HEXO Corp. (HEXO) Q3 2019 Earnings Call Transcript
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 o