global cannabis company.
Global kind of as dominance would require billions of dollars of capital axles now solely focused on being profitable in Canada, first and driving profitable operations here and to dominate in Canada and be one of the top players a wish list number is about $150 million.
The bare bones requirement could be quite a bit less than that significantly less so were worse waiting to see how the markets are going to respond how our ATM performs et cetera and in the short term. There is no cash pressure. So we're in we're in good shape in the in the very short terms. So we have a lot of options as well as a strong supporting shareholders.
From a brand perspective, we're not breaking down the success of specific brands.
What I can say right now is original stash of working very well and we're working on an appropriately launch that we're super excited about that will tie into.
Introducing more higher margin product, but also more advanced a 2.0 products into market appetite and of course hexcel keeps doing very very welcome back.
Thank you appreciate it.
Your next question comes from that Bottomley Canaccord. Please go ahead.
Hi, good morning, everyone. Thanks for taking the questions as Sebastian maybe just if you could provide a little more color on any sensitivity in pricing that you might have given that.
It seems like a lot of your peers are also starting to target. This value brand segment. When are you guys were first to do it but just as your recreational pricing seems to be offsetting overall market penetration growth is there sort of a bottom line price or that you guys have set that would be of concern given where the market going up or is the overall opex leverage and over.
Overall growth in your facility infrastructure expected to absorb a lot about pressure.
Thanks, Matt I, I think that hacksaws assets or some of the best in the world quite frankly, I've seen most of what's around and I think we can rely on that on our processes in our methods that given a set quality I really don't think most of our competitors can compete at the same price. So we're going to continue to drive.
Gross margin, we're going to continue to drive down Opex and as we do that I want to keep flowing through that value to our customers and our consumers and so as long as we maintain a portfolio gross margin above 40% or we're quite comfortable continuing to lower prices.
I think that the overall price in the industry is starting to stabilize because we've achieved with original stash had heck. So the the disruption of the black market and that has been a fundamental change and how people consume I product and so I think we'll though we'll start to see that stabilization.
On value add and I only think there's a heck so when maybe one or two other license producers that can compete in that segment because they have the asset base and cost structure to do so.
Appreciate that and just the second follow up question just respect with respect to your sales and marketing that basically came down to zero. This quarter over the last one I think about 6 million. So can you frame how much of that might have been upfront investment as you know during the launch of maybe candidates 2.0 versus any sort of change in strategy and how you allocate dollars to marketing.
Yes. The there was a there was a big change in strategy in terms of how we're doing a portfolio marketing. So we were marketing brands before really at the firm up from a top level from a corporate level. We've stopped all those activities and now we're taking product launches on a project by project basis and being very similar.
Dave and how we go to market and that's been very successful.
Original stash as one of the best performing product cannabis products of all time across all license producers and that was done on a shoestring marketing budget. So we were the marketing teams doing a fantastic job in doing more with less.
Great. Thank you.
Your next question comes from Johnson seasonal Bank capital markets. Please go ahead.
Good morning, just first question would be just on the positive if it no. Previously you had mentioned 800 store retail store. It is kind of the benchmark for being able to reach that I believe we're we're over that number now across Canada. So the question is is the current retail infrastructure enough for you to reach.
Deposit EBITDA or do you need more stores open and then Terry only and other provinces to get to that to get deposit EBITDA.
Well, John we'll certainly take more stores will make it easier I think the distribution of stores need some rightsizing, we're still probably overloaded a bit in Alberta and light in Ontario.
So at that that needs to be adjusted a little bit.
Given the the third pillar I really that that could balance out the store count is the competitive pressure. So as we start to see more and more license producers outside of Hexcel force filing for bankruptcy and failing that's creating less competition, which then allows us to gain more share in more sale.
And so given that continued trend.
Confident that with or without more stores weaken that we can get positive now without in mind that we do need more stores for the market and for consumers to be properly serviced in this country [noise].
Okay, and then has cooled and 19 impacted the progress of del Valle in terms of construction and bringing in equipment and everything else.
Did I hear you write that got no is now they actually producing 2.0 products for its first failing Alex I thought I would really for more testing purposes revenue producing for.
Distribution.
Yes. So we are we are pilot scale and got no and so what we did as we took our testing purpose facility.
And we're going to markets with certain products now, it's it's a more limited offering that will give you with a full scale and although at the intention is to manufacture everything from L. Bill.
Centrally and right now a construction is substantially complete which is why we've been able also to.
Do show, our Capex ongoing and go forward.
But the debello facility has been it's affected by co bid just in terms of the timing of inspections et cetera. So health, Canada of course completely occupied with a corona virus I'm completely understand the we're working closely with them to see how we can address that for licensing topline et cetera, and we're quite happy to see that there.
We're still doing they're good work.
Your next question comes from Douglas Mine with RBC capital markets. Please go ahead.
Yeah. Good morning, just wanted to go back to the stores for a second when you look at your EBITDA guidance with respect to say, Ontario, and I know that Ontario talked about 250 stores, we thought that was going to be a challenge to begin with but given the current.
Setting can you maybe tell us what youre EBITDA positive outlook is based on this it based on the 250.
And let's say if it were half of that would you still be able to meet your EBITDA outlook.
Yes, I think Ontario, so we're going to have a lot of challenges getting to that number they need to fundamentally fixed distribution center distribution center can't really support more than 40 50 stores at the end of the day, so at that that needs to be fundamentally upgraded its not just a question that store count you also have the reduced throughput of stores given the capital environment. So.
Away, which reduces that count so I think it's prudent to expect a slow rollout and that of course, all in the context of Covance, So which is de prioritizing store openings for the Ontario government effort for the moment.
So in terms of EBITDA positive as I've said I don't think at the store count is the only factor you need to look at you need to look at the total competitive environment, you need to be a market share of our of our new value offerings and our entrance into the higher end segments with our brands.
That should contribute meaningfully.
And so I'm not overly worried we don't need to get through a 250 store count in terms of a specific store number we're not disclosing or specific plan that will because everything is moving so quickly that we're adapting and real time.
Okay. That's fair my other question just has to do you you mentioned that you're having a real impact finally deal with market, especially and come back can you expand on that to give us a bit more details maybe with respect to pricing what type of marketshare, you're taking.
From the illicit marketing I'd be very helpful.
And I'll leave it there thanks.
Thanks for that we're really seeing new consumers come in where it comes down to an or conversations with Sq DC, we're seeing consumers that I've never shop to this Judy see start to walk in in a significant amount and they're walking in asking for original Sasha axle products and so that's really where the first success comes from a from a pricing perspective everything we do.
With the original stash line revolves around attacking the black market pricing. So we'll go out and we'll look at what the cost per Gram is on dried flower I will go look at what the cost per Gram is on hash for example, and we make sure to come in excise tax in with very competitive products and.
Totally I get calls from a with the launch of original Stash I got calls from black market dealers for the first time, saying what are you doing to our business and so that's when I knew we were succeeding.
Perfect. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the way. Your next question comes from Grand Crandon Eat capital. Please go ahead.
Hi, Good morning, and thank you for taking my questions here I just wanted to follow up question regarding.
The ongoing capital needs as well as the covenants I noticed from language Guy in the financial statements about an additional cognizant that was put in about.
About the need for $40 million rave, Bob on or before April Thirtyth. So I was just wondering if that covenant in the language in there that include the activities that were dying.
Towards the end of fiscal Q2, or if that's sort of out within the next 30 days here. Thank you.
Steve.
Ah Thanks to the question that so that $40 million, it's something that's required new money before the end of April.
The fund raising and capital raises we did in Q1 of I think it was good 130 million is outside of that and this is going to be new money.
Okay. Thank you for the clarification, there and then I just another question here.
Sebastian you mentioned earlier on the call. This significant increase at 22000 kilogram equivalents.
In Q2 I was just wondering if you could provide the breakdown of what the flower versus the other equivalents, while we're in that number. Thank you.
Yeah, So really excited about that actually so this and it. This is what's really signaling to me the bottom of the trough.
Is that we're now over half flour and that trend continued so you'll see you'll see continued improvement in our next quarter I believe.
And so so that you have a number of factors here sales increasing gross margin increasing asked the same time that we can get additional penetration with a value product and our fundamental problem a flower versus trim is getting fixed a the guys. An operation are doing a great job. So so all those things put together a couple of.
With the launch of new products is really giving me.
Giving me confidence here.
Appreciate the color. Thank you very much.
Your next question comes from Tom Foreign Policy I do see please go ahead.
Thanks, Good morning, I wanted to touch on your upcoming 2.0 launch I mean, the the majority or flower sales come from cut back the of course and provinces and allowing for most of the derivatives portfolio. So how do you think about capturing market share with your brands and other provinces.
So our brand strategy essentially is our original stash to displace black market and that's going to that's a national strategy, but as you've seen our launch in Ontario, whats harsh so we're taking products that.
Can be made with with other product than flower could come back is consuming most of the flower we produce.
And so we're we're maintaining that share we're going to add markets. One at a time from a flower perspective on top of that and then our 2.0 strategy is going to roll up into the upper brand outside of Tabak, which is going to have a full premium offering is how we're how we're planning on attacking attacking that so you should see that within the next two to three core.
Orders from a full rolled up perspective, the full portfolio rollout.
Okay. Thanks to my other questions on trust your level of cash injections expanded pretty significantly in the quarter can you give us an update on where trust is in terms of financing how much more it might need and also just how it's progressing on the operation side and when we might see those products smarts nationally. Thanks.
Yeah, I Trust Trust facilities are absolutely amazing it is the largest as far as I know beverage facility in the world and most advanced from an oxygen control perspective, which is critical when you talk about the quality control of your cannabinoids. So the beverages taste fantastic. There's a there's no added preservatives, which makes them a which makes them you've.
In more appealing we believe to consumers from a cash perspective trust has been funded with about $90 million. So far adds fully funded from both a capex and opex perspective for for the next while and that has been a of course those contributions came at 57% for Molson Coors, which remain.
In a very actively engaged in interest. So we're all very excited about what thats going to bring from a from a product launch portfolio. We have multiple brands going out so definitely in this calendar year, you'll have a full product launch, but expect some some select launches of select brands in the meantime.
Okay. That's great. Thank you.
Your next question comes from Andrew Carter with Stifel. Please.
Hey, Thanks, good morning, where to ask we've all seen a the anecdotal evidence, suggesting surge demand in Canada, and then significant increase what we had visibility here the U.S. markets, but can you give us a sense of how the provinces and retailers are managing inventories are you kind of seen a commensurate increase in orders from the provinces are they kind of taking a wait and see it.
Roche to the new environment.
Okay.
So the new environment, especially with coal bid has resulted in the province is asking for bigger load ins I think the provinces are being cautious as to a as to their supply chain given this uncertain environment.
And but the demand is real so when we look at the till sales were seeing meaningful throughput hexcel has been managing our provincial partners very closely because we have learned our lessons have not stuffing the channel.
And we are making sure to show you do these stores with what they need and what they can sell through the four necessarily responding to the aggregate purchase orders that are coming in so really focused on what sells through versus sell it.
Thanks, and then kind of second question now that you kind of transition to doing some of your second generation products. Some got now you obviously made that change a couple months ago kind of targeting a stronger kind of gross margin profile is this is this loss is leaning on this versus you know and <unk> waiting until theyre going to be a drag on that 40% gross margin target or could we expect.
The incremental launches here will be significantly increased accretive to your gross margin profile. Thanks.
No, it's not a dry gas or does actually should when it first comes on there's going to be a couple of months of negative hit to gross margin. When belgo first turns on because we're gonna have to take on all that amortization.
But then then it rapidly correct bellville is upside to our margin profile.
It's all a automated facilities, it's built for manufacturing it's in line processing to give you an idea the supply chain I mean today, our products get made in mass Sol go to Montreal for radiation go to Bellville for some packaging go back to mass all and then ship out to come back. So it's a five point supply chain. Once bellville is fully license we actually in house. So.
Not irradiation, we in house other inoculation techniques and sold the product has grown and methanol sent to bellville shipped to customers two or three point supply chain. So we're going to we're going to realize significant cost savings there.
Thanks, I'll pass it on.
Well you can fulfill question at this time. Please proceed.
Okay, well, thanks, everybody for joining the call I'm going to a and again by a wishing you in your families. The best of health keep staying safe and washing your hands as best as possible.
In the meantime, extra will continue to focus on our market share or operational effectiveness and our product innovation and look forward to talking to you next quarter.
Thanks.
Mmm. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.