HEXO Corp.
Q1 2022 Earnings Call Transcript

Published: 14 Dec 2021

[Operator:]

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEXO Fiscal Q1 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer session. Thank you. Jennifer Smith, Director of Investor Relations. You may begin your conference.

[Jennifer Smith:]

Good morning, and thank you, Julie. 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, opinions, forecasts, beliefs, assumptions and other statements that are not statements of fact regarding the future of our business, future plans, strategies, operational results and other future conditions. 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. This morning's discussion is qualified in its entirety by the cautionary notes regarding forward-looking statements and the risk factors that are included at the end of this morning's news release and in the Company's annual information form, management discussion and analysis and annual report. Please view these materials for more information about forward-looking statements and the risk factors that could cause actual results, performance, developments or events 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 for any reason. We are pleased to have several members of our management team joining us this morning. I'd like to introduce Scott Cooper, our President and Chief Executive Officer; Trent MacDonald, Chief Financial Officer; Val Malone, Chief Commercial Officer; and Roch Vaillancourt, General Counsel. I will now turn the call over to Scott.

[Scott Cooper:]

Thanks, Jen. Good morning and thank you for joining us today. Earlier this morning, we released our Q1 2022 results for the quarter ended October 31, 2021. I am pleased to report a good start to our fiscal year with HEXO reporting 50.2 million in total net revenue, an increase of 70% year over year and 29% growth compared to last quarter. While the year off to a good start and also aware of the challenges we're facing, and that's why today, I'm announcing our new strategic plan, The Path Forward to solidify ourselves as Canada's leading cannabis company and position us to capitalize on international opportunities. Over the past six weeks, I've had the opportunity to visit every core HEXO facility. I've met with many of our employees. I've met with customers. I met with analysts. And I have to say, I've never been more confident in this team and on our operations to secure a strong and profitable future for HEXO. The Path Forward is a transformational plan that utilizes HEXO's current assets, including our low-cost cultivation capabilities, strong brands, range of products across the full spectrum of cannabis. These come from our recent acquisitions, and we will use them to drive accelerated organic growth, build market share, become operationally cash flow positive over the next four quarters. The Path Forward is made up of five priorities. One, continue to reduce manufacturing and production costs and maintain our advantage as a low-cost producer; two, streamline and simplify the organizational structure; three, realized cost synergies from acquisitions and recent plant closures; four, focus on revenue management, including more disciplined pricing; and five, accelerate growth through organic market share gains, capture missed revenue opportunities, including improving our ability to align cultivation planning with market demand, reintroduce a focus on medical, and strengthen our commercial capabilities and innovation pipeline. The plan is underpinned by specific actions to fortify our balance sheet, strengthen the leadership team and enhance our corporate governance. As part of our plan to ensure HEXO has adequate capital to meet our requirements, we're taking immediate action to reduce the dilutive effect of the convertible notes. We are working with Lazard and Bank of Montreal as well as our current debt holder to reduce the overhang impact of this debt. We're actively evaluating opportunities in a manner which maximizes shareholder value. I am focused on selecting the best option available for HEXO moving forward. I can tell you we have a number of options available, and are moving with pace. As of December 14, 2021, $118 million of the principal on the Convertible Note has been redeemed and converted, leaving $241.6 million principal outstanding. Our second underpinning initiative is to strengthen our leadership and enhance our corporate governance. To that end, we're announcing a series of executive changes to strengthen our focus on growth, products, operations, and profitability. These decisions reflect our vision for building a best-in-class consumer packaged goods company that is on the path towards the stable long-term growth. There are three changes I'd like to highlight and outline today. First, I'm pleased to announce that to bolster our focus on products we are appointing Jackie Fletcher as our Vice President, Science and Technology. Appointing Jackie allows us to leverage the deep expertise and bench strength we acquired as part of the Redecan acquisition, and in particular, Jackie's practical application of R&D efforts. Jackie will report directly to me. Second, Trent MacDonald will step down from his role as Chief Financial Officer effective March 8, 2022. I would personally like to thank Trent for a significant contribution and dedication to the Company and for agreeing to stay on over the next few months as we complete a search for a new CFO. And third, to enhance governance, we are announcing the appointment of John Bell as our new Chair of the Board. John has a 40-year career of business success. He's Chairman at Stack Capital, Pure Jamaican Limited and a Board member of Cure Pharmaceutical. From 2014 to 2020, he was a member of the Board and Chair of Canopy Growth. His tremendous experience will continue to drive HEXO as the market leader in Canada. As a result, Dr. Munzar will be stepping down from the Board of Directors and his role as Chair. And I'd like to personally thank Dr. Munzar for both his dedication to HEXO and his personal support of me through my appointment as CEO. I would now like to walk you through our transformation plan, The Path Forward. This plan includes a series of value creation initiatives that are expected to generate incremental cash flow of $37.5 million in fiscal 2022 and an additional $135 million in 2023 for a total of $175 million over the next two years, split almost evenly between cost reductions within our control and growth opportunities with revenue. This plan, which has been validated by EY, will position HEXO to unlock opportunities, enhance our value to shareholders and make us more attractive to institutional investors. We have a unique portfolio of assets and a leading product portfolio in the fastest-growing market segments. Once we begin executing on this plan, we will grow organically without the need for any additional acquisitions. Let me walk you through the five priorities in more detail. First, we will continue reducing manufacturing and production costs by leveraging existing capabilities across the facilities that have come together across the companies. We're actively applying best practices and learning from our highest-margin categories and top facilities across the entire operation to improve and optimize productivity. For example, the opportunity I had to two other facilities at Molson. Over the past year, we've reduced our cost per gram of THC by 50%, 5-0, by improving output, reducing costs, improving the bud-to-trim ratio, and just general overall improvements at that facility. That type of capability and learning will take across other facilities. When it comes to something like vapes, we currently outsource the HEXO production, the HEXO brand production. However, given Redecan's expertise in vapes and their capability, we'll now be bringing that production in-house, resulting in an annualized, an immediate $5 million margin improvement for HEXO's portfolio of vape products. Two, we will streamline and simplify the organizational structure and bring operating costs in line with our size and growth. Starting from an industry-leading position, these efforts will continue to position us as best-in-class operational efficiency. We will aggressively tackle costs across the organization, and we will aggressively build capability. We will continue to focus on capital and be much better stewards of capital. Three, we also continue to deliver on synergies as a result of our recent acquisitions. Last quarter, we reported we would exceed our initial target synergies of $35 million. I'm pleased to announce this quarter that we expect to exceed $50 million in synergies based on our latest projections. Four, we will focus on revenue management, including more disciplined pricing across our entire range. The days of unprofitable cannabis companies are numbered. We think that the value-add we provide with our high-quality products means more to consumers than a race to the bottom in price. Successful companies in the future will be those that can successfully run their businesses, and not just by unprofitable market share. Five, to increase revenue, we plan to accelerate growth through organic market share gains and capture missed revenue opportunities through better demand planning. For example, today, we are only delivering 65% to 70% of demand to our customers. Going forward, we will connect our demand forecast of will be planned, and expect to see the results of these actions in Q3, and we will actively manage that through Q2. Redecan went through a similar evolution, and we are able to learn from their experience and apply them across the entire organization. We'll also put a focus back on medical, consolidating this product line under Redecan's leadership given their strength in this category. We're also focused on redoubling our efforts to put consumers at the heart of every decision, working closely with retailers and wholesalers to improve the commercialization of our products and prioritizing operations to respond nimbly to constantly changing market conditions and consumer demand. For example, flower. We know flower is the largest category currently with 45% of the market, and we currently are number two in this category. With the combination of the entities coming together, we now cultivate across the entire range of price categories and are well positioned to add significant capacity with very little capital required. As we expand our indoor growing capability resulting from the Zenabis acquisition and greenhouse and outdoor facilities from Redecan we now have the full suite of production capabilities to allow us to compete in flower across a range of good, better, and best. Pre-rolls. Pre-rolls is the fastest growing market in cannabis and HEXO continues to maintain the market-leading position in this category with best-in-class margins in large part due to our recent acquisition of Redecan. We're putting good, high-quality flower in our pre-rolls, and currently can't keep up with demand and are undertaking steps to increase our capacity by two to three times. Edibles. HEXO is now in the edibles market through the acquisition of Redecan, and we're pleased to announce the launching of our own in-house mainstream edibles to compete with market leaders. We're just getting started in this category and anticipate significant room to grow. And in vapes, to capture lean manufacturing capability, as I mentioned, we're moving HEXO production in-house, leveraging Redecan's capabilities. And we are also responding to evolving and increasingly sophisticated consumers with innovation to responding to evolving and increasingly sophisticated consumers. We currently have the number two market share position in this category. I also want to highlight HEXO’s leading market position in beverages, capsules, concentrates and oils. So in conclusion, before I turn it over to Trent, I'd like to close by saying that HEXO is well positioned to maintain and grow as a domestic leader, and be amongst the first operating cash flow positive and profitable LPs in Canada. We will achieve this by executing our new strategic plan, The Path Forward, and by putting the customer and consumer at the center of everything we do. This business has significantly higher value and upside as we get through our transformation to unlock organic growth. HEXO is on the right path for long-term prosperity and is well positioned to deliver positive shareholder returns in the short and medium term. And with that, I would like to turn the call over to Trent.

[Trent MacDonald:]

Thank you, Scott, and good morning, everyone. Before I delve into our results this quarter, I want to point out the key developments. During the quarter, we completed the acquisitions of 48North and Redecan. We continue to focus on completing these integrations and incorporating best practices from each across the organization, including consolidation of our productive capabilities and cultivation capacity. This ties into our recent public release further into the closure of three separate facilities. Now I'd like to actually jump into the financial results and highlight some key highlights within our results. The first thing I'd like to say, and Scott just alluded to it. According to recent Headset data, not only have we maintained our number one market share position. We have grown the gap between ourselves and number two. In Q1, total revenue -- total gross revenue grew to $69.5 million, while total net revenue grew 29% from last quarter to $50.2 million, both the highest in our history. That said, non-beverage adult-use net revenue grew 40% from Q4 to $46 million. During the quarter, we did a full review of our existing portfolio of SKUs, and are currently undertaking an exercise to radically rationalize our SKUs and ensure that our innovation pipeline is consistently offering customers new products based on their demands. Under our Original Stash brand, we have now launched OS genetics, which are selected from distinct genetics family and grown under specific conditions to bring out the highest quality. Our first products are OS genetics Kush and OS genetics Haze, and we will be launching more new streams under these product lines over the next year. During the quarter, net beverage sales decreased 39% from Q4. The quarter-over-quarter decrease in beverage sales is as a result of seasonality attributable to deep increased sales during the warmer summer months. Truss Beverages, however, did continue to lead in the key markets of Ontario and Quebec, capturing 36% and 70% market share, respectively, while also maintaining the number one market share nationally. International sales decreased by 11% quarter-over-quarter as the Company effectively recognized two periods of revenue in Q4 '21 due to the logistical issues we spoke of in Q3 '21, which was resolved in Q4. We are continuing to focus on international sales as we move forward. Medical net sales increased 237% from Q4 with the acquisition of Redecan. We are continuing to assess the medical market and leverage the strength of our combined entity to gain further ground. As a result of the purchase price accounting related to the acquisitions of Redecan and Zenabis, which we spoke about last quarter, the crystallized fair value adjustments, which otherwise would have been realized upon the sale of inventory, are included in the cost of sales. In order to better communicate the margins from our business activities, we have removed the impact of crystallization in our adjusted cost of sales to calculate gross profit before adjustments. Overall, gross margin before fair value adjustment, excluding beverages, increased to 28% in Q1 from 25% in Q4. Gross margin on adult-use net sales, excluding beverages, increased to 22% from 14% due to the contribution of Redecan sales at higher-than-average gross margins, and the improvement in Zenabis gross margins after realizing some of the planned integration synergies. Medical gross margins increased to 59% with the addition of Redecan medical sales at higher than average gross margin. The gross margins in international sales remained relatively consistent at 64%, while wholesale margins remained consistent at 24%, a minor increase was relatively -- was related to the previously mentioned Redecan and Zenabis sales, which I spoke about a few moments ago. Looking ahead, HEXO is focused on improve our gross margins. As Scott mentioned, we are focusing on driving cost savings and cultivation and manufacturing, improving utilization, and realizing additional synergies across the organization. We are actively reviewing the SKUs where we have strong margins and are applying best practices from these products to make improvements elsewhere. In relation to our operating expenses, we look at core SG&A as SG&A, marketing and promotion and R&D. These, when added together, represented 59.1% of net revenue, down from 61.3% in Q4. As part of our cost cutting, we are continuing to aggressively focus on decreasing core SG&A as a percentage of revenue and longer term, expect us to fall under 20%. In relation to G&A, specifically, it increased $3.3 million over Q4. The increase is primarily related to the acquisitions of Redecan and 48North during the quarter. Marketing promotion increased $2.6 million over Q4 as a result of an enhanced marketing promotion campaign at Redecan and our carbon offset initiatives. Share-based compensation increased $3 million over Q4 as a result of the timing of vesting our previous brands as there were no new options granted during Q1. Amortization of intangibles increased $7.2 million over Q4 due to the additional amortizable intangible assets, namely cultivation, licenses and brands, which were acquired through the acquisition of Zenabis, Redecan and 48North. Restructuring costs increased to $2.4 million as a result of changes in certain senior personnel across organization due to the ongoing restructuring initiatives. Impairment of PP&E increased $3.5 million, primarily as a result of the indefinite suspension of our KIT extraction project, impairments in investment and associate of $26.9 million. On October 31, their existing indicators of impairment on the Company's investment in Truss Beverages, and as such, management performed discounted cash flow valuation at October 31, 2021, which resulted in impairment to its recoverable amount. The historical carrying value of the Truss LP investment included $42.3 million related to the fair value of warrant issued to Molson Canada as part of the initial investment in 2018. These warrants expired unexercised in October of 2021. Acquisition and transaction costs increased to $9.5 million. These are again related to the acquisitions of 48North and Redecan and the integration of Zenabis. Finance expenses decreased from Q4 down to $4.5 million in Q1, and this relates mostly to the broker and advisory and legal fees for the August financing. Loss from operations increased from $60 million to $155 million. This is significantly driven by the acquisition-related costs, fair value adjustments, the impairments of PTD, as talked about, around KITs and others, and the investments and the write-down of the Truss Beverages, as I noted earlier. Adjusted EBITDA was down another $800,000 from Q4, and it sits at negative $11.6 million. EBITDA loss remains somewhat elevated as we continue to work through operational synergies through the acquisitions. As Scott spoke to earlier, we have plans to realize cost synergies, reduce manufacturing and production costs, and streamline and simplify the organizational structure. We now successfully closed all three transactions. We switched from integration planning to integration execution as we move forward through the robust plan we created. We originally thought we would be able to achieve approximately $35 million in synergies, and now believe we will exceed the target and obtain synergies of over $50 million. We have now realized $25 million of those synergies on an annualized basis, which will come into our results over the coming quarters. From here on out, our focus is now on The Path Forward, with our five key priorities as outlined by Scott earlier. I will not repeat them because Scott did such a good job articulating them earlier, but that will be our ongoing focus. On a final note, I would like to thank everyone at HEXO for their commitment and effort over this past year. It's been a pleasure working with such a dedicated and resilient team. I believe personally and wholeheartedly that HEXO has a great foundation on which to build for the future, and sits in great hands. This now concludes my prepared remarks. Operator, we would be happy to take any questions.

[Scott Cooper:]

Just before we turn it over to questions, thank you, Trent, just a couple of closing remarks. I want to thank everyone, once again, for joining us this morning. I’d like to thank, once again, Trent for his service with HEXO on behalf of the Board and management team. Wish you all the best in your future endeavors. And then, the transformation of HEXO over the past 12 months has provided a strong foundation for the Company. As I’ve outlined today, I believe there are significant opportunities across the network to accelerate growth, aggressively attack cost, expand margins and be more effective stewards of capital, all leading us to be the first major cannabis country in Canada, consistently be operationally cash flow positive within the next four quarters. I have full confidence in our path forward and believe there is significant value in this organization and we are on the right path for long-term prosperity as we continue to work through the debt issues. Look forward to speaking to you soon, and we'll now open it up for questions.

[Operator:]

Your first question comes from Aaron Grey from Alliance Global Partners. Please go ahead.

[Aaron Grey:]

So I guess the first question for me would just be around -- I appreciate what you guys are now doing the kind of The Path Forward. But just in terms of market share trends going forward, pre-roll is doing well. But on the flower side, under some pressure, it sounds like, Scott, you guys don't want to compete as much on the pricing side anymore, so specifically on the flower category, currently the biggest within the Canadian market. And how are you guys looking to improve the market share there going forward, particularly as you mentioned on the side?

[Scott Cooper:]

Yes. Thanks for the question. One thing I would say is we're -- if we look at the flower category, and Val, if you want to expand on this, we look at the category in good, better, best, and we are -- we'll continue to compete with good where we have a strong, as we said, a best-in-class cost structure, both in cultivation and manufacturing. What we're particularly excited about, though, as we look at the future, is the opportunity with Atholville from the Zenabis acquisition with the in-door grow facility, bringing higher quality flower to our product line. We've got a full range of growing capacity across the Redecan, HEXO and Zenabis systems. We've got new genetics as a result of the acquisitions, which we're currently testing a number of facilities to bring to market shortly. So where, where I'm excited about flower again, is we have a strong position and with the new acquisitions, we have a lot of opportunity to move into additional segments and categories.

[Aaron Grey:]

Okay. Thanks for that. I appreciate that color. And the second question from me just on the synergies. So expecting to realize $50 million now versus the original $35 million, I believe you mentioned how many synergies you realized to-date. Could you please just repeat that? And then offer some color in terms of the timing of -- to get to the full $50 million? And then if you could provide a split between COGS and SG&A, where you look to realize $50 million?

[Trent MacDonald:]

Sure, Aaron. Trent here. So, so far, we've managed to get about $25 million of the synergies. You don't see all of that in our Q1. Obviously, this is an annualized amount, which we expect to come through the P&L over the next quarters. We have realized some of those in Q1. You'll note that we've talked about the margins in Zenabis, coming back to approximately 32%, which is -- as a result of some of the synergies coming from the closure of Langley, BC, among other things. As we go forward, we're expecting to get to over $50 million, and that would be over the next three, four quarters. As you know, we did announce the closure of several of our facilities, which will take place at the end of January and the end of February, after which those will start to annualize. There's other initiatives in relation to productive capabilities in Atholville, Molson and Redecan, all of which will take some time, but we are doing this with some haste, and we do want this to start annualizing over the next three, four quarters. So you see the full benefit of these acquisitions.

[Operator:]

And your next question comes from Rupesh Parikh from Oppenheimer. Please go ahead.

[Rupesh Parikh:]

So I just wanted to touch on maybe more of the HEXO-based business. So if I take out the M&A, it appears the base business declined year-over-year. So maybe just some more color in terms of what's happening with HEXO excluding the recent M&A?

[Val Malone:]

It's Val Malone. I'll take the question. I really can't comment too much on what's happened in the past, but I can tell you what we're doing forward in terms of growing our overall market share. We are, in fact, number one, in many categories within the cannabis space, and on our way to doing that in others. As we move forward and fuel this engine to ensure that we're driving organic and market share growth, it really is being fueled by a very deep understanding of the evolving cannabis consumer and their needs, and their need states overall. And so our focus, as Scott alluded to on the onset is really focused on understanding these consumers, growing the right products and delivering them in the timely way to ensure that we continue to grow organically and expand our market share position with HEXO and all the other brands that are within our family.

[Scott Cooper:]

Yes. And I'd add to that, because we've talked about closing the gap versus customer demand. So one of the -- as we talk about growth, one of the opportunities as we cultivate to that customer demand, that will certainly be part of closing that gap and accelerating growth. And we're also looking at the portfolio of brands in totality, and we're looking at how can we best meet consumer needs. Consumers are increasing pre-rolls are a fast, fast-growing category. And as we look at the set of brands across the full range, we're managing as a portfolio, again, to meet consumer needs to optimize margins in putting the focus and investment by the highest margin segments. Yes, I would anticipate -- as you kind of look at the business moving forward, we're managing it not necessarily brand by brand, but in aggregate to optimize the full opportunity for it.

[Rupesh Parikh:]

Okay. Great. That's helpful color. And then just on the positive cash flow commentary. When you guys have that target out there, are you referring to positive free cash flows or operating cash flows within four quarters?

[Scott Cooper:]

Operating cash flows.

[Rupesh Parikh:]

Operating. Okay. Great. And maybe just one final question. Just on Redecan. Obviously, that was one of the more significant acquisitions that you guys have recently done. Just any major surprises so far, positive or negative as you look at that M&A?

[Scott Cooper:]

I'm very excited to have Redecan in the portfolio. They bring strong capability and capacity around -- particularly the pre-rolls. But I think where I'm most excited about the Redecan addition to the HEXO organization is their -- the capability. I mentioned appointing Jackie Fletcher to the Head of Science and where that's really compelling across the organization as Jackie has strong, strong technical capabilities. And with Redecan, she had a really practical approach to applying those. And so when you saw that Redecan is -- their ability to get into new segments, new formats really quickly. And as much as Redecan brings capability like infrastructure, they also bring that talent to HEXO, and we'll be increasingly tapping into that across the enterprise.

[Operator:]

Your next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.

[Tamy Chen:]

Hi, good morning, thanks for the question. First from me is on the cash flow targets that you've provided. First, I just want to make sure I understand because you talk about incremental. So if I look in this fiscal Q1 quarter, your operating cash flow burn was about $56 million. So are you saying that for the rest of this fiscal year, there will be an incremental positive $37 million swing on the operating cash flow? And then in fiscal 2023, there'll be an additional $135 million positive swing on top of fiscal 2022? So am I understanding that correctly? And how did you get to these targets? Like can you share a bit more of the assumptions you have underlining this?

[Trent MacDonald:]

Sure, Tamy. So right now, Q1 was very noisy, okay, extraordinarily noisy in terms of cash flow. There was the closing of two major acquisitions. The integration -- continued integration of Zenabis as we closed on these two acquisitions. So Q1 is not indicative of the combined organization, the strength of these organizations bring to one another as we go forward as one consolidated unit. Where we see the dramatic improvements in cash flow are going to come first and foremost, as both Val and Scott have talked about, is the consolidation of SKUs, the rationalization of some of our operating facilities, the integration synergies that we continue to talk about that we believe we're going to be able to obtain over the next several quarters. And you look at the cash flow impacted each of those things, and it's very robust. And so we believe right now, although not asked and not -- we haven't said it that loud, but we believe that we will get to EBITDA positive in this quarter, Q2. So that's what our goal is, and we'll see how that works out, but that's what our goal is to be EBITDA positive in this current quarter. And so that provides us with immediate cash flow better than what we had in Q1. And like I said, our goal is to get to positive cash flow in the next several quarters on an operational basis and then from there, you continue to build. So that's really where it comes as well as some of the cost-saving initiatives that Scott talked about on SG&A, productive capabilities, the combination of certain -- the lowering and the rationalization of some of our overhead and costs that go into the overhead allocations go into cost of goods. And so as you bring those down, it has a positive impact on cash, not just earnings.

[Tamy Chen:]

Got it. Okay. And my second question is your focus to better match your cultivation planning to demand is something that we see in other large LPs also struggle with and are trying to improve, but it's taken some time. And they -- some of them seem to be unable to keep up with the smaller, more nimble companies. So can you please elaborate more on what you intend to do to better keep up with the demand and especially the consumer expectation for essentially constant newness?

[Val Malone:]

Yes, I'll take this one. It's Val here. I think at the onset, again, I'm just going to reinforce the deep understanding of the consumer and planning for the future. So we have a good understanding of what to cultivate in advance. The second key component of that is working cross-functionally together to ensure that there are plans that fact taking count demand or cultivation and ultimately, their overall supply. Integration work continues in terms of putting in place the right systems to be able to manage the systems and our farm management system and integrate all parts of these. But it's a deep collaboration across the organization that's taking place immediately to ensure that we have further looking opportunities to cultivate based against the demands we see coming from the consumers, which is really all rooted in fact in consumer need and the evolving appetite for Canadians in cannabis.

[Trent MacDonald:]

If I could build on that, just a couple of specifics Tamy. So, there's a number of reasons that I believe, I mean, one is simply connecting the right people in the organization and obviously that's underway. But as Val talks about consumer needs, we've just completed a 3,000-person consumer study, which break -- really gives us a much deeper understanding of usage and attitude occasions. And we're using that knowledge. And again, that will be at the heart of everything we do to better understand where Canadians consumers are going, and be out in front of that. And Val mentioned quickly, we've just implemented something called our farm management system, which automates our cultivation, and gives us highly, highly -- high visibility to what's growing, how it's growing. So we have early line of sight to how the product -- how the flower is going to turn out. And then with our new integrated system with Atholville, in particular coming online, we have a number of indoor rooms. And as I mentioned, we have a significantly increased genetic bank, and that allows us on a smaller scale to grow higher quality flower and continue to explore and innovate with flower so that we have a constant set of news. And if we find a particular strain really resonates with consumers, then we've got the capacity with our other facilities to scale it and grow it quickly. So we're really going to use that -- the full capability across the network to allow us to compete effectively in that space.

[Operator:]

Your next question comes from Douglas Miehm from RBC Capital Markets. Please go ahead.

[Douglas Miehm:]

As I think about the $135 million in incremental operating cash flow for 2023, and I believe you mentioned that 50% of that is going to come from incremental revenue opportunities. So let's say, around $70 million. And even if we were to give you a 50% margin on those incremental revenues. It means about $140 million, $150 million in extra revenue next year. Can you tell me about where that's going to come to ensure that, that can occur or where I've gone wrong here?

[Scott Cooper:]

Yes, so, the mix of looking at the opportunities in the marketplace. So if I kind of break it down by format, we believe there's, as I've talked about a significant upside in flower with the portfolio coming together. We cannot meet the demand on pre-rolls today. We've just at our facility in Redecan installed the machine that more than doubles our capacity and capability. It's a machine out of Italy it can produce 1.6 million pre-rolls per day. We are just getting started in edibles. We're just getting started with HEXO, around vapes. We with the number of brands that come together from good, better, best. We have an opportunity now to compete across the full range of the value proposition. We have an opportunity to expand Redecan geographically. We have an opportunity to expand our wholesales. We're continuing to look to expand our international sales. So, there's a huge range of opportunities, and we continue to aggressively pursue those, but it's not all just specifically within the Canadian marketplace.

[Douglas Miehm:]

Yes. I understand. Thank you. Second question just has to do with the ATM, you mentioned. Is that going to be available at any price? And would you be willing to issue stock at, let's say, below $1 to meet the hurdle for your payments that are due?

[Trent MacDonald:]

Right now, we're looking at all options around the holistic solution to the debt itself. So we're not thinking about anything in silo. Right now, we're obviously going to be working with the Board and our advisors on what we think is best for our investors, and we don't want to do anything that's going to be damaging. Keeping in mind that we want to remain extraordinarily liquid and keep all options on our table so that we're always going to be in control of our own destiny. So no specifics on what we're willing to do today or tomorrow on the ATM, but it is -- but the ATM is, in fact, available is, and will continue to be available to us.

[Scott Cooper:]

I would say the one thing that we're making all of our decisions as we evaluate the options through maximizing shareholder value. That is at the front of our mind and it's driving every decision we make. And as Trent said, we're looking at all options, exploring with a number of a number of different options, but always with the lens of how do we optimize shareholder value.

[Operator:]

Your next question comes from John Zamparo from CIBC. Please go ahead.

[John Zamparo:]

I wanted to ask about the balance sheet. Setting aside the convertible notes issue for now, there's just $55 million or so of unrestricted cash at the end of the quarter. I know you raised some through the ATM. But it's not even sufficient to get through one more quarter at the current burn rate and credit to the comment you made earlier, Q1 is maybe not representative, but I'm trying to get a sense of what is the Company's plan to address this? You mentioned a number of options at your disposal in the press release. Can you give us a sense of how is your thinking about that? And what is your leaning towards? Or what investors should expect on capital raise in the coming months?

[Trent MacDonald:]

Yes. John, the -- again, you're right. I mean, look, it is very, very noisy in Q1. So you can't -- I really don't think that that's an indicator of future quarters. With regards to cash, yes, it was $55 million at the quarter. We see -- yes, we use the ATM somewhat to prepare ourselves in the event we wanted to do certain things around the debenture. But look, we continue to try to maximize shareholder value and keep all of our options in front of us. We do believe based on the initiatives we've talked about both through integration and those synergies, and when that the timing of those synergies are going to come into play. Some of the initiatives that Scott alluded to and not just alluded to, but talk to you about in detail on cost of goods initiatives, SG&A initiatives. In the current quarter, as you know there were -- we closed our two major or two acquisitions in the quarter, which obviously have a massive operational capital impact that doesn't repeat itself in future quarter. So a lot of that just goes away on its own, but combination with all of the other initiatives. We do believe we're quite liquid right now. And we believe that we have The Path Forward to get the cash flow positive within the next several quarters.

[John Zamparo:]

Okay. And my follow-up is on the CapEx side. I'm trying to reconcile, I guess, the necessity of some of the spending on CapEx, particularly given the state of the balance sheet. It was just over $20 million in the quarter. Can you elaborate on what the Company is spending on? And is this discretionary spending? Or is it necessary? And are you committed to a significant amount of capital spending over the next couple of quarters, given what you're talking about with expanding capacity on pre-rolls and bringing vapes that was in a few of the other projects you referenced?

[Scott Cooper:]

Yes. So let me address that one. We are absolutely laser-focused on disciplined return on investment on any dollar of capital we spend. We -- one of the first things I did was significantly curtailed the capital plan when I joined the business six weeks ago. We cut our capital at that point in time by 75%, and we continue to look forward to opportunities to cut that further. The capital opportunities that we are proceeding with are related to the acquisition integration synergies and they all have strong return on investment. And we will continue as we move forward to be very focused and disciplined around our use of capital in the business.

[Trent MacDonald:]

I will expand on that just slightly too is that, look, we know which categories that we need to invest in. And quite frankly, the cash flow for much of that has already been spent. There's not a large amount of future CapEx that gets us enabled. We're already enabled. So we believe we can move forward and compete really well in key categories with the productive capabilities that have already been spent. So I think that's a key component here that we don't have a lot of future initiatives that we have to put a large amount of CapEx into.

[Operator:]

Your next question comes from Adam Buckham from Scotiabank. Please go ahead. Adam, your line is open.

[Adam Buckham:]

Hey, sorry. I was muted there. Thanks for taking my question, guys. Trying to do you sort of hammer you on this point, but I wanted to kind of dig in a little more on sort of normalizing free cash flow because you talked about all the moving parts that happened this quarter. Are you able to give us a little more clarity on what normalized cash flows would have been for the quarter so we know what the base was? Is that where you static the $30-plus million you expect to get out? Like some more information there just to understand where you're sitting at currently.

[Trent MacDonald:]

Yes. Look, I mean, the big thing is you have to recall is that it's not just the acquisition costs that go with the -- they come into Q1 and then all the transaction costs that go with that. You haven't actually rationalized your functional areas, your operational teams, that -- as you incorporate these into your organization, you still have several facilities that are fully and completely operational throughout the quarter. All of that sort of goes away. So, as we -- as you know, Stellarton, Kirkland Lake, Langley, BC, the Branford for both HEXO and Branford site for 48North. I mean these are a lot of sites, all of which had some amount of cash impact in Q1. And so that goes away. In addition to, again, you have all your functional areas, whether it's finance, people and culture and other areas of our organization where you're taking all these teams, and you're getting through Q1, you haven't put the systems in place yet to really get all of those synergistic values out of it. And so all of that is a cash impact in Q1, okay? And it's heavy. Now going forward, in addition to that, you had a lot of consulting fees, a lot of advisory in addition to some audit-related issues. So, there's a lot of fees in there. All of that rationalizes itself over the next several quarters. And while you're rationalizing all of those spends, you're also putting into effect a lot of cost-saving missions on COGS and improving margins, and not just on the cost side, but on the pricing side, which Val expressed earlier, and Scott talked about in depth. In that, we're no longer going to be that coming into market on every category, trying to undercut market by 15%, 20% in every single product we launch. It's not conducive to great business. And so you put all of these things together, and it doesn't take long to be able to put on paper how you get to cash flow positive because we do have a tremendous base on which to build. And we are, in fact, what we believe to be one of, if not the lowest cost producer in the market.

[Operator:]

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

[Scott Cooper:]

Thank you very much. I'll just once again take the opportunity to highlight and reinforce the opportunity that HEXO presents. We brought together a set of companies that bring different capability, different assets. I really believe that HEXO is uniquely positioned in the Canadian market, and internationally, to capitalize on bringing the capabilities of the indoor grow facility, all of the brands, the leading position we have in many of the segments and in the fastest-growing segments like pre-rolls. We have the opportunity to aggressively grow tax costs margins, expand our margins, and as I said previously, the more effective stewards of capital. We are very focused on the consumer and customer at the heart of everything we do. We're very focused on getting to be -- that path of operational cash flow positive and confident in the plan that we've laid out. And as I said, I believe there's significant value in this organization, and we're on the right term -- right path for long-term prosperity as we continue to work through the debt issues. With that, with no other questions, thank you, everyone, and look forward to speaking soon.

[Operator:]

This concludes today's conference call. You may now disconnect.