Yahoo Finance HEXO Corp. (HEXO) Q3 2019 Earnings Call Transcript
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HEXO Corp. (NYSEMKT: HEXO)
Q3 2019 Earnings Call
Jun 13, 2019, 8:30 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to HEXO Corp's Third Quarter Fiscal 2019 Earnings Call. After the presentation, we will conduct a question-and-answer session. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Thank you. Please note that this call is being recorded today June 13, 2019 at 08:30 A.M. Eastern time.
I would now like to turn the call over to Jennifer Smith, Director of Investor Relations at HEXO Corp. Ms. Smith, you may proceed.
Jennifer Smith -- Director of Investor Relations
Good morning, everyone and welcome to HEXO's third quarter earnings call. We will start with a presentation by our CEO, Sebastien St-Louis, who will recap the Company's third quarter results, the recently completed acquisition of Newstrike Brands Ltd and our financial outlook before opening the floor to questions from financial analysts.
Before we begin, I would like to remind you that today's presentation contains forward-looking information that involves known and unknown risks and uncertainties, and other factors that could cause actual events to differ materially from current expectations. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the Company appear in the Company's annual information form, and the Company's management discussion and analysis for the three and nine month periods ended April 30, 2019, which are available under the Company's profile on SEDAR. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. The Company disclaims any intention or obligation, except to the extent required by law, to update and revise any forward-looking statements as a result of new information, future events or for any other reason.
Sebastien?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Thank you, Jennifer. Q3 was a busy quarter. Our vision to become top three global cannabis company and top two in Canada, is based on three pillars, operational scalability, product innovation and brand leadership. Our investments in our resources, technology, infrastructure, and especially human capital is critical to achieving that goal and through this quarter, we've made meaningful progress.
Under the direction of our Chief Innovation Officer, Veronique Hamel, we're continuing to expand our R&D and innovation team with top scientists, chemists who have extensive experience in CPG companies such as Kellogg's, Church and Dwight, Coca-Cola, Philip Morris, Campbell's Soup, Smucker's, that's just to name of few. We now have 25 PhDs on staff. They're focused on developing new and innovative products for the market, best-in-class technology for our Powered by HEXO experiences.
Building on our innovative technology is critical in building brand. We believe that brand will be the final moat by which CPG cannabis companies are differentiated. But in the meantime, those products and that moat will be built on distribution and technology. Having consistent quick on and quick off cannabis experiences that include sleep, sport, focus, diet, sex and fun delivered through a full range of Powered by HEXO products is what we're striving to create. Developing these experiences in partnership with Fortune 500 partners through our hub and spoke is how we're going to achieve that goal.
We've added key people to the team with extensive leadership and CPG experience, including our new COO, Donald Courtney, notable experience at Mars, Pepsi Bottling Group and also as the Head of MedReleaf. As well, we've recently welcomed Michael Monahan, as a newly appointed Chief Financial Officer. Michael's guidance will help the Company drive our global strategy moving forward, based out of the US and he brings his wealth of experience from privately held and public companies such as Nutrisystem where he had a very successful exit.
We have recently secured about 200,000 kilograms of hemp supply for CBD and non-THC cannabinoid extraction in fiscal 2020, and closer term, we've done a secondary supply agreement of approximately 60,000 kilograms of hemp to be supplied in the next two quarters as we prepare for the upcoming demand in edibles and concentrates pending legalization in October in Canada. Our hemp supply chain is a critical element to our strategy to be in eight US states in 2020 legally through traditional non-MJ channels. We're looking forward to the following months so that we can elaborate on that strategy.
We've signed a multi-year extraction agreement with Valens to extract a minimum of 30,000 kilograms in year one and 50,000 kilograms in cannabis and hemp biomass in year two. So this helps to smooth out our operating ramp up and curves as we expand our production to our near-term target of 150,000 kilograms and prepare for the legalization of edibles in October. Note that our Belleville site that I'll speak about later in the call will actually be built to support the extraction using all types of extraction technologies for about 375 tons of processing capacity annually.
We're the first cannabis company to join Food and Consumer Products of Canada, which is the largest voice of the Canadian food, beverage and consumer products industry. We welcome the addition of 374 new employees, which brings our headcount to 822 employees at the end of Q3, and today, I'm very proud to say that the team has grown to 1,100 and everyone is working very hard. I thank them very much.
We continue to expand our CSR initiatives, focused on being good corporate citizens. Our support has helped to ensure that those who depend on the services of Moisson-Outaouais and the Ottawa Food Bank will continue to receive the necessary access to fresh sustainable food using environmentally sound technology. Our customers remain our focus. To date, we have sold over 7.5 million grams of adult-use and medical cannabis to Canadians who depend on our safe reputable and high quality products. Adult-use grams and grams equivalent sold increased 9% to 2,700 from last quarter as we continue to expand our distribution across Canada.
Q3 2019, we produced approximately 9.8 tons of dried gram equivalent, so 9,800 kilograms, a 98% increase from the previous quarter. That was due mainly to our increased yields in our 250,000 square foot B6 greenhouse and also our first harvest of 1 million square foot B9 greenhouse. First harvest, I remind everyone, that happened five quarters out from us announcing that we would build that facility, one of the fastest build-outs of a large scale modern cannabis facility on the planet.
We're preparing for phase two of the Canadian adult-use market with the legalization of edibles and concentrates, which is expected in October 2019, although there is some timing risk to that date, we may see a delay from a regulatory perspective up to 60 days pushing us into December. We are developing gummies, a premium vape line and a line of cannabis-infused beverages with Truss, our joint venture with Molson Coors Canada. We remain focused on delivering net revenue in fiscal 2020 of over CAD400 million and that of course excludes Truss Beverages.
Subsequent to the end of Q3 2019, we completed the acquisition of Newstrike, providing us with the near-term increase in production to a 150,000 kilograms annually, expanding our cultivation to three campuses, giving us resiliency and redundancy and giving us access as well to nine provincial agreements, so now reaching over 95% of the Canadian population and increasing the HEXO family by approximately 250 employees.
I mentioned Bellville earlier on the call, very proud to say we are on track. Phase one was online in May as planned and we plan on having the building fully operational by default. That will include not only HEXO core operations in about 580,000 square feet but also the Truss, Molson Coors joint venture which we are expecting to have a full line of bottling and canning made available to be ready for October legalization should regulations allow. A 1.5 million square foot facility will also allow future Fortune 500 partners a licensed, centrally located facility optimized for their specific manufacturing requirements. Looking forward to sharing the future on our future partners.
It was very exciting announcement this morning. We announced that HEXO was now officially international, licensed in multiple jurisdictions with our Greece update. So, we announced that HEXO MED has received its medical cannabis installation license in Europe and that's another step toward our plan of providing regulatory access to Fortune 500 companies, so that we can use their existing distribution networks in countries such as the UK, France and all supplied from a European domicile.
Financial results. Our total gross revenue was CAD15.9 million for the third quarter, an increase of 11.8 times over the same quarter in the prior year. As I guided, last quarter gross adult-use revenue remained flat at CAD14.6 million in comparison to the same period in 2018, it increased by almost a 1,000% which included only medical sales last year. We expect revenues to double this quarter with real life sales from the first harvest from B9 in our 1 million square foot facility, and also as we start to shift flower outside of Quebec which we're very excited to do.
Sales volume increased 9% to 2,700 kilograms from 2,500 kilograms in Q2. Flower and dry products accounted for about 84% of gram and gram equivalents sold during the quarter. Oils accounting for the remaining 16%.
We achieved adult-use revenues per gram of CAD5.29, a CAD0.54 decrease over last quarter due to a shift in product mix and 91% of our sales were done in Quebec with 9% coming from Ontario and BC, reminding everyone that we had not begun starting selling flower in Ontario and BC.
Cost of sales remains quite consistent with the prior quarter about CAD6.6 million, including the cost of dried flower and the transformation costs related to oil and value-added products. The fair value adjustment on the sale of inventory was CAD4.7 million, which has increased from CAD572,000 in Q3 '18 due to an increase in sales, which was offset by lower fair value program on the adult-use market. The fair value adjustment on biological assets was CAD20 million compared with CAD2.5 million in Q3 2018. This is due to an increase in the number of plants on hand, the result of bringing B6 and B9 fully online, so B9 is full of plants today. You can see that in a video that was publicized on Tuesday, I'd invite everyone on the call to go google for that HEXO real, you can see our staff hard at work and B9 full of plants.
We also drove higher yields this quarter on a per plant and per square foot basis and we expect that to continue meaningfully as we ramp to a 150 ton a year production capacity. Our gross margin before fair value adjustment on biological assets was CAD6.4 million, yielding a 49% gross margin on net revenue. So holding toward the 50%, we do expect over the next 24 months as there is significant pricing compression that the flower might drag those gross margins toward the 40%. We do expect that as we introduce more and more advanced products, we'll be able to pull back gross margin back toward the 50%, but do expect some turbulence on gross margin in the short term.
Operating expenses, our G&A increased to CAD10.5 million in Q3 from CAD2 million in Q3 2018. This reflected the growth in operations as we continue to strengthen our general finance, administrative staff, an increase of CAD3 million. Rental expense increased by CAD790,000 related to rent on the Belleville facility. Professional listing and legal expenses increased by CAD900,000 as a result of corporate development initiatives and increased financial reporting and regulatory requirements from the TSX and the New York Stock Exchange American and insurance increased CAD1.8 million due to an increase in property plant and equipment being covered and D&O premium increased as a result of listing on the New York Stock Exchange. G&A is expecting to trend with revenues over the remaining quarter in 2019.
On marketing and promotion, we had an increase to CAD5.1 million in Q3 from CAD2.1 million in Q3 2018. And this reflects the implementation of our adult-use marketing and promotion events to build brand recognition and establish HEXO in the adult-use market. We expect this to trend with revenues in the final quarter of 2019. Our long-term goal on our marketing spend is to be roughly around 5% of revenue and we believe we're on target looking at forward revenue of CAD400 million or CAD20 million for the year, excluding sales and operations of course, so just on pure marketing spend.
Our stock-based compensation increased to CAD8.1 million in Q3 2019 from CAD783,000 in Q3 '18. This relates to an increase in the number of options outstanding and represents our increase in headcount as a result of a significant increase in the underlying market prices of those options, granted during the period. Net loss from operations were CAD2.2 million in Q3 2019 compared with a CAD2.7 million loss in Q3 2018 and this was offset by higher revenues and increased biological fair value adjustments as our production increases.
Net loss from operations decreased 61% over last quarter, due to an increase in fair market value adjustment on biological assets, based on increased scale of operations and the additional plants in our B9 greenhouse. Other income and expense of CAD5.5 million loss in Q3 2019 compared with CAD682,000 in Q3 2018, was due to reevaluation of financial instruments of about CAD1.1 million and a fair value loss on a convertible note receivable of CAD4.1 million.
We turn it over to our analysts on the call, looking forward to taking your questions. Thanks for being here.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Rupesh Parikh of Oppenheimer. Please go ahead.
Erica Eiler -- Oppenheimer -- Analyst
Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So, first I wanted to touch on the CAD400 million revenue target. We were just curious, the sensitivity and ability to hit this target if we do see the regulatory delays in advanced products. And also, maybe you could talk about some of the risks you see to potentially achieving this target.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Thank you, Erica. Yeah. There are two key risks to the CAD400 million. So the first one is of course the -- as you pointed out, the regulatory risk. So, if we don't get the advanced products that would put -- and I believe the risk of not getting it is also is negligible. I think the risk is really in delays. As I mentioned on the call, I think a delay to December would be prudent to expect a delay potentially in the December. But if it's further delayed that could put upwards of CAD100 million of that CAD400 million at risk as that we're planning advanced products to be about 25% of that number.
The second risk is an execution risk, so much more in our control relating to our Belleville facility. So to achieve that CAD400 million target, we do need Belleville to be operational in the fall. And we are on track for that. But if something should happen outside of expectations, I would put that number at risk. We are confident we will deliver an operational facility in time.
Erica Eiler -- Oppenheimer -- Analyst
Okay, great. That's very helpful. And then I just also wanted to quickly touch on market share. Is there any update on your sense of what your market share is currently?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
We believe that we're holding pretty strong as one of the top Canadian LPs. We're not sure exactly where, put us somewhere between top three and top five is probably a good guess. But we have some more work to do on those numbers.
Erica Eiler -- Oppenheimer -- Analyst
Okay, great. Thank you so much.
Operator
Your next question comes from Oliver Rowe of Scotiabank. Please go ahead.
Oliver Rowe -- Scotiabank -- Analyst
Hey, good morning. Thanks for taking my question. When I think about Quebec, which is obviously an important market for you, you're expecting 20,000 kilograms of sales to Quebec in the first year for ag (ph). I think we're over halfway through that year now and sales within about 5,500 kilograms to that province. So it seems to me like it could be a bit challenging for the SQDC sales to triple over the remaining five months. Do you see a risk that the SQDC doesn't need that much product, but picks it anyway and that leads to significant inventory builds and maybe even impacts demand on your year two contract?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. So definitely a risk. I think the demand is there in Quebec. I think SQDC has been doing a fantastic job, but since there were inventory supply shortages on the early days from most LPs, so HEXO was delivering on its purchase orders, but SQDC weren't getting fully supplied. They slowed their store ramps. So the original plan called for about 25 stores in Quebec by this day. And last quarter we were at about 13. Now the good news is SQDC has now gone back to seven days of full time selling. So that adds significant demand. They've added more stores now. So we have a brand new store in Gatineau, right next to an Ottawa population center.
I do think there could be some timing risk around a few of those tons -- of those 20 tons. Now of course, as you pointed out, it is to take or pay contract, but we value our relationship with SQDC more than the few million dollars in revenue we could get this quarter. So we're working very closely with them. We ramped (ph) our SKU mix to create more interesting products. We plan on launching a whole bunch of new products over the following couple quarters, which we think will help that, but expect some timing risk whether it's an October, November, December timeline to hit the full 20 I think would be a reasonable assumption. We're confident we can completely offset that in more of course in other provinces.
Oliver Rowe -- Scotiabank -- Analyst
That's helpful. And just to follow up on Quebec, I know the province recently added six more suppliers to the prior six. And I believe that you re targeting a 30% share in Quebec. So, is that at risk as they increase supply or do you think 30% is a pretty sustainable number for you, no matter how many suppliers they have?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
It's always going to be a risk. I mean, people are going to be gunning for the top spots in Quebec. I mean, it's the second largest market in Canada and now people are finally realizing that. Thankfully, HEXO has a preferred supply for that, we have a great reputation in Quebec, our products are loved. So I think it's very feasible to defend our 30% market share. But of course we'll have to be very vigilant, we'll have to keep listening to our customers and responding to their needs.
Oliver Rowe -- Scotiabank -- Analyst
Great. That's helpful. Thank you.
Operator
Your next question comes from Chris Carey of Bank of America. Please go ahead. We have a question from Chris Carey.
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Hi. Can you hear me?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yes, thank you, Chris.
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Hi. So, just on your explication for the 40% gross margin in the near term, I mean, how much of that is investment without getting kind of the requisite sales leverage and mix -- and mix being flower and oils? It really -- what I'm trying to get at is, when you secure your capacity for a longer term margin it is clearly expectations are for your gross margins to be a little bit higher over even the medium term horizon. So, I wonder if you could just talk to the near and longer term dynamics around the gross margin line?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah, absolutely. Thank you. I think, so longer term I think 50% is definitely doable. But that will be contingent on us building a brand more long term. I think the 50% will be reserved to the top three or four global cannabis companies that are able to create brand pool. Otherwise, cannabis companies as a whole, not just HEXO, will be pushed toward the 30%, right, in the long term.
I think in the short term, the pressure is completely different. The pressure is because as we've mentioned in Quebec, new producers constantly coming online, coming to the provinces and we're talking right now about -- for example, in Quebec, six new producers onlining, but remember that there's 150 companies in Canada that have licensing that want to start to sell flower. So what's going to happen in the next 18 months is that those companies are coming to the provinces saying I want to get my flower listed. These companies are not sophisticated. They're small scale. They have high cost and they need to get a listing, they need to get sales revenue.
So in turn, what we believe is going to happen is, the provinces are going to say, well we have enough flower SKUs, we have trusted partners, we don't need your flowers. And then the smaller producers are going to have no other choice, but to drop their price. In consequence, what's going to happen is that the provinces will then call their preferred suppliers, HEXO and other major licensed producers in the country, and we'll say, well, guys you can get to keep your listing, but you need to be competitive with these smaller guys.
What that will do is that will create a shakeup in the industry over the next 18 to 24 months. We believe there will be 80% of smaller licensed producers that will go bankrupt, because they will be unable to obtain significant listings and leverage. And as such their financing will also dry up. I think that'll be an incredible painful process and that'll put downward pressure on our ability to generate margin from flower in the short-term. That's what brings me to 40%. Now the good news is less competition and nobody except the majors focused on advanced products and HEXO being at the top of the list as an advanced products company with great partners such as Molson Coors, we believe that we'll be able to introduce products that are in the 60% plus margin range, which helps to balance us out. so over time, as we shift from flower to advanced products able to kind of stabilize in the 50% range.
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Thanks for that. And so as the market stays along flower over a longer period of time, how quickly do you think your own product mix will shift toward new product form? So your 84%, I think in this quarter on flower will stay at that level for the next six to nine months or do you envision being able to capitalize on these opportunities in the near term both for things like your sprays and also obviously, you have the beverage lines coming at the end of the year?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. And that -- well, the biggest question there, Chris is going to be the regulatory risk around the legalization. So if we're live in October, which is still very possible, but at risk, so if we were live on shelves in October and HEXO is ready. So we're ready for that date, we're going -- we're ready to load in, starting in September. So we're very excited with that. The Truss products are phenomenal. They taste great. They work super fast, so we think those are going to be a home run. So if we launch in October, to your question on six or nine months, absolutely, I think that's going to move the needle.
I don't expect the needle to move from 84% flower to 20% flower. It's not going to be that kind of seismic shift. It's going to be a month by month. People are going to try these new products. There will be some excitement, but look for a gradual move where flower takes less and less and less of our total sales. Flower will not go away, and I believe that even long term flower will remain about 35% of the total addressable cannabis market. And we plan on maintaining that position in Canada. I think for us to get there, if you look to Colorado, historicals could take about five years. So if you take us from 84% flower now and find a straight line down to 35% in five years, I think that's a reasonable guess, taking into account certain regulatory risks. So if I don't get my advanced products before December, for example, then I think I expect flower to remain in the 80% plus range for six to nine months.
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Okay. Thank you. If I could squeeze in one more, I appreciate it. How quickly can you enter the US, and just any flavor on that launch? Thank you.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
We're very excited about the US. So I've committed to be in the US in 2020. I think we can do multiple states, so the number I mentioned is eight. I think we could do those states legally with powered by HEXO non-THC based experiences, so that'd be focused sport and sleep to start. We think we can enter with our Fortune 500 partners in our hub and spoke strategy. We think we can lever their existing distribution and go through traditional non-marijuana channels. So I think this is going to be a key advantage for us as we use our hemp supply and the farm bill and our extraction technology to clean outdoor field hemp.
I think we can use all that in our formulation technology and are powered by HEXO team to gain -- to essentially leapfrog the multi-state operators. So instead of being limited to say 60 in individual retail stores, our strategy is to go with non-THC experiences at first through traditional retail where we could get a listing in a traditional retail like our Walgreens or CBS thereby getting thousand plus stores at once. So that's a -- watch for them in 2020. And of course, if we're able to do that a bit faster, you'll see it in the news right away.
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Thank you.
Operator
Our next question comes from Brett Hundley of Seaport Global. Please go ahead.
Brett Hundley -- Seaport Global Securities -- Analyst
Hi, good morning, Sebastien. Thank you for all this detail around near-term revenue and margin. It's really helpful. If I can go a step further and think about your specific route to the new 2.0 market, as we get beyond fiscal Q4 and maybe look at the early part of fiscal '20, what parameters might you put in place for us thinking about revenue performance in Q1 into Q2 as you potentially short the flower market and get product ready for the 2.0 market?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. So we haven't provided guidance spread on specific ramps for the CAD400 million, but you can expect that it will be an incremental step function, so try to -- I think if your model is a linear model, it will get pretty close. If -- and that's probably a good place to start.
Brett Hundley -- Seaport Global Securities -- Analyst
Okay. I appreciate that. And then I wanted to go back to a comment you just made on entering the US, because I think what you're saying does make some sense insofar as competing well with the MSOs, if in fact you're able to get product into traditional markets, traditional channels rather and leverage some of these hub and spoke partners. And it gets back to a question that I wanted to ask you broadly just about hub and spoke trends. We personally were hoping to see more in the way of strategic tie-up at this point in time. And it's at least my understanding that maybe big CPG and big pharma are looking a little bit away from marijuana and maybe toward hemp and bio synthesis insofar as getting cannabis into their branded products sooner or rather than later, and I'm clearly here focusing more on the US market. Can you just talk a little bit about your own discussions with hub and spoke partners? And what you think they're looking for at this point in time? And whether or not that has changed relative to six or nine months ago? I'd really appreciate it.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. Thanks. I think you're absolutely bang on that hemp is a key part of the strategy. So one thing that hasn't changed for the Fortune 500s, I mean, we're talking to over 60 of them right now in the funnel, obviously talking to more than that, about 60 in various stages of discussion. So we remain on track for our plan, kind of one a year over the next five years to round out a wheel. The hemp strategy is key, because if you want to operate legally in the US, and of course not pseudo legally on a state by state basis, but legally at all levels of government with FDA and DEA, no contest, you'd need to source from hemp. And so that's why HEXO has put in place these hemp relationships. That's why we already now have 260 tons of hemp biomass secured under contract. That's why we've invested heavily in specific extraction technology to be able to clean out those real hemp.
I think one of the things that the Fortune 500 companies, and you've seen this from a few of them, some of them are taking a strategy of saying, we don't need the marijuana companies, we don't need LPs, we're going to go at our own, and then they take a hemp strategy. And then they come up with a product that perhaps doesn't taste as great as what they would normally have. That doesn't have the right actives, that doesn't work fast enough and quite frankly becomes a sub-par offering.
Now just going with the pure hemp product, like we're doing with a hemp oil, much easier alternatives that go in with a complex formulation something that we're trying to achieve with Powered by HEXO. So I think the discussions are still very lively. We're still very excited about delivering kind of our one year spoke partner. In the meantime, Truss, our existing spoke partner is performing very well. We're developing that business plan and the drinks are going to be absolutely dynamite, we believe, in traditional retail channels, so working away at that.
Brett Hundley -- Seaport Global Securities -- Analyst
That's really helpful. Thank you for going through that. Just lastly for me. Do you guys have a target for reaching profitability on the EBITDA line? We can all do the math given your commentary over the near term, but have you disclosed any target as far as profitability on that line?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
No, we haven't guided that. But I do -- I am happy to share with you that 2020, we're going to make some money. I mean obviously, CAD400 million at the kind of margin we're throwing off, it would be a little foolish not to. So we're going to do that, but this we are in growth mode. So the reason I don't want to guide EBITDA is because I'm ramping up my R&D team and nobody is investing in marijuana today for the EBITDA I'm going to generate next year. If we were all investing in marijuana for that reason, none of these companies should be worth what they are worth. What we're building, our global branded companies, what we're building is a sustainable moats around not only that brand but the technology and the powered by HEXO experiences, and that takes significant investments.
With these top PhD scientists we've hired, I mean, the team of 25 obviously, there's significant cost to that but I don't want to stop there. 25 is not enough. We plan on having 100 PhDs on staff. We believe that that will actually create a human capital moat as well beyond just the pure technology and IP. There's not a thousand of these top food scientists on the planet and HEXO is continuously attracting top talent. So we believe that over time that erects the technology moat over the next three years and then that gives you one more reason to go back to the Fortune 500s and say, well our technology is fundamentally better, you can do it on your own and spend hundreds of millions of dollars to try to develop a product that will be sub-par or you can solve it immediately, global supply chain, already solved in the US and eight states in the UK, in France and then we also solve the technology piece. So I think that, yes, absolutely, able to be profitable next year but the number will be modulated given our investments back into R&D.
Brett Hundley -- Seaport Global Securities -- Analyst
Thanks, Sebastien.
Operator
Your next question comes from Graeme Kreindler of Eight Capital. Please go ahead.
Graeme Kreindler -- Eight Capital -- Analyst
Hi, good morning and thank you for taking my questions here. Just first off, as a matter of housekeeping, you are mentioning in the press release this morning about revenues doubling in the next quarter, I just want to confirm that that -- the doubling there would not include anything on the Newstrike side of things, that would be strictly from the number reported on the HEXO side this quarter?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
So the doubling of revenue would include the Newstrike numbers, which are expected to be consolidated in next quarter, yes.
Graeme Kreindler -- Eight Capital -- Analyst
Okay. Understood. Thank you. I wanted to just elaborate a little bit on the US strategy and understanding that you have supply agreements signed for 2020 to source the biomass there. But, when you think about that strategy how capital-intensive does that get for you? We've seen some other of your peers looking to invest a significant amount of capital on the processing manufacturing side. So, how does HEXO look at the US opportunity and how capital-light or capital-intensive would that be?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. So the -- well, the US, I mean, at a very broad level, right, when I look at our world wide plan, when I talk about becoming a top three global cannabis player, if I look at what it took to becoming top three Canadian player, that was about CAD400 million, right, deployed often down between CapEx operations, and that was pretty efficiently deployed. So, if I looked at Europe, that's five times the size of the Canadian market that will be 400 times five gets you to CAD2 billion in investment required for Europe. The US is about 10 times the size. So, you're looking at CAD4 billion.
So look at the total capital deployment of about CAD6 billion. Now that's not all going to come from treasury in the form of capital raises. I think there's significant M&A opportunity in the US and so the exact mix of what's going to be done through M&A out of that CAD6 billion and what's going to be done through capital -- future capital raises is yet to be determined. So whether that's 40-60 or 50-50 we're not sure yet.
We believe that that level of investment fundamentally long term will be required in the US. And then of course that'll break down between your capital, your R&D and then your marketing spend as we get the traditional channels and we lever the ability to build brands in the US, which is very exciting. Because that's going to unlock our potential. And as you see in that marketing video we put out on our B9 greenhouse on Tuesday, the HEXO marketing team is doing a great job and putting some exciting material out there. So, that gives you a high level idea, where kind of the next 5 to 10 years a CAD6 billion requirement to become a top three global player. And of course, HEXO will continue to manage its capital responsibly continuing to rely on our great finance team and calculating our IRR making sure we return a good return on capital and continuing to penetrate in new markets.
Graeme Kreindler -- Eight Capital -- Analyst
Okay. Understood. Appreciate the color there. Just to follow up with respect to the entrance into the US market, is that something where you would lead in with the HEXO brand or would this be leading in through the Truss JVs?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
So, leading in with the Truss suite of products, so we're really excited for Truss to come out and have a conference call with Brett later next week and we're excited to be able to start to plan that rollout. Obviously, a lot of questions around what the brands are going to be. They are very exciting. We're touching over 85% of consumer occasions and the marketing team at Truss has done an absolutely dynamite job. But I'll let him take that thunder.
The exciting piece is that, we're going to have powered by HEXO marks on every single product going out. So the idea of course is to build a long-term brand around powered by HEXO, think and tell inside, think the draw where someone can walk into a store know that powered by HEXO sleep has worked very well in the brief format, but then know that if they need to go take a plane the next morning, they can also find a face cream by a trusted cosmetics brand that has powered by HEXO sleep as well. So that's our long-term build on the HEXO brand itself. And of course, in Canada, we'll continue to have HEXO as core products.
Graeme Kreindler -- Eight Capital -- Analyst
Got it. Thank you. And finally, with respect to the eight states, is there any additional color you can provide at this time in terms of which markets are at the top of the priority list?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
We're keeping that as a bit of a competitive advantage, figuring out all the regulatory work around how to operate legally in the US is a key strategic advantage. Our regulatory team is absolutely phenomenal under the direction of our General Counsel, Roch Vaillancourt. He's built an amazing legal team, which I really think that if you look 10 years out, those are going to be the two core functions at HEXO. It is going to be R&D and innovation and our legal and regulatory team. So we're really making great inroads there. So I'm not disclosing a whole bunch of color on where we're going to be, but what I can tell you is, we will be legal at all levels of government and we will have no contest from both the DEA and FDA.
Graeme Kreindler -- Eight Capital -- Analyst
Okay, thank you very much, appreciate that. That's it for me.
Operator
Your next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
Matt Bottomley -- Canaccord Genuity -- Analyst
Good morning, Sebastien. Thanks for taking all these questions. Just wanted to touch back on something Graeme mentioned with respect to what we're expecting for next quarter on that top line. So maybe it has to do with the dynamics of the production ramp up versus getting everything packaged and labelled and excise tax into the wholesale channels, but considering you are producing close to 10,000 kilograms as of this reported quarter versus sales of 3,000, I would have anticipated that that double next quarter would be facilitated just from the HEXO side of things independent of Newstrike, so can you just comment on the dynamics of how that shapes out?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. Happy to Matt, and thanks for the question. So, it all boils back down to infrastructure. So I think last quarter I had mentioned that we'd be flat this quarter, we'd double in Q4. And I pointed that the key reason for that is that our infrastructure to package what we were growing was still ramping up, right. And now that infrastructure, this particular quarter has caught up and that's what's leading to the double.
So your insight is right. The infrastructure that's allowing us to package everything is really from HEXO -- from the HEXO side leading to that double. Obviously, we're going to grow much more, right. Our yields continue to go up every day. We're going to add the Newstrike yields, which is going to be great. But fundamentally, to truly unlock our infrastructure requirements, I need my Belleville facility. So I need the facility that's going to have processing capacity for 375 tons per year. And that kicks in in the fall. So that's why we're going to double and not much more immediately, as you pointed out, because we're catching up our infrastructure in two phases. Phase one now complete, and Belleville in the fall.
Matt Bottomley -- Canaccord Genuity -- Analyst
Great, that's helpful, makes sense. And then just on the guidance, again I know this was for 2020, touched on a little bit already. But you gave some good color there that about 25% relates to derivative products, and obviously, there's some timing there that, that is within your control base than what the government puts out. Can you give any other sort of slicing of that number with respect to just the domestic contribution in Canada between Quebec and other markets? Obviously, it's about 90% plus, now listing Quebec on a trailing basis. So of that 400, how much of that would be just Canada? And then what would sort of the goalpost be between Quebec and ex-Quebec?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah, well you can work back to our five year contract with the province of Quebec, year two 35 ton commitment there. So that gives you a good sense of where that should round out. Expect that Ontario will be pretty close as a large market. Alberta, certainly doing a great job with their rollout, so we're excited to be in market there. And so it's fundamentally all going to wash out to kind of population base with HEXO being overweight in Quebec. So that gives you a good sense, but we're still working through the exact numbers before we share those.
Matt Bottomley -- Canaccord Genuity -- Analyst
No. That's understood. And then just on the Quebec side of things. So given that there was six more LPs entering that market, I know initially when you announced the five-year deal and I understand there's assumptions that go into this number, but sort of that headline CAD1 billion five-year contract, did that contemplate other entrants coming into the market? And would you still classify at that quantum over a five-year period?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
I think we still -- I still think the potential with that contract is absolutely to hit CAD1 billion in five years, yes.
Matt Bottomley -- Canaccord Genuity -- Analyst
Okay, great. I'll flip one more in, and apologies, I know Brett was talking about the hemp side of things in the US, you know, I was pulled out of my office for a second. But can you comment if you would anticipate that an execution strategy in the US similar to what you're doing on the parameters with Truss or maybe you partner with cosmoceutical, nutraceutical, I know healthcare is becoming more and more topical right now into entities outside of HEXO as part of that rollout? Or are you expecting it to be completely in the economics of your current entity.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
No, we're absolutely planning on using our Fortune 500 partners. So in Canada, HEXO has all the distribution. We're listed now in nine provinces, touch 95% of the population. So we actually provide the marijuana distribution to our partners like Truss and Molson, and our other spoke partners. So when we add cosmetics, when we add health and wellness, when we add edibles, when we add vapes. So in the other markets, we're going to rely on their distribution. So we're actually getting their international distribution. So in the US obviously, Molson very strong with a top four position in beverages, top two in the UK. But, as we add more spoke partners that gives us all that more opportunity.
So as we're focused on the technology and supply chain piece, those partners are bringing a deep understanding, a consumer occasion, the international distribution piece. And of course, the base product, which is very important. Because there's really two parts to creating awesome cannabis products, it has to work and it has to work better than the rest. And so HEXO has got that covered. But I do think one risk that most cannabis companies are ignoring is that, it will be very difficult for a cannabis company to make a better chocolate than the Nestle, to make a better face cream than L'Oreal and a better beer than a Molson. So that's why I think our strategy fundamentally leads to better products, which will lead to better success in market.
Matt Bottomley -- Canaccord Genuity -- Analyst
Great. Thanks, Sebastien.
Operator
Your next question comes from Robert Fagan of GMP. Please go ahead.
Robert Fagan -- GMP Securities -- Analyst
Hey, Sebastien. Thanks for taking the questions. Just wanted to ask about on the ramp up of capacity at B9. Obviously, we saw in the video, how it seems to be already quite filled up with plants and just wondering if you can give us kind of a cadence of how much of the overall capacity of that facility is already ramped up and what's left to ramp up.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah, absolutely. Thanks, Rob. So the facility is full. So as you've seen in the video, there's plants -- the entire 1 million feet is full of plants. So with the first harvest out of greenhouse, there's always dialing in. And you'll see, if you look at our historical numbers for B6, so a 250,000 square feet greenhouse, that will give you a really good idea of how we're dialing the environmental with the new greenhouse, how we start to improve yields quarter-over-quarter. I think to get to our 150 ton ramp, reasonable to see is, early 2020 to be at that number on a run rate basis. And so that'll really reflect incremental yield improvements. But the facility is full and now it's just a question of you should see meaningful improvement every quarter.
Robert Fagan -- GMP Securities -- Analyst
Great. That's quite impressive. Is there any potential delays from beginning sales from that facility around licensing in any kind of way, does that create any type of hurdle to actually get sales generation from that facility?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Rob, we have our sales license. We just didn't think it was a big deal. It's kind of order of operations these days. So now we're selling from that facility, I'd say, really we've begun. And so, you know that facility is fully licensed, so no worries there.
Robert Fagan -- GMP Securities -- Analyst
Excellent. Just shifting to extraction now. In light of your agreement with Valens and in the context of Belleville, hoping to be able to accommodate 375 tons of the input material for extraction. How do you see the kind of margin evolution from your cannabis 2.0 products as a result of perhaps a shift in capacity from third-party to your own for the production of those products? And then if you can just give us maybe a bit of insight on how you intend to go about extraction operations in the US with that hemp biomass being secured?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah, I think from a long-term strategy perspective, if we get a third-party extractor, that can match or beat; a, our capacity; two, our quality, three, our technology. We'd conceptually be happy to work through a third-party operator, which is why we've been working with Valens and they've been great so far. From a -- remember that 10 years out, if HEXO were to look like a team of lawyers and a team of scientists and a great brand Powered by HEXO in hundreds of different Fortune 500 products, that's what we're striving for.
In the meantime, we have to make sure that we can deliver certain products and that means having enough capacity for HEXO's scale, which is shooting to be a top three global player. And quite frankly, there's nobody else whether that's the extractors, other LPs that have shot for the level of scale that we're putting in. We are preparing for the possibility that we could shoot not just for a 20% share in Canada, but actually grow that. So we are preparing ourselves, and let's say, we were to say this is a 1,000 ton market with 375 tons of potential processing power and 150 ton to grow, the idea is we're already starting to prepare to have less grow in the supply chain, so 150 tons moves through our manufacturing and extraction and formulation stage, which has 375 tons supplemented by hemp in the short-term, in the medium term perhaps supplemented by other forward contracts with other licensed producers or imports from overseas, and then moving on eventually to the final phase where we're simply an IP and technology company.
During that whole journey, as I mentioned, in the very short-term, we'll see some margin compression, especially as our sales on flower come in. But that margin should start to dilate back up. The nice thing is as we scale up, our costs are coming down significantly. And I think a testament to the team has been the supporters, you see our revenue per gram of course has dipped, but we've managed to hold our gross margin relatively stable, so we're recovering the costs. Unfortunately, I do think that in the face of lowering costs, you will have continued selling pressure, so it will be difficult to translate those costs to additional gross margin until those advanced products come online.
Robert Fagan -- GMP Securities -- Analyst
Okay, great. Thanks for that color. So, last quick one. If you could maybe -- I don't know if you can give us an idea of the mix in terms of the new products in Canada. You mentioned the gummies, vape and beverages, can you give us an order of magnitude of the split there? What would be the biggest drivers?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
So our top priority is our beverage launch followed by our vape launch and then gummies is one that we think from an edibles perspective will be very interesting. So they are in that order. I think steady state in the future as I mentioned on the call that, at steady state this market will be about 35% flower, 65% advanced products. Of the advanced products, we think that beverage and vape could easily be a third, each with other categories such as edibles, which gummies is the largest part of the edible segment, which would be less. I had started to give you a bit of an idea of how we see the (inaudible)
Robert Fagan -- GMP Securities -- Analyst
Great. Thanks a lot.
Operator
Your next question comes from David Kideckel of AltaCorp Capital. Please go ahead.
David Kideckel -- AltaCorp Capital -- Analyst
Hi, good morning. Congrats on the results and thanks for taking my call. I just wanted to go back to the US and with you -- Truss, the JV in particular. So when we're talking about in the press release and we've talked about this morning so far, when you are looking to enter into eight states in 2020, just to clarify for housekeeping here. Does this only -- and you also mentioned, Sebastien, that you want to lead into the US with Truss. But do these initial eight states, is this only going to be including the Truss products?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
No, so it will be including Truss. Well and specifically I should clarify, so Truss is a Canadian joint venture, so it's Canadian-only. So most likely the exact form of entity we haven't revealed exactly how we're doing this with MCBC yet. So MCBC and HEXO will be doing a joint release at some point in the future to explain exactly how under which brands. Of course, Truss and all the work that's been done will be leveraged on the marketing side. So that's one piece. The other pieces we're going to have our other spoke partners. So I've said one a year, so you could assume that in 2020, we have two at this point. Late 2020, maybe three. And, yes, the idea is to enter the US using our spoke partners not to go direct with HEXO core products in the short term.
David Kideckel -- AltaCorp Capital -- Analyst
Okay, thanks. That's helpful. And to clarify as well, then you mentioned that the Truss beverages are great. And so there's a lot of progress that has been made. So, can we assume that the development in the R&D, all the innovation behind the actual beverages, are those nailed down now or are they still being tweaked?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
So, 1.0 is nailed down and our 1.0 is amazing. It's better than anything that's in the US today by hands down. But I think our 1.0 has a lot of room to grow. What I'm excited about is the future, right. I'm excited about a two minute onset. I'm excited about a 45 minute onset. I'm excited about bad experiences, a sparkling water where we reduce your appetite using the ingredients in cannabis that are non-psychoactive. These are all things the R&D teams are working on and I think that's going to provide for really exciting roadmap for the next five years. Today, our starting lineup is best-in-class, it's better than anything that exists on the planet that I've seen, and so I'm tremendously excited about that.
David Kideckel -- AltaCorp Capital -- Analyst
Okay. So then just to confirm then, so the Truss product, the beverages are ready to go subject to I guess number one Canadian, the derivative legalization and then also with your eventual and near-term strategy in the US.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yes. We have technology. We have a level of technology and product quality right now that puts us in our own class. I expect that I have launched, you will probably be -- we'll see how we're performing against the other top LP obviously, Canopy with the Constellation partnership I'm sure are going to be coming out with something pretty impressive as well. But, I haven't seen anything else in the industry right now that compares to what we have today. So what we have from the technology perspective today is absolutely phenomenal. The team has done a great job. And now the question is going to be the ramp up in infrastructure, and that ramp up in infrastructure is dependent on our Bellville facility rollout and the Truss rollout within that Bellville facility, which we are on schedule to deliver for the fall. But that is the risk to that full rollout, and obviously for the 2020 plan in the US, there's some infrastructure in US which is why we formed HEXO USA, our hope in Delaware to have that corporate structure to start acquiring assets and doing infrastructure build out in the US.
David Kideckel -- AltaCorp Capital -- Analyst
Okay. Great. Thank you for that. Another question, I have a couple more here quick ones. I know, Sebastien, you mentioned sort of capital deployment over time around the CAD6 billion mark which could include both M&A and capital raises. Is there any -- just to tweak this down a little bit over the next say 12 months or 6 to 12 months, can you provide any CapEx guidance for HEXO?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
We're not going to provide the CapEx guidance just yet. But -- so thanks for asking. We'll see what we can do over the following quarters in terms of thinking about that. But I want to make sure we nail down our numbers and again we don't give up exactly the how -- of how we're entering the US just yet, I'd rather do it and then tell you guys about it.
David Kideckel -- AltaCorp Capital -- Analyst
Understood. That's great. My last question, Sebastien, actually, I think it was brought up by another analyst before in passing around bio-synthetics. I'm just wondering in all of your discussions with Fortune 500 partners, I mean, it's apparent I think from a lot of our due diligence, that a lot of the Fortune 500 partners, especially when considering cannabis, they really pride their final product with consistency, purity and potentially low cost as well. So, on that note with bio synthetics, can you maybe -- is there any color you can give to your discussions with the Fortune 500s around any sort of bio-synthetic discussion that's of relevance for them? And how that could impact your strategy if you decide to move into the area of bio-synthetics as well?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. I think bio-synthetic certainly have a lot to offer but they also have a lot to prove. And so from our perspective, we're waiting to see who will emerge as the bio-synthetic winners, before making significant investments in that space. And to us, the winners are not only the ones that will solve scale, but also the ones that will solve intellectual property and especially when it comes to rare cannabinoids that would be relevant to a specific powered by HEXO experience. So those are the really ones that are going to keep our attention. We have great relationships with quite a few of the bio-synthetics companies. We're keeping an eye on them. We're tracking their progress and I think from the Fortune 500 perspective, they're leveraging our maturity in market and understanding of all that to kind of sort it out. The Fortune 500s today, from my perspective are not taking bets on technology to come, they need to solve the market access now and that's something that HEXO is doing today from plants.
In the future, of course, I've talked about the HEXO team being lawyers and scientists, that could very well mean that our supply chain is sourced from greenhouses in Canada for the flower, hemp fields in the US for 80% of our cannabinoids and then a few bio-synthetic providers for rare specific cannabinoids as cost depends. But I don't plan on marrying myself now to a cost structure. I think we can pivot in the future depending on which solution becomes best. And I think that the reason of Fortune 500 would need HEXO as a partner, it's because to figure all this out in a relatively effective way, it takes a lot of energy and expertise which they simply don't have on their team. So that's why our powered by HEXO, a partnership model has resonated very well with Molson and is resonating very well with a number of companies in our funnel.
David Kideckel -- AltaCorp Capital -- Analyst
That's a really great insight, Sebastien. Thank you. That's it for me.
Operator
Your next question comes from John Chu of Desjardins Capital Markets. Please go ahead.
John Chu -- Desjardins Capital Markets -- Analyst
Hi. Good morning. Just a couple of quick questions. On the US strategy, the CAD400 million in revenue guidance for 2020, is that including any revenue generated from the US? And then second one, I just...
Sebastien St-Louis -- Co-founder and Chief Executive Officer
No, it doesn't, John, and let me clarify. So the CAD400 million guidance is for fiscal ending July. When I say 2020 US, I'm talking to December calendar. So there's some offset, but the nuance to consider as well is that our current spoke partner, Truss, so with Molson and depending on how the future ones will be structured, the revenue itself does not consolidate up to HEXO. We're going to see our 42.5% share of the net income or loss. So you will see it post bottom line, so obviously, show up on our financials, but you wouldn't see the revenue and so that's the primary reason that's not in the guidance.
John Chu -- Desjardins Capital Markets -- Analyst
Right. Okay. And then to what extent does FDA approval on the CBD side come into play in terms of your entry into the US?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah, we're watching the FDA very closely, because how they will decide to treat overall CBD treatment relative to the pharmaceutical, nutraceutical, et cetera will obviously have an impact on how we're operating. But we're currently following a path where we believe we'll have no contest from FDA. So very confident at this point in our strategy.
John Chu -- Desjardins Capital Markets -- Analyst
Okay. And then just lastly, you mentioned in terms of shipping flower to Ontario, BC and in other provinces, are you going to ship that officially right now and what's the update on Alberta? That's a pretty big market and it doesn't seem you're having much exposure there at this point in time?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. So when you look at the -- you look at our throughput of course, Quebec remains -- has remained a huge market. But that has not been demand constrained. That has been supply constraint to-date. As we double this quarter and as we go of course, and we start to ramp from there into our CAD400 million next year, as I mentioned, the infrastructure block goes away largely by fall. So you have more and more capacity to supply into these markets. And we want to make sure that we are not only a preferred supplier in Quebec, but that we're a top supplier in all other provinces. So we want to make sure when we go into these provinces that we respect our commitments, we make sure that whatever is on the shelf is always available and that we really provide a great customer experience. So not so much demand cap, and that's why you haven't seen anything in Alberta yet, but expect to see more and more things in other provinces as the months go by.
John Chu -- Desjardins Capital Markets -- Analyst
Okay, that's it for me. Thank you.
Operator
Your next question is from John Zamparo of CIBC. Please go ahead.
Krishna Ruthnum -- CIBC -- Analyst
Hi. This is actually Krishna Ruthnum on for John. My first question is on pricing. And my apologies, I missed part of the prepared remarks that there's a meaningful decline quarter-over-quarter in your pricing. I just wanted to understand whether that was simply due to lower oil sales, a greater focus on Quebec or maybe what you alluded to earlier, which was constraints on the packaging size?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Yeah. Thank you. I think a little bit on oil, but it's really we're starting -- so earlier in the call, I'm not sure you got the point, but I was talking about how we're going to go into a period of price compression around flower as you have these 150 smaller LPs that vie for market share and that really have very little ability to go to market, right. So we're already seeing that price compression in the market begin. So that has started. And I think that it's prudent that we all expect that to continue for a certain period of time. And I think that it's been prudent to have a bet on companies like HEXO that will have to scale in operational expertise and cost control to survive their margins in that price compression. So as you've seen, despite the price compression we've held our margins, so I'm not too worried about it. But the smaller producers over time will not be able to because they won't have the economy of scale.
Krishna Ruthnum -- CIBC -- Analyst
Okay. Thanks for that. I also had another question just around the 260 tons of hemp supply that you announced. Are there any terms or is there any additional color that you can give us just sort of around that supply?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
So we're not disclosing the terms, but you can kind of look at how we operate. We always operate from a kind of a fundable supply, globally approved supply chain perspective. So when we look at our cost per milligram, we track everything. And then there's -- so there's two things to look at. Where do you need the supply to come from and how is that supply relevant to specific jurisdictions? So in the US, you need hemp to participate, but then two, whether it's bio-synthesis, hemp or marijuana, we are continuously evaluating our cost per milligram of all cannabinoids in formulation and flower and then searching the most cost effective alternative. So you can assume that our hemp transformation will be at a good price.
Krishna Ruthnum -- CIBC -- Analyst
Okay. Thanks for that. And one last question just on your guidance for Q4, just given where we are in the quarter, just wondering if you can give us some comments on the trend to date as well as your -- the pace and sort of your confidence of reaching that target?
Sebastien St-Louis -- Co-founder and Chief Executive Officer
We're going to reach the target. I mean, I'd ask you and I continuously, I welcome a challenge-as I think that the analyst community is doing a phenomenal job in our space. I welcome more transparency in our space. I welcome a broader discussion for investors. If you ever hear me say something and not deliver, you have to call me out. And in reverse, I would tell you today, nobody has ever called me out on anything because HEXO has always delivered what we said we would. We're delivering a double this quarter.
Krishna Ruthnum -- CIBC -- Analyst
Thank you.
Operator
(Operator Instructions) There are no further questions at this time. Please proceed.
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Thank you very much, everybody, for your time and the great questions. Look forward to speaking with you during the following months and of course at our next earnings call.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Duration: 65 minutes
Call participants:
Jennifer Smith -- Director of Investor Relations
Sebastien St-Louis -- Co-founder and Chief Executive Officer
Erica Eiler -- Oppenheimer -- Analyst
Oliver Rowe -- Scotiabank -- Analyst
Christopher Carey -- Bank of America Merrill Lynch -- Analyst
Brett Hundley -- Seaport Global Securities -- Analyst
Graeme Kreindler -- Eight Capital -- Analyst
Matt Bottomley -- Canaccord Genuity -- Analyst
Robert Fagan -- GMP Securities -- Analyst
David Kideckel -- AltaCorp Capital -- Analyst
John Chu -- Desjardins Capital Markets -- Analyst
Krishna Ruthnum -- CIBC -- Analyst
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