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HEXO Corp. (NYSE:HEXO)
Q1 2020 Earnings Call
Dec 16, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hexo Corp's First Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jennifer Smith, Director of Investor Relations at Hexo Corp. Ms. Smith, you may proceed.

Jennifer Smith -- Director of Investor Relations

Thank you. Good morning. I'm Jennifer Smith, the Director of Investor Relations for Hexo Corp. Thank you all for joining us this morning for our 2020 Q1 earnings call. We will start with a presentation by our CEO, Sebastien St-Louis, followed by a recap of our first quarter results by our CFO, Stephen Burwash, before opening the floor to questions from our financial analysts.

Before we begin, I would like to remind you that today's presentation contains forward-looking statements that involve known and unknown risks and uncertainties, and other factors that could cause actual events to differ materially from current expectations. The forward-looking statements are based upon and include the Company's current internal estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of fact.

Any statements contained herein or discussed during today's session that are not statements of historical fact may be deemed to be forward-looking statements. Such statements can often, but not always, be identified by the use of forward-looking terminology and similar words and expressions that are predictions or indicate future events and future trends, including negative and grammatical variations thereof or statements that contain certain events or conditions may or will happen, or by discussions of strategy. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to 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 its business plan; renew required permits and licenses, and related regulatory compliance matters; implement its growth strategies; obtain and maintain financing on acceptable terms; maintain and renew required licenses; maintain good business relationships with its customers, distributors, other strategic partners; keep pace with changing consumer preferences; protect intellectual property; manage and integrate acquisitions; retain key personnel; and relating to the Company's competitive advantage, the development of new products and product formats for the Company's products, changes in laws, rules, regulations, and the absence of materially adverse changes in the industry or global economy.

A more complete discussion of the risks and uncertainties facing the Company appears in the Company's annual information form and the Company's management's discussion and analysis for the three-month period ending October 31, 2019, which are now available under the Company's profile on SEDAR. Although the Company has based forward-looking statements on assumptions that it believes are reasonable, it cautions the readers that the actual results and developments, including the Company's results of operations, financial condition and liquidity, and the development of the industry in which the Company operates may differ materially from those made or 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 of the date of this presentation, the Company disclaims any intention or obligation except to the extent required by law to update or revise any forward-looking statements as a result of new information or future events or for any other reason.

Any forward-looking statement contained herein or discussed during today's session is expressly qualified in its entirety by the above cautionary statement.

I'll now turn the floor over to Sebastian.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Thank you, Jennifer. Good morning, everybody. During our Q4 call a few weeks ago we signaled several changes in market conditions and assumptions, created significant challenges for the legal market in Canada. We listed seven short-term strategic priorities that Hexo has initiated to ensure that we're addressing these challenges while preparing for the 2.0 market and targeting profitability in calendar 2020.

In Q1, we are very pleased to highlight that our increased focus on controlling our expenditures and cash burn have resulted in a decreased operating expenses of 25%, that's excluding restructuring costs. Revenue growth in the Canadian market continues to be hindered by slower-than-expected store openings. The Government of Ontario announced this week that they'll scrap the lottery system and start issuing licenses in the New Year. The AGLC will issue up to 20 retail authorizations per month as stores become ready. There could be approximately 250 stores opened by the end of calendar 2020.

Additional store openings in Quebec will start to alleviate market access constraints on the licensed producers. However, we don't believe that the retail channel will be substantially built until the end of 2021 or partway through 2022. The illicit market channel will continue to thrive until retail access is brought to the majority of Canadians.

Pricing levels have continued to decrease since legalization. Hexo has taken an aggressive stance on our pricing to increase our market share. We've launched Original Stash, a value brand now available in both Ontario and Quebec, that's designed to combat the illegal market and increase our overall share of the market.

Our aggressive pricing policies are designed to produce product returns and drive consumer sell-through, while addressing the needs of consumers that typically shop in the illicit market. While this has affected our net revenue and our gross margin over the last quarter, we feel that by doing this we will be able to significantly reduce the levels of unsold products currently in the supply chain, improve overall sell-through and continue to increase our market share across the country. This is having short-term impact on our gross margins and we expect the overall margin to increase once we're able to launch our 2.0 products.

We're changing the strains we're growing in production and bringing to market to meet consumer demands based on realized sales data from the last 14 months to help new sales. High THC products continue to drive demand. Given the nature of cannabis production, product mix changes can take anywhere from three to eight months before they are ready for consumers. We are a national player. We're now listed in all 10 provinces of Canada. And as I mentioned, Original Stash is in both Quebec and Ontario, and will soon be available in Alberta and B.C. We remain the preferred supplier in Quebec and hold approximately 33% market share.

Together with our partner Molson Coors, we've made significant progress toward launching beverages in Canada in the first half of calendar 2020. We're looking forward to making more announcements regarding specifics as we get closer to launch date. Beverages will be sold under several brands in a variety of flavors, which include THC, CBD, and combined THC, CBD and minor cannabinoid products. We pride ourselves for our commitment to innovation and quality, ensuring our consumers have access to the most reliable, consistent and safest cannabis products.

As such, our proprietary vape liquid formulations contain cannabinoids and plant-derived terpenes. That's it. We understand that the rooting agents found in some cannabis extracts are under increased scrutiny for having potential negative health impacts. We're conducting further research on safety given the reports of vape-related illnesses and we already have a robust product development protocols that include clinical testing aligned with good production practices and pharmaceutical-grade R&D, reiterating that our vapes will contain nothing but products found in cannabis.

We expect other form factors to follow, that will include ash [Phonetic], gummies, chocolates, other edibles. Along with taking steps to increase our top line, we are also refocusing on reducing and controlling our operating expenses and cash burn. During the last quarter, we were able to reduce operating expenses by 25%. While this reduction is impressive, we've taken further measures to keep costs under control, while we still continue to face the challenges within the infrastructure in the Canadian market.

Our team has been focused on streamlining operations to continue to drive down costs through the organization, implementing a capital-light structure where it strategically makes sense for the business, driving operational improvements in existing infrastructure, reducing underutilized space, and optimizing automation. We are diligently working toward reaching our goal of becoming adjusted EBITDA positives in calendar 2020.

Our Belleville facility is a key component in continuing to drive down our cost structure while also ensuring that we can meet the growing demand for our products by scaling up our processing infrastructure. We have received the license for the first phase of the facility and are continuing construction on the second phase. This would be for cannabis 2.0 products.

We've submitted our edibles licensing amendments and are looking forward to beginning production at the facility upon receipt. In the short term, we're completing test runs and preparing for the market in our Gatineau pilot facility, which is licensed for 2.0 products. To ensure capital needs of the Company are met, we recently closed a CAD70 million convertible debenture offering. In addition to outside investors, several members of the Board and myself participated in the offering, supporting our belief in the future of Hexo.

Additionally, we are in the process of setting up an at-the-market financing program, or ATM, to raise additional equity to build a capital reserve and fund our high-priority initiatives. The ATM is limited to 10% of the closing market cap of the company in the previous month. While these have not traditionally been used frequently in Canada, they are an excellent vehicle for allowing management increased flexibility in a capital raise, to lessen the impact on the market, typically incurring lower transaction costs with less onerous capital structures. They are becoming more and more popular for cannabis companies to use to raise capital.

As we prepare for the 2.0 market, we've taken a hard look at our forecasts, demand-based planning needs and current inventory levels. In light of the changes in demand and

downward pressure on the price of dried flower in the wholesale market, we've impaired our inventory this quarter by CAD25.5 million. By addressing these issues now, we're looking to provide greater transparency to our investors and more accurate financial statements.

As previously disclosed on November 15, 2019, upon discovery of the licensing issue in Block B of the Company's Niagara facility, inventory from Block B was quarantined and held back from sales. Inventory was kept on the books. And although destruction was a possible outcome, the Company has reassessed any risks related to such inventory and concluded that it is cleared for sale and will not be subject to destruction. Note that Block B in the Niagara facility is now fully licensed by Health Canada.

I'd like to hand the floor over to our CFO, Steve Burwash, to discuss our first quarter results.

Steve Burwash -- Chief Financial Officer

Thank you, Sebastian. Good morning, everyone. I'll start at the top of the income statement with revenue. The total gross revenue was CAD19.3 million for the quarter. That's a decrease of 6% over Q4. Gross revenue is net of CAD1.2 million in price concessions, as we continue to assess our pricing to drive sales volume and sell-through, and a return provision of CAD700,000 to provide for possible unsold inventory in the supply chain.

Net revenue was CAD14.5 million. Adult-use sales increased 5% to 4,196 kilograms from 4,009 kilograms in Q4. We are expecting to see overall volumes continue to increase with the introduction of Original Stash at the end of Q1. Distribution of Original Stash has expanded past Quebec with listings in Ontario and at the end of November, B.C. and Alberta will also have Original Stash. We achieved adult-use revenues per gram of CAD4.35 per gram, a decrease of CAD0.39 over the last quarter. This figure includes a provision for price concessions, which resulted in a reduction of CAD0.30 per gram and a provision for sales returns, which resulted in a CAD0.17 per gram reduction.

Cost of sales decreased 3% to CAD9.9 million compared to CAD10.3 million in Q4 '19. The fair value adjustment on the sale of inventory was CAD6.7 million, a decrease from CAD7.3 million in Q4 '19 due to a slight decrease in total grams sold. The unrealized gain on changes in fair value of biological assets was CAD7.1 million compared to CAD5.3 million in Q4 '19, as a result of an increase in estimated yields and production rates at Gatineau. This was offset by higher cost to produce in Q1, a typically lower yielding period due to humid conditions in the summer months.

In Q1 2020, the Company recorded an impairment loss on inventory of CAD25.5 million in the quarter. CAD16.4 million of this impairment related to excess supply of trim and milled products on hand when compared with our short-term demand needs. CAD4.4 million related to bulk purchased products, CAD3.4 million related to a surplus of oil products and CAD1.2 million related to finished goods samples, which are required to be archived by Health Canada. We are closely monitoring inventory levels as well as assessing applications for inventory in our 2.0 products and we'll continue to keep you updated on a quarter-by-quarter basis regarding any further impairments that may be required.

Gross margin before fair value adjustments for Q1 '20 was CAD4.6 million or 31.5% compared with a net revenue from sale of goods compared to CAD5.1 million, 33% in the prior quarter. This decrease is a result of the previously mentioned provisions on pricing and possible returns. We expect margins to improve once the launch of 2.0 products begins, which yield a higher margin than dried flower. Gross margin after fair value adjustments and the impairment was a negative CAD23.4 million.

Operating expenses. In G&A, we decreased to CAD16 million in Q1 from CAD23 million in Q4 '19. This reflects some of our cost control measures. Payroll was reduced by CAD1.5 million as a result of the consolidation of some of the Newstrike operations, we were able to reduce cost by a total of CAD2 million.

Professional listings and legal expenses decreased by CAD1 million. Q4 included an additional CAD3.5 million costs related to the Newstrike acquisition, which was not present in Q1 '20. G&A is expected to continue to decrease through 2020 from Q4 2019 levels as we continue to rightsize the business and refocus the business on achieving operational excellence by developing lean, repeatable, and scalable processes by leveraging IT. Marketing and promotion decreased to CAD6.2 million in Q1 from CAD9.5 million in Q4 '19.

CAD2.7 million is related to a decrease in marketing and promotional expenses during the period as well as a reduction in payroll of CAD700,000. We are continuing to evaluate our marketing activities. Stock-based compensation decreased to CAD8.2 million in Q1 '20 from CAD10.2 million in Q4 '19. Overall amortized compensation remains relatively consistent, CAD2.7 million of capitalized inventory during the quarter as it related to production in place.

The loss from operations in Q1 '20 was CAD58.5 million compared with CAD60.7 million in Q4 '19. The decrease was primarily related to the 25% decrease in operating expense that we've discussed, which was offset by CAD25.5 million inventory impairment loss. We are still focusing on reducing operating expenses and streamlining operations. In Q1, there was a restructuring cost of CAD3.7 million primarily related to severance and other payroll related termination costs.

Our cash position. At the end of the quarter, we had CAD73.5 million in cash, cash equivalents and short-term investment. Subsequent to the end of the quarter, we closed our CAD70 million convertible debenture private placement. And as we have previously mentioned, we expect to launch at-the-market financing in the near future. We are expecting additional capital expenditures of CAD60 million to CAD80 million primarily in Belleville and completing our work on the B9 expansion in Gatineau.

We expect sales to grow starting in Q2. And combined with our operational rationalization, it should lead our business to be adjusted positive EBITDA in calendar 2020. This is an estimate is -- that is based on the assumptions we have today regarding store count, operational improvements and cost savings. In these statements, the Q1 statements for 2020, we have released the press release and the notes of the financials, which have included a change in the deferred tax provision of approximately CAD14.4 million in Q4 '19.

We will be restating our Q4 '19 financial statements in the next few weeks. The adjustment is the result of an amalgamation of Newstrike into Hexo operation, subsequent to the end of the fiscal year effects to the deferred tax liability and share capital are realized.

I will now turn the call back over to Jen.

Jennifer Smith -- Director of Investor Relations

Thank you, Steve. We will now take questions from our analysts. Due to the large number of analysts joining us today, I would ask you to limit your questions to two at a time and you're welcome to rejoin the queue after we do that. Thank you.

I will turn it over now to our first question.

Questions and Answers:

Operator

Thank you. The first question is from Adam Buckham from Scotiabank. Please go ahead, Adam.

Adam Buckham -- Scotiabank -- Analyst

Good morning. Thanks for taking my question. So I was just want to start off on capex. Is there any changes to the CAD100 million to CAD110 million capex program for 2020? And could you provide some color on the magnitude of the expected step down in 2021? I understand it's far out, but any color you can provide would be helpful?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Well, yes. We have a couple of changes to the 2020 capex budget. They are items that we believe we need to do strategically and they are in the budget, but not approved to spend until we have the market conditions in their right conditions. 2021, we don't really have a lot of visibility as to what the capex would be in 2021, but it is not the same level of building at Belleville and Gatineau.

Adam Buckham -- Scotiabank -- Analyst

Okay, perfect. So just to clarify there, you're saying that there is additional capex required to the CAD100 million or you're deferring it -- some of it?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

So we have identified a couple of projects that would add to the CAD100 million, but it will depend on market conditions in 2020.

Adam Buckham -- Scotiabank -- Analyst

Okay, perfect. And then just following up on SG&A and marketing. So you're going to continue to control costs here going forward. But with 2.0 coming online, how should we be thinking about any additional costs that would be associated with that throughout 2020?

Steve Burwash -- Chief Financial Officer

I think with 2.0 specifically, you have to look at most of our cost related to that is -- you already see in our SG&A and R&D lines. So we are investing in the 2.0. The formulations are all mostly developed. In terms of capex, there is a limited amount, but that's within that CAD100 million budget you mentioned. And what we're -- we're confident, we will deliver our 2.0 strategy in a capital-light manner.

Adam Buckham -- Scotiabank -- Analyst

Okay, great, thanks.

Operator

Thank you. The next question is from John Zamparo from CIBC. Please go ahead, John.

John Zamparo -- CIBC -- Analyst

Thank you. Good morning. Sebastien, in the past you made comments about partnering with other Fortune 500 partners beyond just Molson Coors Canada. Can we get an update on those plans, please? I'm just wondering, are those conversations still happening? And if so, what's the major roadblock for other industries getting involved?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. Thanks, John. Conversations still definitely happening, in fact more players than ever that are interested in Hexo's strategy. The structure behind the strategy, we're certainly reevaluating. So in terms of our partnership with Molson Coors, it was a joint venture, which we're very proud of, and that has a -- that's executed some really nice beverage portfolio that I'm looking forward to speaking about.

But the -- what we learned is that the joint venture structure was quite heavy from a partnering perspective. So there's a lot of work that went into the structure itself. So we're starting to open it up with -- in our discussions with the Fortune 500s we're speaking with as to other possible structures and that seems to be resonating. So going down that path for the moment.

John Zamparo -- CIBC -- Analyst

Okay, understood. And then one housekeeping question. In terms of working capital and the Truss JV, what do you expect your capital contributions to be toward those over the next 12 months, let's say?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. So Truss has been funded with an aggregate of about CAD80 million to date, Hexo providing 43% of that capital. And we have a little bit of funding left to go. I think an aggregate funding of about CAD26 million left to go in that total. So -- which would leave Hexo with 43% of that, call it CAD12 million. And that covers both capex and OpEx. Also the capex has been deployed. The Truss facilities are gorgeous, 180,000 square feet of state-of-the-art beverage manufacturing in our Belleville facility.

John Zamparo -- CIBC -- Analyst

Great, thanks. And sorry, just if I can squeeze one more. So the working capital you expect over the next 12 months outside of that?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

The working capital is including in that CAD80 million, but we're not breaking it down, John.

John Zamparo -- CIBC -- Analyst

Okay, thank you.

Operator

Thank you. The next question is from Graham Erinoelle [Phonetic] from Eight Capital. Please go ahead.

Graham Erinoelle -- Eight Capital -- Analyst

Yes. Hi, good morning. Thanks for taking my questions here. I just wanted to dig a little bit deeper within the 2020 outlook expectation there. And I know there's a number of underlying assumptions and I was curious as to whether that considers the current derivative market environment in Quebec, specifically with what looks like a delay in the rollout of vapes and tighter limits on the restrictions around edible products. Thank you.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes, it does. That's a good point. So we're adjusting to that reality, which obviously puts a bit of downward pressure in the short term. As we're -- we are still planning out on rolling out our vape products, although that will obviously be outside of Quebec at first, and we do expect that once we can share the results of our clinical trials with the Government of Quebec, that will prompt good discussion.

Graham Erinoelle -- Eight Capital -- Analyst

Okay, thank you. And then my second question here is with respect to Original Stash, trying to look at the margin profile on that product and that becoming margin accretive on a consolidated basis. Could you help me understand sort of where the margin profile on that product is now and based on all of the work being done and the further efficiencies you're looking to drive at your existing facilities, how that's expected to trend over time because doing the simple math right now in terms of where our cost per gram sold, doesn't imply that there is a very accretive margin on what the expected selling price would be on that product. So, any color would be helpful. Thank you.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. We still think our total portfolio margin will be low-40s over the long term. There is some headwinds in the short term as we continue to get out to market as we continue to lower costs. We've been able to strip CAD25 million in cost out of the business in one quarter. I'm extremely proud of that. And we're just getting started there. There is tons of efficiencies to go get and that's a big part of the Original Stash story, something that will grow in margin over time as we remove costs, while continuing to deliver something that beats our black market pricing.

Graham Erinoelle -- Eight Capital -- Analyst

Okay, thank you.

Operator

Thank you. The next question is from Matt Bottomley from Canaccord. Please go ahead, Matt.

Matt Bottomley -- Canaccord -- Analyst

Good morning. Thanks for taking the questions. Sebastien, I just wanted to touch base on some of your commentary from last quarter and then, obviously, topping up for this, on the derivative roll outs and the leveraging of your Belleville facility. So my understanding is, that's probably going to be a mid-calendar year 2020 implementation at scale.

So what's the best way, or what are the -- maybe the leverage we should look at, that could potentially move the current run rate that you're at on your top line. I think your net top line is about CAD15 million. Is it Ontario, store rollouts, are there other factors that analysts should look at to try and handicap where exactly your top line might go prior to inflecting product out of your Belleville facility?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. I think you're hitting the two factors right there, Matt. So one is external, is the store growth that has to get the assumption right. We're thinking of 1,000 stores nationally still by the end of the year here. But the other one is internal, which is getting our Belleville facility fully ramped, and I think your assumption of mid-summer is a good one here until we really see that starting to kick in.

The good news is that from the original prototyping we're seeing the step change in cost structure is phenomenal. We're really seeing like our packaging throughput, which used to take to do a unit, I'll stay away from specific numbers, you'll see them in coming quarters, but where we used to do X units with Y people, you're doing now kind of 4x units with a tenth of the people. So Belleville facility is going to be -- we're very excited about. But it is taking a little bit of time to get everything up and running here.

Matt Bottomley -- Canaccord -- Analyst

Okay, thank you. And just a follow up more housekeeping. Just your cash balance. I'm not sure if you put out there what the number is today. I know you did last quarter. So is it appropriate to look maybe back of the envelope the CAD70-odd-million you had as of period end, the CAD70 million you closed and then if you look at sort of what your historical capex and OpEx burn was, the last couple of quarters, would that kind of put where your balance is today? I sort of have it between CAD90 million and CAD100 million. I'm just wondering if that's appropriate, if you can comment on that.

Steve Burwash -- Chief Financial Officer

Yes. Your range is good. We're just over CAD90 million.

Matt Bottomley -- Canaccord -- Analyst

Okay, thank you.

Operator

Thank you. The next question is from Chris Carey from Bank of America. Please go ahead, Chris.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. So it's -- I guess it's clear to me what the current strategy is for the predominantly flower portfolio and you are three quarters in Quebec, right? But I guess I'm trying to figure out what the differentiation or the pitch is to the other provinces, because -- for 2.0, because you're not really going to be able to leverage the core Quebec presence when you're going out with vapes and beverages. And so I guess for the back half of calendar '20, you're going to be going up against a lot of other companies also rolling out vapes predominantly. I guess I see the differentiation with beverages. But what's kind of the pitch and how do you see your portfolio differentiated relative to some others given that I think predominantly people are kind of focused on the same thing.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. So I think it's a two-part answer there, Chris. So the first part is the strategy overall when we're approaching the provinces is to take a portfolio long-term approach. So the idea that in dealing with Hexo, we can provide them better service, a better full range portfolio to address the various segments. So that's when you start to see in our branding with our UP products, all the way down to the value brand, Original Stash and our Hexo in the mid market.

We really touch on the whole portfolio. Same strategy is going to come in with beverage, but also with the 2.0 products. So having the full range, so you can shop in one place, lowers costs for the provinces, lower shipping costs makes it more efficient and we get products in front of consumers at a better price. That's the first part.

Then there is individual strategies on individual product lines. So specifically I mean beverage has really been a quality and segmentation strategy and when we roll that out with Truss you will understand. Definitely one of the best beverage portfolios in the world right now when that gets rolled out.

On the vape strategy, it has been one of safety. So we start with vapes with out clinical trials. To my knowledge, we're still one of only two companies that are doing safety trials for adverse reaction on our vapes. We're one of the handful of companies that is delivering a vape liquid that is pure cannabis. So no oils, no vitamin acetate, etc. So we are making a good bet on that, all that in the context of cost control. So as we've seen in flower, 2.0 we will be extremely cost competitive.

Your point is not lost on us. I mean, in vape there is currently well over 600 SKUs being presented at provinces. So we're coming right out of the gate as a hyper competitive launch. And this is symptomatic of having to compete against the developed illicit market and having many companies in the running. I think that starts to alleviate over the next year as we see more and more of the smaller producers really have to pick and choose where they focus. So for that part, I think we're in good shape.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Okay, thanks for that. And then I guess secondly, and this has been asked in several different ways, but maybe I'll try another approach. I'm just thinking about the revenue cadence into kind of the -- until you get to the back half of calendar '20. And I think there is a reasonable case to be made that volume should continue to sequentially grow, especially with new stores coming in Ontario around Q1 '20, we'll see when exactly they come out. But I guess your pricing is also going to sequentially go down just for no other reason than mix. If Original Stash is better, your average pricing should continue to trend down. And so I'm just trying to think about, it's just the situation where revenues could be flattish to slightly up for the next couple of quarters or if there is a case to be made that volume should really accelerate with some of these new stores coming online.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. I think, Chris, we've talked about the two main factors back when Matt posed this question. And so, definitely we need more stores, that's a -- that's guaranteed. And now you're seeing Ontario delaying store openings until April. So that's definitely a factor that could potentially affect -- well, not potentially. It will affect our ability to earn revenue in the near term.

In the medium term, we need to look at onlining our facilities. I mean, we've got CAD130 million sitting in Belleville of capex, of deployed capex, that is not operational right now. That's a ton of operational efficiencies that we're not living, which includes an ability to serve that volume across the country and that also not showing up in the near term, that's showing up in the medium term, which puts us about six months out.

I think that the third inflection is really the one of competition. As I've said in the previous quarter -- quarters, plural, I think we are going to see more consolidation in the industry. I think we're going to see a majority of licensed producers in the industry being troubled and that will, in the longer term, lead to a bit of a release valve on the competitiveness, so -- which will give us more room. So very confident now having the re -- popped up the cash balances to make sure we're one of the ones that make it all the way because I still see a future where there is four or five large licensed producers, Hexo being one of them, capturing a 20%-plus share of the CAD7 billion market. It's a rocky path to get there.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Okay, thanks guys. Appreciate it.

Operator

Thank you. The next question is from Scott Fortune of Roth Capital. Please go ahead.

Scott Fortune -- Roth Capital -- Analyst

Good morning. Real quick, any updates on the CBD or the mCBD [Phonetic] offering in the US and strategy there, you guys move out going forward here in 2020?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Our strategy is progressing really well, Scott, thanks for asking. And Steve was talking earlier about some specific capex initiatives that we're starting to reserve money from. So that is specifically US-focused formulations. Again, all the R&D work we're doing is going to apply in our platform technologies that we can sell to Fortune 500 companies. So that progressing very well and that's going to be a stay tuned in the medium term for the next steps on our US strategy, but we remain focused. Now that we've delivered 10 provinces in Canada, I'm starting to focus on opening up the US market.

Scott Fortune -- Roth Capital -- Analyst

Okay. And then real quick follow-up, can we expect revenues some time in second half of next year from this offering in the US?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

I think, let us demonstrate the revenue. I don't want to get into pseudo guidance. We're definitely focused on getting the supply chain robust and then we'll start hitting the quarters from a results basis.

Scott Fortune -- Roth Capital -- Analyst

Okay, that's it from me. Thanks.

Operator

Thank you. The next question is from David Kideckel from AltaCorp Capital. Please go ahead, David.

David Kideckel -- AltaCorp Capital -- Analyst

Hi, good morning. Thanks for taking my question. Just a couple of quick ones here. I'm wondering if you could provide any guidance with respect to your product mix, specifically, and going through some of your MD&A this morning with your key products from UP, Hexo and the Original Stash. Is there any trends you're seeing in the current marketplace that suggests what the relative percentages of customers' purchasing patterns are?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. David, I think you really have to look at what consumers want, that we've got a pretty good idea, but that has to be measured against both store openings availability and also regulatory ability to go in front of consumers. So with 2.0, I think most of the governments are still relatively cautious in their approach and more loosening of the regulations in the correct spots will allow us to get closer to what consumers are actually demanding and to close out black market. And to put numbers around it, I don't think it's changed overall. I think we should expect 50% of the market to be flower. I think the balance of your 2.0 products will be heavy vape, heavy beverage, and then a mix of edibles and innovative. So roughly split a third, a third, a third between vapes beverage and then a variety of other things that include pills, patches, etc.

David Kideckel -- AltaCorp Capital -- Analyst

Okay, that's helpful. Thank you. And I had a question also as well, just based on the Ontario government's announcement that came out last week, Thursday night, I'm just wondering Hexo's position here. We see now with the government opening up dispensaries throughout the province, but what are your thoughts regarding when it comes to the privatization or the wholesale model we see in Saskatchewan, for example, where the LPs, whether it's Hexo or any other have direct conversations with the -- say, the dispensaries. What is the Hexo's position on the Ontario government still having the so-called bottleneck in place, even though we saw good news coming with the number of dispensaries increasing. There is still the government as the middle person in the middle, so to speak. So if you could just give any color with respect to what your position on that is.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. I think the government is in an incredibly difficult position. Much like licensed producers today, we're in a transition piece after this first year of legalization where we've enacted a lot of changes. You see it in Hexo. We've stripped out a ton of cost. We're putting our capex online that will bring more operational efficiency, we are lowering price, but you don't see it in the numbers for the next so many months. And I think with the government, it's the same idea. They're making a good strategic shift to go into privatization but there still some meaningful improvements they need to do in the distribution channel. And I think that will take a number of months to surface.

David Kideckel -- AltaCorp Capital -- Analyst

Very helpful. Thanks for taking my questions.

Operator

Thank you. The next question is from Brett Hundley from Seaport Global. Please go ahead, Brett.

Brett Hundley -- Seaport Global -- Analyst

Hey, good morning guys. Steve, I just have two questions for you. My first is on profit timing in 2020. My expectation is that you guys would reach that profitability during the back half of the calendar year. Well, I guess late summer. And my question is, do you think that we will see that profitability in one of your later quarters during the fiscal year, or do you just anticipate reaching that profitable level at some point during the year?

Steve Burwash -- Chief Financial Officer

Yes. So what we've guided is that we're going to reach positive EBITDA in calendar 2020. We haven't pinned it down any further than that.

Brett Hundley -- Seaport Global -- Analyst

Okay. And then separately, did you guys run an impairment test for Niagara during the quarter or will that be pushed to the end of the fiscal year?

Steve Burwash -- Chief Financial Officer

We ran an impairment test in Q1.

Brett Hundley -- Seaport Global -- Analyst

Okay, great. Thanks so much.

Operator

The next question is from John Chu of Desjardins. Please go ahead, John.

John Chu -- Desjardins -- Analyst

Hi, good morning. So Sebastien, you mentioned that you took out a lot of OpEx costs in the quarter, but you also said that there is tons of other efficiencies that you can get as well. Could -- maybe some more details on that and how quickly do you see additional efficiencies being drawn out of the system?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. So the early focus, John, was really to cut the -- kind of cut at the senior level, make the pyramid a little wider and less pointy at the top from an SG&A perspective. So still you've seen a lot of severance, etc., built into those cuts. We haven't start to live that. The future cost savings, I'm taking really above the line, so on our gross margin. So as we start to online, I've talked about Belleville, for example, you've got a CAD130 million of capital there that's really just going to drive efficiency. So once that starts to hit, I think it hits really above the margin. There are some nuances still to do some massaging to do below the line, so into our SG&A still. So, we're keeping an eye on that. But the majority of the costs below the line have been taken care of.

John Chu -- Desjardins -- Analyst

Okay. And then just on the price adjustments and the [Indecipherable] return provisions that you've been taking. I mean, are we starting to see that settle down a bit or is there still more to go in the upcoming quarters?

Sebastien St-Louis -- Co-founder and Chief Executive Officer

I think the pricing we've taken a really good direction on it. I think we're working better than ever with the provinces in figuring out how to price things so that it moves. We've moved away from channel stuffing very well. So now, when we're loading the stores, it's what consumers want and they get start to purchase. There is still some work to do especially outside of Quebec and actually getting those pricing adjustments in front of consumers.

So there is a nuance where pricing adjustments in stores -- for example, in certain stores in Ontario and Alberta, even though we can cut or adjust our pricing, that pricing hasn't been presented to consumers because the stores don't have a way to live that pricing adjustment. So that will take a bit of time to work itself through channel, but then we should be in pretty good shape.

In terms of kind of future-proofing against future price adjustments, I don't think it's safe to assume that they're are all done. But with in mind, we're closer than ever to good price. And a good indicator is that we're below black market pricing. So once that happens, you lose one of the key reasons to keep driving that below. So I think you will see pricing stabilize around where we are now.

John Chu -- Desjardins -- Analyst

Okay, thank you.

Operator

[Operator Instructions] And the next question is a follow-up from Chris Carey of Bank of America. Please go ahead, Chris.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Hi, thanks so much for taking my follow-up question. I just had a question on the partner strategy. I guess a couple of years ago when legalization of cannabis in other markets wasn't so obvious. The strategy is kind of clear to me, develop competitive advantages, develop IP, etc. But as we get closer to, say, maybe US legalizes federally in the next one to two years, other countries globally to be determined, but how has that conversation evolved. I guess in a similar vein of a question I asked earlier, what's the pitch to Fortune 500 company today for them to invest into Hexo versus, say, waiting another year or so until the legal landscape is a bit clear? Thank you.

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Yes. So quality, supply chain and technology is really the pitch that we're making to these -- to our future partners. So from a quality perspectives, one of the biggest mistakes we've seen in the US markets have been emerging brands starting to source from multiple different producers and losing track of their quality. We've seen some of the top brands just vaporize because of that. Hexo can solve that for Fortune 500 companies. So we're going in, and we can provide steady supply, we can guarantee pesticide free and we can guarantee the same quality across various states.

The next piece on the supply chain is a chain of custody, in a world where there is gray market, black market, white market and everything in between, Hexo is able to validate the supply chain for our Fortune 500 partners. And in an extremely complex regulatory environment, we guarantee that our partners are operating legally.

The third is one of technology. So we are well ahead of the curve with our emulsion technologies and a few more platform-based technologies that we can include as part of the supply so that we can make innovative products that taste better, work better and get in front of consumers. All these things leads an advantage that's way beyond one year. I think that Fortune 500 companies or any company that choose to go without a cannabis partner will face extreme headwinds. And I think that will become clearer and clearer as our portfolios with those partners like Molson hit the market.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

That's helpful. Thanks, Sebastien.

Operator

Thank you. There are no further questions. You may proceed.

Jennifer Smith -- Director of Investor Relations

Great. Thank you very much for joining us today, everyone. We look forward to speaking to [Phonetic] you. And should you have any other questions, please don't hesitate to reach out.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Jennifer Smith -- Director of Investor Relations

Sebastien St-Louis -- Co-founder and Chief Executive Officer

Steve Burwash -- Chief Financial Officer

Adam Buckham -- Scotiabank -- Analyst

John Zamparo -- CIBC -- Analyst

Graham Erinoelle -- Eight Capital -- Analyst

Matt Bottomley -- Canaccord -- Analyst

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Scott Fortune -- Roth Capital -- Analyst

David Kideckel -- AltaCorp Capital -- Analyst

Brett Hundley -- Seaport Global -- Analyst

John Chu -- Desjardins -- Analyst

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