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HEXO Corp. (NYSE:HEXO)
Q4 2020 Earnings Call
Oct 30, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. Thank you, all, for joining us for HEXO's fourth-quarter 2020 earnings call. Before we begin, we would like to remind you that certain matters discussed in today's call or answers that may be given to questions asked could constitute forward-looking statements. These statements are based on the company's current internal views, estimates, expectations, and assumptions.

These statements should not be read as assurances of actual performance or results. They involve known and unknown risks, uncertainties, and other factors that could cause actual results, performance or achievements to differ materially from current expectations and those implied by such statements. We would also note that we utilize certain non-IFRS measures in our financial reports, which may be discussed on today's call. The reconciliations between any such non-IFRS measures to be their closest reported IFRS measures are included in our MD&A.This discussion is qualified in its entirety by the cautionary notes regarding forward-looking statements and the risks factors that are included at the end of this morning's earnings news release and in our MD&A and [Inaudible] filled with our fourth-quarter 2020 financial statements on SEDAR this morning and which will also be filed on EDGAR.

Please review these materials for more information about forward-looking statements and the risk factors that could cause actual results to differ materially from our current expectations and those implied by such statements. HEXO 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 reason. I will now turn the call over to the CEO of HEXO, Sébastien St-Louis. Thank you.

Please go ahead, sir.

Sebastien St-Louis -- Chief Executive Officer

Thank you, operator. Good morning, everybody. I'd like to start by wishing everyone's safety and health as this global pandemic continues. I'm very proud of HEXO and the team for the dedication as we navigate through the ever-evolving and unpredictable environment.

The safety of our team is always our first priority, and we're operating within the confines and processes we put in place at the start of the pandemic. We established COVID-19 response team, which manages the company's information flow of COVID-19 updates, reviews, public health, and safety protocols, and we've developed the action plans to mitigate risks. We transferred all functions, which we can do to work from home and operate purely from that stay-at-home mode, web-based and teleconferencing platforms. And our functions, which require on-site activity, we increased focus on social distancing, and we added personal sanitation station and provided additional PPE.

We also implemented travel restrictions and quarantines while traveling. And importantly, we initiated a Hero Pay program to support our cultivation and manufacturing employees who continue to work during the pandemic. Despite the many dire economic and social consequences the pandemic has caused the cannabis industry continues to grow, and that's a testament to the consumer demand for safe and legal product that we offer. Industry has a $2.9 billion run rate and continues to grow.

We remain in a top-4 market share position, closing in on the third spot and increasing the gap between number -- ourselves and the No.5 and No.6 LPs. We've been deliberate and selective in our launch of 2.0 products. We've launched vape pens, our hash products, and they've been overwhelming successes, great quality reviews, and we are No.1 in the hash category. We continue to lead the way with original stash, including our 28-gram package format, which is a high-quality consistent product, priced to compete directly with the illicit market.

This was an industry-first, and HEXO will reset the Canadian market for dried flower as a result, many of our competitors scramble to duplicate our efforts. Our hash product is a market leader, delivering a phenomenal head high, super clean, very little body buds, reminiscent of the best Montreal hash of the decade. We're the first company to roll out nationally, and we have the largest market share. Again, we're competing with the black market, but are delivering a high-quality product at CPG scale.

We have a plan for further hash line extensions to come. We've also launched a COVID-friendly share pack of pre-rolls, setting the bar for competitors and lighting the way for consumers to enjoy high-quality pre-rolls in an affordable 12-pack. Our up products are a great example of our focus on COGS while we deliver more value to the consumer and begin to move up market while introducing higher consumer promises. We increased the average revenue per gram this quarter from $2.22 net to $2.95.

We continue to focus on driving that as high as possible. Beverage is a category that I'm extremely excited about, especially this last quarter. Truss, our joint venture partner with Molson Coors is going very well, and we're learning a lot about this exciting new product category. We believe beverage represents a huge opportunity in cannabis, especially over the next several years, which is why it was so important to have a world-class partner, such as Molson Coors.

In early August, Truss began rolling out its range of THC and CBD-infused beverages across Canada. The portfolio of brands is suitable for a wide range of beverage occasions, and it's designed to appeal to both current cannabis consumers and those who are just beginning to explore the category. Whether it's helping people unwind, whether it helps to add energy to social occasions or it's part of your wellness routine, expect to find Truss products there. While the cannabis beverage market continues to develop and distribution continues to build, consumer feedback on the taste and performance of Truss' beverages has been overwhelmingly positive.

As of October 2, with only seven of 13 SKUs available, Truss has shipped approximately 0.5 million units of ready-to-drink beverages. In the three short months that HEXO and Truss, we have been in market with beverages, we have now become the market share leader at till sales. Outside of Canada, we intend to penetrate the Colorado market, and our current launch is teaching us a lot about becoming No.1. As powered by HEXO pushes into the U.S.A.

with Truss USA, we're proving our template for the low-capex, capital-light partnership strategy. Internationally, we also began selling flower into Israel, which contributed to $1.3 million of net sales in Q4. Beyond the top line, this year, we launched our truly world-class Center of Excellence in Belleville, which also houses our Truss operations. It has highly automated manufacturing capabilities, which are aimed at ensuring HEXO products are not just meeting the sizable market demand but that products will get to the consumer as fresh as possible.

Our customer demands HEXO's quality and value, and that includes a freshness component that competitors just don't have the supply chains to deliver. Matching timely supply and demand, down to the SKU level, is critical. This is an area of deep focus for us, and we believe we still need to get better. We understand the frustrations of our customers when they -- we introduced a great product in the market and then it sells out and they can't get access to additional supply.

As such, over the past several months, we've purposefully taken the time to better understand forecasted demand and to carefully optimize our production and supply chain. Our goal is to keep our most popular and successful products in market. So, our customers can gain access to these HEXO products over and over. We've been spending a lot of time ensuring that we're the best-positioned player to dominate the market in the future.

That means we've had to take some aggressive and proactive steps, particularly with our balance sheet at the end of the year. We've corrected our inventory levels to match supply to the market and have taken impairments on property, plant, and equipment. These will be discussed in more detail by our CFO momentarily, but I'm very pleased with our current financial strength and liquidity. While we strive for consistent positive EBITDA, we're also focused on learning from the past.

It's not our intention to overpay for assets or overbuild our capacity. With today's announcement, we feel we've put ourselves on a path toward positive earnings per share. Our capital-light global strategy to partner with Fortune 100 companies continues. While we aren't announcing any new partnerships today, it's a top priority here at HEXO, and we're in a meaningful – a few meaningful conversations with several potential CPG partners.

We have a lot of work to do. But the news is that our revenues are growing, our yields and volumes sold have improved, our normalized gross margin is healthy, and our costs continue to come down. Our adjusted EBITDA loss improved materially in the fourth quarter, and we hope to be EBITDA-positive very soon. Lastly, we've made investments in our team and recently welcomed our new CFO, Trent MacDonald; and Emilio Imbriglio to our board.

We have a fantastic team in place to capitalize on the opportunity in front of us. Let me pass the call over and welcome Trent now to run us through some financials.

Trent MacDonald -- Chief Financial Officer

Thank you, Sébastien. Good morning, all. I recently joined the company and delighted to be part of the management team. The innovation, creativity, and operational expertise I see here at HEXO is truly staggering.

I believe HEXO has an opportunity to become one of the largest cannabis-based companies in the entire world. Our view is that companies in a new and growing industry have to first gain a top market position with high-quality winning products, but they have to do so while controlling SG&A, at least that they hope to achieve consistent robust EBITDA levels. This has been problematic for the cannabis industry. At the outset, most of the larger LPs were able to build out robust teams, systems and infrastructure as if they were all going to be multibillion-dollar companies.

At HEXO, we have gotten ahead of the curve in rightsizing our SG&A, but we are not done. We cannot rest on our laurels. We continue to focus on this area, ensuring that we have the right processes, tools, and people to scale our top line without adding costs into the organization. While our company and the entire industry is focused on positive EBITDA, we also know this is only a first step.

We need to move past EBITDA and develop a clear path to positive earnings per share. That is why it is so important to focus on our balance sheet to ensure our EBITDA isn't attained off the back of a grossly high depreciable capital base. Throughout history, there have been plenty of examples with -- of companies with positive EBITDA who have failed due to the consistent and pervasive erosion of book value through interest and depreciation. This has been and will continue to be a problem for many larger cannabis LPs as time goes on.

At HEXO, we feel we are extremely well-positioned in this regard. With today's PP&E impairments, we believe we are or are near best-in-class in terms of reachable asset base, especially when compared to our potential future EBITDA, which, again, is clearing the path for positive EPS. Unlike many LPs, we wanted to stop piecemealing our inventory writedowns, PP&E impairments and goodwill and intangible impairments. We truly wanted to go into the next fiscal year with a strong balance sheet, putting the path behind us so we can focus on the future.

I believe we've done just that. And so, my top goals are to ensure we optimize the business, not just to get to adjusted EBITDA positive, but to achieve meaningful profitability on a per-share basis, and I see plenty of opportunities to do this. Starting at the top. This was a record quarter and year for sales.

Consumers, especially the everyday high-volume user, have turned to HEXO for quality products at retail. Our products have strong repeat purchase rates, and consumers are loving our 2.0 products. As Sébastien mentioned, we've sold out in many categories. And as we enter 2021, we are taking the opportunity to evaluate how to most effectively meet consumer demand at retail.

That means ensuring our production planning and demand forecasting is spot-on. We learned a lot about this in the fourth quarter, and we are taking some of those lessons with us into Q1. We have and are deliberately taking the time to get this right. And our margins follow suit.

While we are already a lean operator, we see opportunities across manufacturing, particularly packaging and in many areas like yield and concentration. We have launched an internal war on COGS with the goal to become best-in-class on a cost-per-gram basis. We want to be able to maintain high margins as we continue to grow market share in a price-competitive environment, and not just on our core products, but across all products. While the top line grows, we are also focused on the foundational aspects of our business, like IT, IT systems, and infrastructure, so we can reduce SG&A to become truly scalable.

From a liquidity perspective, we are in a great position. We had $223 million of working capital, including $184 million of cash, while our operational cash burn was only $3.8 million in Q4. In addition, we aren't burdened with high debt levels and the related debt servicing that goes along with it, which, as we all know, can diminish a company's ability to focus on strategic investments. So, I believe we are the best possible position to drive long-term shareholder value and can become the leading player in both Canada and beyond.

Lastly, I do want to speak to the reverse split we announced this morning. In relation to our continued listing requirements on the New York Stock Exchange, we decided on a one-for-eight reverse split, and we intend to have that completed shortly after our upcoming board meeting in December, while we -- where we anticipate it will be approved. We'll put out updates as necessary. Thank you, and we will now open up the line to questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Aaron Grey of Alliance Global Partners. Your line is open.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi. Good morning, and thanks for the question. First one from me. I just want to dig a little bit into the adult-use results, excluding beverages, it looks like net sales were up about 10% sequentially.

I know vape was partially attributable to the sales growth as well as the average sales price. But even without vape VAT, it looks like sales were up sequentially with a higher ASP. So, I wanted to get some color on some of the shifts you might have seen within your flower brands or whether it was hash, and just whether or not you saw any increase in your higher price flower brand versus the original stash during the quarter? Thanks.

Sebastien St-Louis -- Chief Executive Officer

Thanks, Aaron. We're really proud about the demand of the products. This really all starts with consumer demand. And the thing that's clear is that HEXO products are flying off the shelves.

The biggest thing we need to work on to improve go-forward is supply chain to ensure we're constantly in stock on all SKUs. So, the revenue-per-gram has really increased driven by vape. So, you're correct in that assessment, but also by some new higher-end flower products like original stash reserves. We're also driving -- we're driving a hash and 2.0 offerings, which are being very well-received.

Although, again, not in market all the time. So, the impact wasn't as big as we would have liked. So, what's interesting about the raise in the average price per gram is that we're clearly showing a way now that this is not a race to the bottom, that there is room for margin and that we are able to deliver that solid margin, excluding beverage, again, at a 42% adjusted margin. We're very pleased with what the team's been able to do while having one of the lowest average sales price per gram in the industry.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Great. Thanks for that. That's super helpful.

And then just looking at, you know, sales provincially. I know Québec is obviously a bigger promise for you guys. But Ontario has been another market that you guys have looked at. So, you're just looking at retail sales data from Stats Canada.

Ontario has obviously been an outperformer the past couple of months in terms of growth as additional stores have come online. So curious as to your efforts to kind of pick up share, you know, in that region and how that's gone. Obviously, it remains a rather competitive market, but a lot of opportunity there. So, I'd love to hear your insights in terms of opportunity for you within Ontario.

Thanks.

Sebastien St-Louis -- Chief Executive Officer

Yeah, Aaron. So, the strategy at HEXO was always starting our home market of Québec, and we remain the market leader in Québec and the preferred supplier to the SQDC. I think SQDC itself is continuing to grow stores at a very good pace. As far as Ontario, we're really excited about what Thomas and his team have -- are doing over the OCS.

Big focus on store proliferation, and we're also excited to be a big part of that journey. We're only at the start of that journey. So, this is maybe the second quarter where we're really starting to build up in Ontario, and we've made some really significant progress. So, if you look about three quarters ago, we did not have any meaningful share and now HEXO sits at around 5% market share in Ontario.

So, a meaningful start. And our plan, of course, is to hit the top-2 market share nationally, which would translate to about a 20 share in Ontario. We think with the investments in supply chain, we can get there over time.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Hanks. I'll get back in the queue, and pass it along to others.

Operator

Your next question comes from David Kideckel of ATB Capital Markets. Your line is open.

David Kideckel -- ATB Capital Markets -- Analyst

Hi. Good morning. Congrats on the quarter, and thanks for taking my question. First question, just going back to the provincial split here, Sébastien.

So, 5% Ontario in this quarter. Should we assume that the rest of the 95% is all Québec? Or do you have some share in Alberta and any other provinces?

Sebastien St-Louis -- Chief Executive Officer

Yeah, David. So, it wasn't 5% of sales for HEXO. I was saying in the overall Ontario market, HEXO accounts for 5% market share.

David Kideckel -- ATB Capital Markets -- Analyst

OK. Understood. So then maybe on that [Inaudible]. Are you able to break up, you know, your provincial split then with sales nationally?

Sebastien St-Louis -- Chief Executive Officer

So, I won't give you the full breakdown in every market. I can share that, in Québec, we remain the No.1 player by market share by volume, that's still north of 30% by kilograms by price. It will fluctuate month to month and quarter to quarter. We are listed nationally, but not with a full product offering.

So, the next priority is really to make sure that the full product offering gets everywhere and that we remain in stock. And that's really supply chain-driven. So, the good news is we have plenty of demand, and there's no demand problem at the moment.

David Kideckel -- ATB Capital Markets -- Analyst

OK. Great. Another question. I want to go down to beverages for a second here, and congrats on the launch of Truss.

I just want to, first of all, just for some housekeeping, rectify something. In your earnings release, it says sales for the quarter ended July 31 accounted for about 7% of sales for beverages. But in your prepared remarks, the rollout occurred August. So, I just want to rectify if you're speaking of 7% sales for the quarter ended, or since the commencement of the rollout, which was in August.

And after that, just my question is, what have you seen so far for consumer demand? Which types of beverages have been the most popular? Is it CBD, THC, high THC, low THC? Any color would be helpful. Thank you.

Sebastien St-Louis -- Chief Executive Officer

Thanks, David. Yes. So just for the housekeeping piece, you're looking at the quarterly numbers, but pre-August, we did have the VeryVell Drops in market. So those account for the nominal sales that you started to pick up.

In -- when we refer to the launch in August, that's the ready-to-drink portfolio, and it's been a phenomenal success. Again, so we were about three months later than some of our key competitors in really launching full -- or half of full portfolio nationally. But in those three months, measured at till sales, HEXO and Truss are now the market share leader. So, on a weekly basis, we are selling more beverages at the till than any single competitor in Canada.

So that's a phenomenal success and shows you the amazing work the Truss team has done on the portfolio. The portfolio is quite balanced. There's offerings for everybody. We have zero-calorie CBD beverages in our Sicilian lemon in VeryVell in the wellness line.

You have high-THC beer products available in Mollo which is a 5-milligram THC offering. And then you have quite a few other occasions when you start to look at our Little Victory products, which are 2.5, 2.5, so a one to one blend, which are made from real wine that's been dealcoholized. So very, very high-quality product, phenomenal taste. And on the kind of flavor-forward profile, then we went to House of Terpenes.

So, House of Terpenes has been a really interesting success. Our Limonene is probably the highest seller in that category. But we're also starting to see an interesting uptake on our more unique flavor profiles like our Myrcene product. So, House of Terpenes Myrcene is a cocktail we designed to appeal to a flavor-forward cannabis kind of serves.

It pairs amazingly with steak, and it's to go and replace kind of what you would typically take as a strong-alcohol occasion. So, what's been really interesting is that, first, consumers didn't know where to place that product. And the reactions were mixed. Some people were surprised.

There was a little bit of negativism. But as people have been trying the product and are learning to pair it with some heavier foods, they're really starting to enjoy that Myrcene product. So, we're starting to see sales pick up. What I think has really been successful in the Truss strategy has been the portfolio approach.

There's really something for everybody. Whether you're looking for zero-calorie, low calorie, wellness better for you, a THC CBD offering, there's something for everyone.

David Kideckel -- ATB Capital Markets -- Analyst

That's great color. Thank you, Sébastien. I'll hop back in the queue.

Operator

Your next question comes from Rupesh Parikh of Oppenheimer. Your line is open.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Good morning. Thanks for taking my question. So, I want to start out with the question just on liquidity. So clearly, you had a strong cash position at the end of June.

Is there any color you can provide in terms of what you expect to spend for capex and just how you're thinking about cash generation this year?

Trent MacDonald -- Chief Financial Officer

Hi, Rupesh, Trent here. Yeah, look, we have a pretty robust investment plan on capital over the next fiscal year. We continue to invest in our Belleville facility to ready ourselves for things that are coming, for both trusts and potential -- potentially other CPG partners. We want to continue to have operational efficiency on meeting product supply with that forecasted van.

So, we're still putting money into that facility and believe there's a real high IRR that comes with that spend. So, we're not scaling back at all on our path forward to capital investment.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

OK. Great. And then given that -- I think your Q1 -- I believe your Q1 just ended, is there anything you can comment just in terms of just Q1, how to think about it from a top line and from a gross margin perspective?

Trent MacDonald -- Chief Financial Officer

Well, we're not really giving guidance. You know, I think as an industry, the guidance has gotten a lot of people into travel. And so, we're trying to step back from that. Although we can -- we have said, and Sébastien repeated earlier, we are moving toward EBITDA-positive and continue to move that path.

Our sales are healthy. We have been taking the time to invest in that forecasted demand, and understanding it, and making sure that we can match supply. To Sébastien's point, earlier, we have launched lots of great products, 28-gram OS original stash was a great example of it where we went into market. Hadn't really anticipated the forecast demand to be as high as it was and ran out of supply.

And then, of course, all of our competitors duplicate our efforts and jump in and take some share. We don't want that to happen. We're too innovative in terms of our product development and product launches, a lot of money and time and resource into that process. And so, we don't want to be setting ourselves up where customers are disappointed because they don't have product to buy if they're trying it for the first time or coming in for a repeat purchase.

So, we're taking some real-time Q1 to get that right, to set ourselves up for longer-term success.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

OK. Great. And my final question, maybe for Sébastien, just on Cannabis 2.0. It's clearly good progress this quarter.

Just want to get a sense of how you're thinking about the mix as we go forward, you know, for the balance of the year. Not looking for guidance, but just anything, just qualitatively you can share in terms of how you think about the Cannabis 2.0 contribution?

Sebastien St-Louis -- Chief Executive Officer

Yeah, thanks for that. And absolutely, I can tell you where our focus is. We have been -- we've really narrowed the focus over the last two quarters at HEXO in order to really go deep in the areas and win the categories in which we play. You saw us redefine the market on flower completely, right? You almost have half of the market now that came behind us after we launched original stash at 28-gram last year.

And you're seeing us do it again on Hash and extracts. So overall, I think categories will be about 40% to 50% flower go forward. I think that's a solid number on dried flower. Pre-rolls, probably 15% to 20%; vape, probably 15%.

Then we think Hash can be a very significant part of what remains in the market. And those are really the four areas of the core focus that we do on our own. Beyond that, we're really looking to partners to add new products into market, and this is why we're thrilled to be with Molson on the beverage side, and that's working phenomenally with taking the No.1 spot of all LPs in Canada. The -- but overall, I think if you focus on those four top categories, you cover 80% of the market.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

OK, great. Thank you.

Operator

Our next question comes from Matt Bottomley of Canaccord Genuity. Your line is open.

Matt Bottomley -- Canaccord Genuity -- Analyst

Yeah, good morning. Thanks for taking the questions here. I just wanted to get a bit more color on the inventory write-offs in the period. Last quarter, there was none.

And in the quarter before, you had [Inaudible]. Just in that kind of, you know, period from fiscal Q2 to fiscal Q4, is this legacy, you know, dry bud that was written off [Inaudible] inventory in the interim period that would then [Inaudible] trying to find the timing of what exactly was written off and [Inaudible] your Q2 reporting? Or is this just, you know [inaudible] dry bud [Inaudible]?

Trent MacDonald -- Chief Financial Officer

Yeah. Again, Trent here. Look, if you look at what our Q3 balance sheet looked like, and we had been piecemealing this inventory writedown as a lot of LPs have been doing over the course of the past, you know, four to five quarters. When I came into the organization, it was the very first thing --even before I came to the organization that was the very first thing that I was looking at.

And Sébastien and I had a great conversation. The number of days sales and inventory that were sitting there Q3 comparative to our peers was, I thought, was relatively high, way too high, in fact. And I think that's still a problem across the entire industry. And look, we want to be able to move forward with a clean balance sheet.

And so, it was imperative for us to get that inventory down to a manageable level from a day's inventory and supply. Match that to our production plan for the coming year and where we think forecasted demand is going to be, and we're in a just a very, very, very healthy place. So across different categories, within -- with inventory, to answer your question, we looked at those that were -- had been slower-moving or getting a little bit aged in terms of freshness because that is a strategy of ours, and took appropriate writedowns where applicable. Again, the bigger, broader strategy here is to have a strong balance sheet.

And don't set ourselves up for future impairments and future writedowns. We want to come into the year with a clean, strong balance sheet and just move forward. And I think we've done that more than anyone else in the industry, quite frankly.

Matt Bottomley -- Canaccord Genuity -- Analyst

Understood. And then maybe -- do you have any color on -- because, unfortunately, with the accounting standards with all this share value adjustments that increased at time. Do you have an estimate of how much of that is cash versus noncash? Just sort of the reversal of previously, you know, increased equity or increased inventory on the fair value [Inaudible].

Trent MacDonald -- Chief Financial Officer

Well, most fair value adjustments are not on cash, as you know. It's an accounting standard versus us investing. We -- you know, we invest in cost, logical assets and cost inventory, and then we have to adjust to fair value-based on the market trends and what we as management are getting from industry news and industry data, and we adjust the inventory carrying balances accordingly. So, all fair value adjustments for the most part are noncash.

Sebastien St-Louis -- Chief Executive Officer

What's interesting, I think, Matt, is that the work we've done that Trent had led on the balance sheet is starting now to match the work happening in operations. There's an overarching strategy at HEXO, and my marching orders to the team are to make sure we deliver high-quality product. And that includes being able to deliver at the right cost, at the right potency, but also with the right freshness. So, making sure that consumers are continuously getting a fresh stream of product.

This quarter was incredibly significant, starting in Q1. Not only are we starting from a clean balance sheet, but we're not adding to the problems over the next 12 months. What's coming out of the greenhouse and what's being transformed being is done on an as-needed basis to the demand. So, we are really getting close to being able to supply in on a one-to-one demand and not repeat these mistakes of the past that all license producers have made were to accumulate a massive inventory stockpile that you have to write down.

So, I think on a go-forward, this is what really positions HEXO to win is that we are matching supply to demand.

Matt Bottomley -- Canaccord Genuity -- Analyst

Understood. And then just one more for me. On the buying patterns of the [Inaudible] business. Are you seeing any sort of [Inaudible], particularly with the Ontario and the [Inaudible] that roll through with their actual buying patterns? Obviously, I know it's going to be different with different SKUs and new product launches that you guys have done.

But just maybe overall, on average, is that something that is flowing through now where when we see these very attractive, you know, Stat Canada's numbers where every month, the Canadian industry is at a new high month over month, you know, is that something that's flowing through now in those provinces where retail stores are facilitating higher participation in the legal market?

Sebastien St-Louis -- Chief Executive Officer

Yeah, Matt. And I apologize if I don't precisely answer your question, you're breaking up a little bit at the front end. But I understand that you're asking like the additional total Canadian market demand and is that flowing through to LPs and I think definitely, one of the changes in the industry narrative that's important to note now. Sales at the licensed producer level are no longer limited by store growth.

I think our provincial partners have done a phenomenal job opening stores. I think they now have the most aggressive plan I've seen since the beginning of legalization to open more. So, don't misconstrue that. There is additional upside to opening more stores.

But the current growth of LPs, there -- we can grow within the current store environment. So, there is -- the logistics are now in place for us to do our job, which is phenomenal. In terms of seeing that flow through, I think what's really exciting is you're seeing HEXO being one of the very few licensed producers that are taking share. So, again, if you look at the market share listing, I mean, HEXO quarter over quarter, we grew our net sales 17%, and that's best-in-class.

We're right up there with the absolute best competitors. And the market -- that follows pretty closely what the market has done over the last couple of months. What's interesting is we're starting to see most of our competitors falter. Where HEXO has closed the gap with the No.3 competitor by market share, we've increased the gap between ourselves and the No.5 and the No.6.

There's still, as well -- and I talked about this last quarter, I think we're still going to see most smaller producers have a lot of difficulty over the next 12 to 24 months. And at the moment, those smaller producers account for about 30% of the total national share. So that's where you're seeing the national number grow faster than the top LPs like HEXO, in the smaller producers that are still hanging around and getting listings. But it's very challenging for these small producers to remain competitive.

They do not have the scale, they do not have the operating expertise, and they do not have the portfolio approach. So, I think in 12 to 18 months, that rectifies, that frees up that balance, 30% of the market to be absorbed by the top-performing LPS. And we are hot on the tails of that top-3 spot to ensure we're here for a long time.

Matt Bottomley -- Canaccord Genuity -- Analyst

Thanks, Sébastien. Very helpful.

Operator

Your next question comes from John Zamparo of CIBC. Your line is open.

John Zamparo -- CIBC -- Analyst

Hey. Thanks. Good morning. I wanted to follow up on the question about sales performance in F Q1, your comments about wanting to get the supply chain right and making sure you're always in stock.

Should we interpret that as you might not see as much of a sequential increase in Q1 versus what you saw in Q4?

Sebastien St-Louis -- Chief Executive Officer

Yeah, John. Thanks. We're working on it. So, we're not providing guidance either way.

But for sure, as part of an overarching strategy, we want to make sure that the year 2021 is a blowout and that we move up that market share ranking. So, I'm much more interested in making the top 3 position from a market share position, that the specific number on the quarter. Okay. Understood.

Maybe more of a housekeeping question. But can you help us understand how the accounting practice on trucks will play out over the next few quarters and when these results will transition to the equity pickup line rather than your P&L?

Trent MacDonald -- Chief Financial Officer

Sure. Let me answer that. We're still working through the license process. And it can't move over until that process has gone through its entirety.

So, once it does get its license, it will become a separate legal – well, it's separate legal entity now, but it will move to separate legal entity accounting. And therefore, to your point, it will come off of our results and come to equity reporting. I don't have an actual time line on that, but it is in process.

John Zamparo -- CIBC -- Analyst

OK. Got it. And then last one for me. Maybe you don't want to disclose the initial number, and that's fine.

But can you talk about how your large-format value products with original stash performed in the quarter versus prior quarter. It does seem like you said, Sébastien other competitors have really crowded the category. So, I'm trying to get a sense of how that performed quarter-over-quarter and how much of a priority for you is it to win that category? It sounds like it's maybe not so much and that you're focused more on higher-profit or more profitable items, but just would like to get your commentary there. Thanks.

Sebastien St-Louis -- Chief Executive Officer

Hi, John. Yeah, I think when we made the move last year, and we reset the whole market, right? Like there was no such thing as a $2 gram until HEXO created the category, with that 28-gram offering. And when we did it, the first comments were, OK, race to the bottom, never going to make any money. The next step in that evolution of our strategy, we proved that we could make money.

We proved that, that product could hold a 40% portfolio margin and was part of that portfolio margin strategy. We proved it again this quarter with the portfolio margin actually increasing. That's Phase 3. So, what's been interesting is all our competitors have kind of just brainlessly copied without understanding the strategy.

What we did is we came back in over top with a better feature set. So, we introduced original stash reserve. We're leveraging that now with the relaunch of our Up brand. So, we're super excited about that coming to market with the -- a very clearly defined feature set.

So Up flower is actually going to market with a guaranteed 20% plus THC. That's a first in the whole industry. So, it's never been done where flower has had a defined feature set under a brand. And we think that's going to be a phenomenal success and another opportunity to increase our price per gram.

So, the strategy as a whole, you asked me, am I trying to win value? No. Am I trying to win low-cost, high-quality product under original stash? Yes. And am I trying to gradually increase my price per gram by bringing back new feature sets continuing to innovate in market? Absolutely. And that's tracking very well.

As we dial in our supply to our demand, I don't really see the necessity to go invest in additional capital to build capacity for that race to the bottom. The capacity that we have coming out of our flagship grown in [Inaudible] is phenomenal product. And so that is to compete in that 28-gram format, quite frankly, a higher price point than most value of our competitors. A lot of my competitors have come in on that 28-gram format, and this is on the -- against the base original stash product.

They've come in at $99, and we're still performing very well at $125. You see consumers saying, "Oh, wow, the best value in that mid-market is really original stash. And then we have an opportunity, of course, to price even higher with the original stash reserve.

John Zamparo -- CIBC -- Analyst

That's very helpful. That's all for me. Thank you very much.

Operator

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

Andrew Carter -- Stifel Financial Corp. -- Analyst

I wanted to understand the inventory dynamics a little bit because you did outline pretty specifically where the writedowns were in the quarter by purchase or harvest. And if you add back the charges, you do have kind of a capitalized inventory growing $2 million. But I was kind of confused because you -- a lot of it was also a big drawdown on purchase inventory. So, I wanted to get an understanding of kind of where you were from suppl/demand in balance on kind of your supply chain internally as it stands today?

Sebastien St-Louis -- Chief Executive Officer

Thanks, Andrew. Yeah, the -- really, overall, we're in phenomenal shape, probably best-in-class from a suppl/demand mix on a go-forward basis after these changes to the balance sheet.

Andrew Carter -- Stifel Financial Corp. -- Analyst

OK. Sounds good. I wanted to also ask because, you know, you completed the ATM during the quarter, $34 million. But prior to the ATM, I think you had a net cash position of more than $130 million.

You're clearly on track with the business in terms of your expectations, and you have much larger goals in mind than kind of the streets giving you credit for. So, I'm not sure I understand why exhaust the ATM issuance late in the quarter at essentially a dollar a share. So, could you help us understand kind of the capital allocation here?

Trent MacDonald -- Chief Financial Officer

Yeah. The -- look, we -- unlike a lot of our competitors want to,again, going back to the balance sheet, ensure that we have a very, very, very strong balance sheet. And so that means liquidity. That means great working capital ratios.

And the cash was there, we could go-to-market at the time, and there was some demand for the ATM, and we took it, took that opportunity. We want to have to say that we've set ourselves up for the long term, and we have. And so, you know, we're not – you know, you never say never, but we're not -- we're in a great place. And so, our debt is not high.

We have very low secured debt at $30 million. We've taken care of the convertible debentures on our balance sheet. We've increased our cash reserves. We have strong working capital.

We've written down our our inventory. We've taken our impairments. We don't have any goodwill on our balance sheet at all. I mean, I would stay in that balance sheet up to any other of the larger LPs in the market, and then some.

That's what -- I think people just have to do their homework here. When you're thinking about HEXO, to your point, clearly, we're in a position of strength. And so, the ATM took place, and it was the right thing to do at the time, and now we're sitting in a tremendous position of strength.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Thanks. I'll pass it on.

Operator

Your next question comes from Douglas Miehm of RBC Capital. Your line is open.

Douglas Miehm -- RBC Capital Markets -- Analyst

Yeah. Good morning, Sébastien, Trent. Just as it relates to production capacity at Belleville, it looks like you have some significant plans here. And with your ability to get to No.1 on the beverage side, just want to make sure that you're going to be able to supply the market over the next few years.

Can you maybe give us a few details on how things are going there and capacity utilization?

Sebastien St-Louis -- Chief Executive Officer

Yeah. So, thanks very much, Doug, and good morning. So, one of the advantages of having partnered with Molson Coors on Truss is that they've come in with experience that did not exist and barely exists today in the cannabis industry as a whole. What they've done with that trust facility is staggering.

So capacity is not an issue for trust. There's really no -- we won't bump up against any capacity constraints on our bottling and canning lines for a long time, which was part of the strategy, ensuring that we could build a robust portfolio, not just for this year, but really for five years out, because we think beverages could be between 15% and 20% of the total category. Now, there's some meaningful things that need to change. From a regulatory standpoint for that to happen, we're convinced they will happen, but it's a matter of time.

And these are, for example, the five-beverage limit to purchasing. This is the broader distribution of CBD beverages outside of strictly cannabis stores. So, there's a couple of Domino's that need to fall. But when that happens, what's interesting, we've proven out we have the best portfolio now.

We've proven out that we can produce at scale. And so, the question -- and we've proven out we can get the distribution. So, with that regulatory -- when those regulatory hurdles come, we are really well positioned to make sure we're first. And perhaps even more excitingly, all those learnings can translate to the U.S.

So that whatever changes we see following this election, we'll be able to take advantage there as well.

Douglas Miehm -- RBC Capital Markets -- Analyst

OK. Perfect. My second question just has to do with -- I guess, what I'm interested in is how you've been able to move to a No.1 market share within -- and we know that there's not a lot of companies that are operating in the space on the beverage side, but maybe you could delineate why you believe that you've been able to, you know, take that No.1 share away from, you know, the large company in the space.

Sebastien St-Louis -- Chief Executive Officer

Doug, I'd say it really comes down to better products. I think the product portfolio is broader, so it's more appealing to a wider-range audience. I think we've done phenomenal work from the quality. So, if you look at the actual capabilities of our facility, we have a better ability to control oxygen into the product, which means better stability, better taste.

I think we put a lot more work into the taste of the product. So, for my personal taste, they taste better. So, we don't have any lingering cannabis taste. Our emulsion technology is better.

I think that we've made a better formulation from a calorie perspective. So, if you look at most of our competitors' products, you're talking 100, 150 calories a can. You know, we don't want that. And the millennials and younger generations, nobody wants to ingest 150 calories of sugar.

So, this is what's super exciting about taking a product like Mollo or either our 5-milligram THC offering or the light version of 2.5. Each of those beers, which tastes great, by the way, it's a light beer, but a bit more complex than your typical, say, Cores Light. So, a little bit of complexity to it. But that's a 30-calorie product.

So, it's absolutely phenomenal, right? Like when I'm -- I was at my cottage the other day, I had some friends having the chance to try it, and they were blown away that between Molson and HEXO, at Truss, we were able to create a product that was better-tasting that a lot of the flagship beer products out there at a fifth of the calories that also delivered a phenomenal head-high. So, I think it's just been the -- it's a confluence of a lot of things, and we have a lot of work to stay No.1. I think it's the No.1 leadership margin right now is still very tight. It's not a large margin.

And so, we'll have to work to continue to stay there to continue to innovate, and that's a big part of what we're doing with our powered by HEXO investments and the R&D investments that HEXO does behind the scene and the value that we contribute to the partnership.

Trent MacDonald -- Chief Financial Officer

And I'm going to follow up on Sebastien because what happens is that once people actually try the product, they're coming back for repeat purchase because of all of the things that Sébastien just said. But let's not discount the fact that, you know, getting into market across the country really comes down to our partnership with Molson Coors as well. You know, with the retail background, such as myself, I know that retail is about shelf space. It's about getting listings into market.

And if you don't have a wonderful partner, like we do in Molson Coors, that's going to be difficult. And so, you're seeing that with a lot of these other smaller LPs that are coming out with beverage, they're not getting the listings. They're not getting the shelf space that at Molson Coors is going to demand. And so that's what's been extremely helpful for us in terms of landing ourselves in the No.1 market share.

And then you see all the things at Sébastien said that that are holding us there and are going to help to build it because we're getting great repeat purchase and great uptake because of the flavor profiles and the mix of product.

Douglas Miehm -- RBC Capital Markets -- Analyst

Great. OK. Thanks very much.

Operator

Your next question comes from John Chu of Desjardins Capital Market. Your line is open.

John Chu -- Desjardins Capital Market -- Analyst

I just wanted to continue to touch on this, matching the supply and demand. So, it sounds like we're still not quite there yet as of, I guess, the end of October. But it also sounds like you're readjusting the strains that you're growing in terms of understanding what the consumers want. So then there's a process of waiting for that growth cycle to complete.

So is that cultivation part of that meeting supply/demand in place and that's the bottleneck of that supply side is just kind of a little bit for along the process. Is that the best way to understand that meeting supply and-demand process?

Sebastien St-Louis -- Chief Executive Officer

Yeah, John, thanks. I think the supply and-demand process is something we're going to be working on forever. It's not -- and let me qualify that. So overall, to more directly answer your question.

We are better now than we've ever been, and we keep improving on a day-by-day basis. However, the demand at the SKU level in-store fluctuates all the time. Consumers look for something new. They want to induce trial.

Some products, they love more than anticipated. Right [Inaudible] a lot with HEXO where we have a certain demand profile that we come up with our provincial partners, people go in and they try it, and then it blows the lights out and then, all of a sudden, they want four times more than what we thought they would. And so that creates a problem So, our response to that, strategically, if you focus on having this freshness strategy where we first started the genetic, to your point, and that's part of our blanker genetic lab, where we're continuously innovating and breeding new best-in-class strengths. That, by the way, is what came behind the new Up launch and our ability to promise a 20% THC and on.

That then feeds into our Masson-Angers greenhouse, which we've made tremendous progress in improving the -- so the cultivation team has done a phenomenal job there in improving consistency, yields, quality, yields -- and also the constant availability of fresh flower. So, if you look at what's available in market for HEXO, the -- you're always getting things that are packaged on fairly recently. And then the last part of that, which there's still a lot of progress to make there in the following two quarters, will be our Belleville manufacturing, which is primary pack and secondary packaging. And our strategy is to overbuild in those areas so we can move to a near-distant-kind packaging strategy.

And so, once we get all those elements together, then when I talk about supply and demand being an ongoing issue forever, it's really about having best-in-class planning ability and relationships with our provincial partners in which we've invested heavily. So HEXO has invested quite a bit in bringing top CPG demand planners, top CPG supply liners into our organization. And we believe, over the long term, that will form a moat, along with the top-level relationships that performing with our partners. And one of the reasons it's critical to make it into that top-3 market share spot over the long term.

John Chu -- Desjardins Capital Market -- Analyst

OK. That's very helpful. And then just a second question. So, it looks like the vape and Hash margins were a drag.

So, it looks like it's slower than flower. And maybe just give me a sense because I know it's early stages for both of those products. Will margins get to a point where both will be higher than flowers that sales volumes for both of those products ramp up? Or maybe just give me an idea of how they might rank in order of margin generation?

Sebastien St-Louis -- Chief Executive Officer

For sure. So, John, I think the thing with margin is right now, any new product launch, and this is a thing with cannabis companies, right? We're continuously launching new products. So, the margins are understated on the front end, right, because you're -- we're building for scale. And so just by the sheer lack of volume, meaning you dividing that margin.

There is a very few products [Inaudible] so margin looked particularly low. Both products, over time, and right I'm talking 6, 12, 24 months, will be some of the product that can really drive margin to be superior. And so, we're quite pleased actually with how that's tracking once it gets to scale.

John Chu -- Desjardins Capital Market -- Analyst

OK. Great. Thank you very much.

Operator

Your next question comes from Jesse Pytlak of Cormark Securities. Your line is open.

Jesse Pytlak -- Cormark Securities -- Analyst

Hey, good morning. I just kind of want to circle back to some of that commentary on kind of strengthening that internal supply chain and the stockout issue that you're kind of experiencing in the quarter. Just wondering if you could maybe just quantify a bit more what kind of an impact those stockouts had? And then just kind of the amount of time you think it will take to kind of strengthen those supply chain capabilities to reduce this.

Sebastien St-Louis -- Chief Executive Officer

The quantification, I'm not sure how relevant it is just because the number is staggering, right? So, the unconstrained demand for HEXO products, if we had an unlimited on-demand supply that was instant, now, that's impossible, right? Like no company in the world in any business can do that. But assuming you had unlimited supply instantly of anything, you're getting to a multiple of a multiple, right? Like, your sales then go -- it would not be unrealistic to say we could do it next. And this is what in the past has gotten us in trouble because we did not understand our supply chain well enough to avoid those pitfalls of giving, for example, unrealistic guidance because it was not constrained in the right way. So, this is why we're taking our time now, specifically through to Q1.

And I think over the next six to nine months, you'll have another significant improvement in HEXO's ability to deliver products to market, which will really unlock that demand. Now what's -- that's also in the context of a competitive environment where there are very few companies, I think, that are focused on matching that supply and demand. And so, should really provide a solid foundation for us to continue to grow sales.

Jesse Pytlak -- Cormark Securities -- Analyst

OK. Thank you. That's helpful. And then just kind of turning to the gross margin on beverage.

Just kind of wondering how we should maybe think about this on a steady-state basis and then just kind of the cadence to achieving that.

Sebastien St-Louis -- Chief Executive Officer

Yeah. Well, beverages are part of an eventual portfolio strategy at a 40% margin, right? So, you have to understand that this facility that we built with trust. So, the first step is being absorbed on the HEXO financials, as Trent discussed earlier. When Truss obtained its health Canada license and a stand-alone, those financials will consolidate up to Molson Cores.

And so, we'll come off of the HEXO top line. So, we will, hopefully, at that time, see net income out of that business come back on to our financial statements. But the margin, I mean, obviously, you're coming in, you're starting, you're dividing all that start-up cost on a relatively low amount of beverages pulled through the market. So, I think, for one, it will improve greatly and contribute positively over time to net income.

And two, it will not impact the gross margin of HEXO as soon as Truss gets their license because it will come off our financials.

Operator

Your next question comes from Adam Buckham of Scotiabank. Your line is open.

Adam Buckham -- Scotiabank -- Analyst

Good morning. Thanks for taking my question. So just one quick question for me. If we look at the quarter, it's hard to tell from your MD&A, but was the consolidation of Truss negative to adjusted EBITDA? Or was it backed out of the calculation? And if it was a negative, can you quantify the amount?

Trent MacDonald -- Chief Financial Officer

Yeah. No, there was no negative. The way we account for Truss is that Truss owes us back the net cost and burden on our P&L. So, it's an in-and-out.

So, the net is -- it's a zero-sum balance. It does, obviously, impact our margins as everyone has noticed. And again, to Sébastien point, that's because we're at low-volume, and, you know, we're in a CPG environment. So, you're burdening cost of goods with overheads.

And so when you have those fixed costs being applied to inventory, and it flows through the P&L as COGS on low volume, clearly, you're going to have negative margin, but that's just a scaling issue. As we continue to go forward and scale and continue to put product into production and into market, that takes care of itself. We anticipate fully that it's going to get to a healthy positive margin over time. And that when it comes off of our P&L and out of our books and we can sell it on an equity basis, that it will be -- it will eventually give us a really great return on that investment, and that's why we're in it.

Adam Buckham -- Scotiabank -- Analyst

Great. Thanks.

Operator

There are no further questions at this time. I will turn the call back to management for closing remarks.

Sebastien St-Louis -- Chief Executive Officer

Thank you, everybody, for joining the call. So, a great takeaway from our part, a big thanks to the whole HEXO team for the continued effort. I'm sure pleased with our No.1 position in beverage, our No.1 position in hash. So that's been phenomenal.

And again, we are tracking against our strategic objectives. So, when I measure this quarter against the top three things we said we wanted to do, which was be a top innovator, operate with a very healthy portfolio margin, and become a top-2 market share company. We've made progress against all three of those pillars. So again, closing the gap on that top 3, delivering an adjusted margin, so without the beverage of 42% at a gross margin level.

And on the innovation side, being first in a number of categories. It's really been a phenomenal quarter for HEXO. So, looking forward to delivering more and being able to really align on that over the following quarters as we start to talk about positive EPS and really show what this team can do. Thanks for your time, and we look forward to talking to you next quarter.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Sebastien St-Louis -- Chief Executive Officer

Trent MacDonald -- Chief Financial Officer

Aaron Grey -- Alliance Global Partners -- Analyst

Sbastien St-Louis -- Chief Executive Officer

David Kideckel -- ATB Capital Markets -- Analyst

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Matt Bottomley -- Canaccord Genuity -- Analyst

John Zamparo -- CIBC -- Analyst

Andrew Carter -- Stifel Financial Corp. -- Analyst

Douglas Miehm -- RBC Capital Markets -- Analyst

John Chu -- Desjardins Capital Market -- Analyst

Jesse Pytlak -- Cormark Securities -- Analyst

Adam Buckham -- Scotiabank -- Analyst

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