Hexo Corp
TSX:HEXO
Hexo Corp
TSX:HEXO
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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 future 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 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 [AIS] filed 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.
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 a 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 a number ourselves and the #5 and #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 #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 scrambled to duplicate our efforts. Our hash product is a market leader, delivering a phenomenal head high, super clean, very little body buzz, 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 hence begin to move upmarket 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 7 of 13 SKUs available, Truss has shipped approximately 0.5 million units of ready-to-drink beverages. In the 3 short months that HEXO and Truss, had 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 #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 we introduce 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 towards 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 -- in a few meaningful conversations with several potential CPG partners. We have a lot of work to do, but the good 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.
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 scramble to build out robust teams, systems and infrastructure, as if they all want 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 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 [ pre-fill ] asset base, especially when compared to our potential future EBITDA, which, again, is clearing a path for positive EPS. Unlike many LPs, we wanted to stop piecemealing our inventory write-downs, 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 1-for-8 reverse split, and we intend to have that completed shortly after our upcoming board meeting in December, 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?
[Operator Instructions] Your first question comes from Aaron Grey of Alliance Global Partners.
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, 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 brands versus the Original Stash during the quarter?
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 reserve. 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 has been able to do while having 1 of the lowest average sales price per gram in the industry.
Great. That's super helpful. And then just looking at 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 a 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 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?
Yes, 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, 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 3/4 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 a 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.
Your next question comes from David Kideckel of ATB Capital Markets.
Congrats on the quarter. 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?
Yes, David. So it wasn't 5% of sales for HEXO. I was thinking that the overall Ontario market, HEXO accounts for 5% market share.
Okay. Understood. So then maybe on that [indiscernible]. Are you able to break up your provincial split then with sales nationally?
So I won't give you the full breakdown in every market. I can share that in Québec, we remain the #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.
Okay. 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 in 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.
Thanks, David. Yes. So just for the housekeeping piece, you're looking at the quarterly numbers, but pre-August, we did have the very well 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 3 months later than some of our key competitors in really launching the full -- or half of full portfolio nationally. But in those 3 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 0-calorie CBD beverages in our Sicilian Lemon and Veryvell on 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 1:1 blend, which are made from real wine that's been dealcoholized. So very, very high-quality product, a 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 0 calorie, low calorie, wellness better for you, a THC CBD offering, there's something for everyone.
Your next question comes from Rupesh Parikh of Oppenheimer.
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?
Rupesh, Trent here. Yes, 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 Truss and potential -- potentially other CPG partners. We want to continue to have operational efficiency on meeting product supply with that forecasted demand. 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.
Okay. 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?
Well, we're not really giving guidance. 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 towards 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 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 went to 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.
Okay. Great. And then 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 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?
Yes, Rupesh, thanks for that. And absolutely, I can tell you where our focus is. We've been -- we've really narrowed the focus over the last few 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-roll is 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 4 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 #1 spot of all LPs in Canada. But overall, I think if you focus on those 4 top categories, you cover 80% of the market.
Our next question comes from Matt Bottomley of Canaccord Genuity.
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 [ looked itself ]. Just in that kind of period from fiscal Q2 to fiscal Q4. Is this legacy [indiscernible] that was written off or the new, I guess increases inventory in the interim period that were then written down, I'm trying to get the timing of what exactly was written off and [indiscernible] your Q2 reporting? Or is this just going back at the [indiscernible]?
Yes. Again, Trent here. Look, if you look at what our Q3 balance sheet looked like, and we had been piecemealing this inventory write-down as a lot of LPs have been doing over the course of the past 4 to 5 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 at Q3, comparative to our peers, was I thought was relatively high, well 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's was imperative for us to get that inventory down to a manageable level from a days 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 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 write-downs 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 write-downs. 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.
Understood. And then maybe do you have any color on because, unfortunately, with the accounting standards with all this fair value adjustments that increased over time. Do you have an estimate of how much of that is cash versus noncash? Just sort of the reversal of previously increased equity or increased inventory on the fair value from the [indiscernible].
Well, most fair value adjustments are not on cash, as you know. It's an accounting standard versus us investing. We invest in cost, cost biological 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.
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, what's 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 licensed producers have made was 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.
Understood. And then just one more for me. On the buying patterns of the [indiscernible] business. Are you seeing any sort of [indiscernible] the relationship, or any other color you can provide, particularly with the Ontario and the [indiscernible] retail stores -- [indiscernible] 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 [ Stat Canada's ] numbers where every month, the Canadian industry is at a new high month over month. Is that something that's flowing through now in those provinces where retail stores are facilitating higher participation in the legal market?
Yes, 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 license 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 #3 competitor by market share, we've increased the gap between ourselves and the #5 and the #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 is 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.
Your next question comes from John Zamparo of CIBC.
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?
Yes, 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?
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 -- 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.
Okay. Got it. And then last one for me. Maybe you don't want to disclose an actual 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.
John, yes, 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, okay, 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 grow in Masson-Angers in Gatineau, it's phenomenal product. And so that allows us 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.
Your next question comes from Andrew Carter of Stifel.
I wanted to understand the inventory dynamics a little bit because you did outline pretty specifically where the write-downs 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 supply/demand in the balance on kind of your supply chain internally as it stands today?
Thanks, Andrew. Yes, the -- really, overall, we're in phenomenal shape, probably best-in-class from a supply/demand mix on a go-forward basis after these changes to the balance sheet.
Okay. Sounds good. I wanted to also ask because 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 Street is giving you credit for. So I'm not sure I understand why exhaust the ATM issuance late in the quarter at essentially $1 a share. So could you help us understand kind of the capital allocation here?
Yes. 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 wanted to have to say that we've set ourselves up for the long term, and we have and so we're not -- 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 inventory. We've taken our impairments. We don't have any goodwill on our balance sheet at all. I mean I would stand 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. 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.
Your next question comes from Douglas Miehm of RBC Capital.
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 #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 your capacity utilization?
Yes. So thanks very much, Doug. 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 the Truss facility is staggering. So capacity is not an issue for Truss. 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 5 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 5 beverage limit to purchasing. This is the broader distribution of CBD beverages outside of strictly cannabis stores. So there's a couple of dominoes 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.
Okay. 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 #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 take that #1 share away from the large company in the space.
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've 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 at can. 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, Coors 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 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 than a lot of the flagship beer products out there at 1/5 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 number one. I think it's the #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.
And I'm going to follow up on Sébastien 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 getting into market across the country really comes down to our partnership with Molson Coors as well. 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 #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.
Your next question comes from John Chu of Desjardins Capital Markets.
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. 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's meeting supply and demand process?
Yes, 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 and this happens 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 4x 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 Brantford genetic lab, where we're continuously innovating and breeding new best-in-class strains. 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 greenhouse, which we've made tremendous progress in improving the. So the cultivation team has done a phenomenal job there in improving consistency of yields, quality of yields and also the constant availability of fresh flower. So if you look at what's available in market for HEXO, 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 few 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, just in time 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 planners 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.
Yes, it's pretty 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?
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 we're building for scale. And so just by the sheer lack of volume, meaning you dividing that margin over very few product [indiscernible] 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.
Your next question comes from Jesse Pytlak of Cormark Securities.
I just kind of want to circle back to some of that commentary on kind of strengthening that internal supply chain and the stock out 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 stock outs 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.
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 10x. 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 6 to 9 months, you'll have another significant improvement in HEXO's ability to deliver products to market, which will really unlock that demand. Now what -- 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.
Okay. 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.
Yes. 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 Truss. So the first step is being absorbed on the HEXO financials, as Trent discussed earlier, when Truss obtained its Health Canada license in a standalone, those financials will consolidate up to Molson Coors. 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, 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.
Your next question comes from Adam Buckham of Scotiabank.
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 a negative to adjusted EBITDA? Or was it back out the calculation? And if it was a negative, can you quantify the amount?
Yes. No, there was no negative. The way we account for Truss is that Truss actually 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 0 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 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 caused, 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 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.
There are no further questions at this time. I will turn the call back to management for closing remarks.
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 super pleased with our #1 position in beverage, our #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 3 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 3 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.