Good morning, ladies and gentlemen. Welcome to Village Farms International’s Second Quarter 2020 Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the second quarter ended June 30, 2020. That news release along with the company's financial statements are available on the company's website at villagefarms.com under the Investor's heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following completion of the call. Details of how to access the replays are available in yesterday's news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of the conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in a company's various securities filings with the SEC and the Canadian regulators, including its Form 10-K, MD&A for the year ended December 31st, 2019 and the 10-Q for the quarter ended June 30, 2020, which are available on Edgar. These forward-looking statements are made as of today's date and except as required by applicable securities law, we company undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

Thank you, Jack and thank you to everyone for joining us today. With me for today's call is Village Farms’ Chief Financial Officer, Stephen Ruffini. Today's call begin with a review of the highlights of the quarter, most notably the sixth consecutive quarter of profitability for Pure Sunfarms, as well as positive EBITDA in our Produce business. Steve will then review our financial results and I'll return briefly discuss why we remain so confident in the future of our company. And we then -- we'll open it up to Q&A. Before I begin, with respect to COVID-19, I am, again, pleased to report that all our Village Farms and Pure Sunfarms facilities in Canada and the U.S. have continued to operate uninterrupted, as they have since the start of the pandemic. We have experienced an extremely small number of COVID-19 illnesses at two of our four produce facilities in Texas only. However, appropriate protocols will follow and have been no material disruption to our operations. Our success to date in managing the challenges of the pandemic is a testament to our adherence, to the recommendations of health authorities at all levels of government, which are over and above the already high standards of hygiene practices and safety protocols already in place as a highly regulated fresh food producer. In fact, other than the slowing of the build-out of provincial retail cannabis infrastructure and its effect on industry sales, COVID-19 has had no material negative impact on our operation today. And at this time, we don't foresee any lasting impacts going forward. So, before I start my scripted remarks, I just want to say how important this most recent quarter was for us, and how pleased I am with the results. We proved clearly that Pure Sunfarms can lead the Canadian…

Thanks Mike. I will review some headline figures from our Q2 results by business line. First, produce while not the business line that most want to talk about is our historical business and base business as we move into a new agricultural based CPG business lines. Our top line Q2 produce sales increased year-on-year by 15% in U.S. dollars to $47.6 million from $1.3 million with cost of goods sold relatively flat year-on-year, resulting in an improvement in our gross margin of $6.5 million from 2019, providing a gross margin percentage of 7.4% in the second quarter of 2020 versus a negative gross margin in the second quarter of 2019 of 7.2%. Historically QQ has been a tough quarter for our produce business due to the dynamics of the North American tomato supply business as all U.S., Canadian, Mexican greenhouse producers are producing in this three-month period. Basic economics presides higher supply in a relatively flat year round demand business results in historical challenging market pricing in the spring and early summer months, year-in and year-out. But historical dynamics like many things in 2020 have been turned on their head, in our case to the positive. We are experiencing increased demand consumption from our retail customers as Mike mentioned our big box grocery store -- national grocery store chains, as most people are staying at home and eating at home, while tomato supply around the world has its own issue with its own virus, which is resulting in lower tomato supplies. So, basic economic 101 [ph] is occurring increased pricing. Year-on-year, our Q2 2020 average tomato pricing increased 39% from our average price in 2019. The increase in pricing was even more prevalent in our large commodity tomatoes, beefsteak and TOV as we have seen an increase in consumption in…

Thank you, Steve. So, we are now at a place where we really see the future of Village Farms coming into focus. We are realizing our vision to become a highly profitable plant based consumer packaged goods company, leveraging our decades of experience in large scale, low cost intensive agriculture and our vast organizational capabilities as a vertically integrated supplier to the North American major groceries and big box retailers for emerging for new and high value opportunities. At Pure Sunfarms our plan does not change from day one, lead the industry as a low cost producer of quality product, establish and grow a leading market share in dried cannabis, leverage that brand performance for other large product categories, and do it with consistent profitability. We look forward to watching Pure Sunfarms build on success with the eminent launch of its cannabis. 2.0 products and the Canadian industry still continues to grow. We are at the leading edge of the global cannabis frontier, and this is massive opportunity and we are proud to already be one of the most successful companies in the world in this new industry, but also excited about our many future opportunities at home and abroad in CBD and in cannabis. And that will drive shareholder value in the near term, mid term and longer term. I just want to reiterate my opening comments about how pleased I am with the Q2 results. They clearly show the earnings power of Pure Sunfarms and how this part of our business will continue to deliver value for our shareholders. We push the envelope on pricing in the second quarter to demonstrate that we can compete with the illicit trade day-in and day-out and be profitable. That is a huge demonstration. And with that, we will take any questions that you may have.

Certainly. [Operator Instructions] Aaron Grey with Alliance Global Partners. Your line is open.

Hi. Good morning and thanks for the questions. I guess, first one for me -- and also congrats on another quarter of profitability for Pure Sunfarms. But first one for me, as we look at the top line on the retail side specifically, you mentioned, still doing well in Ontario with 14% market share. Still in the early days of Alberta and BC, but specifically with those two provinces, you mentioned, a lot of competition and competitors there. So, just wondering if you give some color in terms of how much that's kind of impacted the repurchase rates there. And if it's kind of going to take some of the shake out before you see more meaningful contribution from those two provinces, or just any color there in terms of how we should expect kind of ramp up in those two provinces come? Thanks.

Well, you can't forget that the second quarter was an interesting quarter because of the pandemic. What happened towards the end of the first quarter of February and clearly March, there was a huge purchase at the provincial levels. A lot of pantry hoarding was going on and that's had an impact sort of at the beginning of the second quarter, especially April. So, that -- so when we look at the second quarter, there were a lot of things that are -- that were impacted due to the coronavirus and it started to smooth out halfway through the second quarter. But remember that we didn't really -- in March is when we launched in BC without a large format. And we actually launched in the OCS, on 4/20 in April, so tied to that date and then Alberta followed. So, a lot of this -- a lot of impact really started as far as sales increases towards the -- at the middle to the end of the second quarter. And now going forward, this will be the first full quarter that Alberta and Saskatchewan are on a large format is in all those provinces. And I think we'll start -- we'll demonstrate that traction in the third quarter going forward.

Okay. Great. Thanks. That's super helpful. And then, if I could just ask one more on the gross margin side, certainly makes sense how we saw some pressure sequentially as you rolled out your value formats. A couple of things here. As we think about more value offerings coming online and then also potentially 2.0 products. And then also it seems like you have some opportunity on the cost per gram side. How to kind of think about the puts and takes in terms of the gross margin evolution over the next couple quarters? Thanks.

Well, I think this would be the lowest -- I think, the second quarter -- look, we pushed the envelope in the second quarter and because at the end of the day, we've always said that for us, it's about taking -- cannibalizing the illicit trade. That is the market, as we see it. And whether it's dried flower or vapes, which will be soon to be launching, we have to go through -- the cards we're dealt with in Canada. And the Canadian market is very different than any other market. All these international markets will have uniqueness to them. So, Canada is very different from the U.S. The cards we're dealt with in Canada are that one -- as I've said many times before we have to pay a huge amount of taxes, our taxes for our licenses, which is based on revenues will slowly in the next six months, be close to $0.5 million a month. We pay $1 gram excise tax. There has to be a strong margin for the provincial boards to make. And then we have to make our margins and be profitable. And the second quarter demonstrated that if we're going to take the market share from the illicit trade, which is clearly, as I mentioned, 80%, 90% of the existing market, we have to compete with that. In the U.S. that's not the case. Less and less -- the illicit trade is less and less of a issue in the U.S. market, but it's clearly there in Canada. So, regardless of -- so, whatever the gross margin came out and we were very pleased that it came out north of 30%, which I think will be the very low end of the scale going forward. We demonstrated that we can survive, be profitable, be cash flow positive and take market share. I mean, we were able -- if the market move 5% or 10% from the first to second quarter, we were able to increase our sales 90%, that really shows the power of being aggressive in pricing. And I'm not even sure aggressive is the right term. It's a requirement to compete with the illicit trade. So, as we introduce more single strains, that have drivers like a high THC that commands a greater price, as we deliver our 2.0 products that have higher gross margins, those numbers should be increasing. So, I think this quarter, as I said, was a huge quarter demonstrate that we can be viable at these prices and be profitable. So, then I think we'll show that going forward.

Thanks for that color. That's helpful. And I'll jump back in the queue.

Andrew Partheniou with Stifel -- GMP. Your line is okay.

Thanks for taking my questions. I wanted to touch on a little bit of the dynamic of the provincial boards, their purchasing and the stock levels. I mean, you guys are obviously doing exceptionally well with sell through with the stat that you mentioned, PSF being the best brand in Ontario. But anecdotally, I've seen at times that your product is out of stock. Could you maybe touch a little bit on that, provide a little bit of extra color with regards to inventory levels? I'm wondering if the provinces kind of increase the repurchasing of our product, given it's so popular that your sales could -- especially in this quarter, have been significantly higher.

Yeah. I mean, that's -- this is Steve. Thanks for the question, Andrew. It's a continuing issue. Obviously, we see that, Pure Sunfarms see that, to some extent, these provincial buyers are say not similar behavior to what we deal with on produce business, a commercially driven P&L manager --buyer who's driven by P&L. These provincial buyers -- Ontario, as an example, have I think, upwards of over 50 suppliers to flower, which is an incredible number of vendors. So to some extent and Pure Sunfarms has been told this that the provincial buyer has a certain dollar amount that he can buy. And they have been told in certain instances when something's out of stock, that essentially it can't be reordered at this time because essentially the money for purchases has been spent. So, to a large extent, obviously, an out of stock is a loss sales. That's how we look at it, how Pure Sunfarms looks at it on. To some extent, as Mike has mentioned, the Canadian system is a Canadian system and is one of the headwinds that all the LPs have to deal with. You're dealing with provincial buyers, not commercial buyers who are necessarily looking at -- in the case of a produce buyer, dollars per square foot. That's just not how these provincial buyers are currently operating. That said, they have changed their behavior. Pure Sunfarms seeing more frequent purchases from what occurred in early 2020 and late 2019, which was large purchases. And we wouldn't see any reorders for a month. Now, we're seeing in places like Ontario weekly orders, which is helpful to Pure Sunfarms and allows it to restock those SKUs that are moving. And hopefully, avoid over shipping SKUs that don't. This is a consumer branded goods business at the end of the day. So, new SKUs, as the cases with large format can negatively impact existing sales of small format, that did occur.

Yeah. And if I could add to that. I mean, we have to understand and be patient that this is a whole new massive industry, and they're feeling their way to. And I think they're doing a great job in just early days here. So, when you see SKUs that are selling well, that are out of stock, it's just part of building a new base business for them as well. So.

Thanks for the additional color. If I could ask one more. Just on the expansion of your geographic distribution and adding new provinces, you touched a little bit around that on your prepared remarks. But maybe if you could just give a little bit more color on what exactly are you working on to penetrate additional markets. What's really the obstacles that you guys kind of face to turn on that new contract and win that shelf space?

Well, I think, the information we're receiving for the provincial -- from the provincial markets that we are in is that we're in a position of -- one, two and three in terms of quantity being sold. So, we're very pleased with that. And as I mentioned in my remarks, the final -- Quebec is really the final major market we want to penetrate, which then will represent 70% to 80% -- or more than 80% of the Canadian population. And that's the only one left. But I think Pure Sunfarms has been very prudent and making sure they can deliver it to each provinces, fulfill the orders, understand what their needs are before they take on another one, because as we know -- you always want to deliver. And so, I think they've done that. Although, prudently, they've moved very quickly and Quebec is on the radar screen, for sure. And I think, God willing that will happen pretty, pretty soon. And then, we'll be where we want to be more or less. There are some discussions going on with the Maritime as well, but Quebec is the next big move for us.

Thanks for taking my questions.

Adam Buckham with Scotiabank. Your line is open.

Good morning, Mike and Steve. Thanks for taking my question.

Good morning, Adam.

I wanted to dig a little deeper on pricing the start. So, it sounds like from your comment, you expect to see overall pricing stabilized to an extent moving forward at PSF. So, I guess, my question is with where PSF now and the product portfolio is now, do you believe that there is any need in the near term for price adjustments to maintain our gross share? Or do you see the setup -- the current setup it’s hard to match by the market?

Yeah. I think, yes, to both. I think, we don't spend a lot of time really looking at the competition. We just are driving our business model forward. And again, we see competing with the illicit trade and understanding that's the industry, that's the market that we have to understand and compete against. Now, if others can compete at that level, that's their issue, not ours, but that's where we're going. And this -- as I said, this was a demonstration that we can compete day-in and day-out against the illicit trade. While we have all these other cards we have to deal with in terms of the dollar, excise tax and the ability -- we don't have any ability to use the tools that the illicit trade may in terms of biologicals or the pesticides and so on. And that's almost like growing. As I've mentioned in the past with one arm and leg tied behind your back. But those are the cards we're dealt with. That is the market in Canada and we have to learn to compete. And I think they're doing it very well. So, with pricing, yeah, they, they kind of went to the mat here and that's why I'm really excited about it, because going to the mat and generating north of 30%, which -- 30% to 50% for a traditional mature CPG business. I mean, that's probably a sweet spot and this is sort of a low end of that. But I don't see that we have to deliver pricing any lower to compete. We've demonstrated that, the 90% increase in volume sold supported that we're at that sweet spot. So, I think now introductions -- the introductions of single strains and H2O products Health Canada, the vape and everything else we're delivering, we'll be at higher margins and our average margin will come up. So, I think, this is sort of the bottom of that range. And not to be redundant, but it shows where we compete, and it gives us a lot of confidence in the sustainability and durability of our business model.

So, it was a great comment. Thanks. So, secondly, I guess, at a high level, can you provide some color on just how the cost profile is different between your wholesale sales, the large format and your other SKUs?

Probably not too much. That would probably get -- what I want to give too much out of the competition, but our large format is high quality and it's very good product. So, it's just -- we found a way we can do it. I think not saying maybe we were the first introduced it, but clearly we've been the most successful in that introduction and is resonating very well with consumers. And that's sort of our -- a little bit of our IP, so to speak. And -- but we're going -- we're looking at producing. We're doing a lot of things in our new processing center, hand drying and coming up with the creation of products that others may deem more of a craft side. And so, we have a full array to meet all consumer needs going forward. But the bulk -- I think the bulk of the market still remains flower and the value added pack is still going to rule going forward.

Okay. That's great. I'll just squeeze one last one. More on the produce side. So, I think, Steve, made -- might have mentioned the spine demand dynamics in the tomato market and how it was a tailwind for pricing. Can you maybe provide some detail on what you're seeing in the market currently? And then when you might expect supply to catch up to where demand is?

Yeah. Well, like, I've always said with the produce challenges -- the produce challenges are caused by the master agreement that changed the dynamics. And it would be similar that if the Canadian government opens up importation of cannabis from South America, as an example, it's going to change the dynamic. And that's what happened in the produce industry. We compete with Mexico. And I've said -- and we grow in Mexico. It came to the point where we can't beat them, join them, because it's a labor intensive industry and we're paying 20 bucks an hour all-in whether it's Canadian or U.S. assets. And that includes, of course, benefits and all. And Mexico is still more or less than $6 per day for agriculture way. So, I think with the pandemic what's happened is obviously people aren't eating out. As I said in my remarks, 90%-plus of our sales are to retail food chains, not food service, which has taken a huge hit due to nobody eating out. So, we were fortunate there. And people are eating at home more, it's driving greater fresh food sales. And I think, we're actually seeing a much more of a stronger interest in U.S. product as well with some of our customers. So, I think that's driving it. And I think it's -- we feel it's pretty sustainable. I think there's going to be a lot of changes in the behavior, how people operate, people are getting comfortable eating at home. So, we feel good about that. And we continue to work on our relationships. Part of the result was replacing volume that we lost and conversion of our greenhouses. And so, I think, we'll continue on. I think -- I hope that answered your question.

Yeah. No. it certainly does. Thanks. That's it for me.

Eric Des Lauriers with Craig-Hallum. Your line is open.

Okay. Great. Thanks for taking my questions guys. So, I want to focus on the wholesale market. It's good to hear at least on the retail side that you think this price level is sort of the bottom here. You mentioned -- you've seen a bit of a revival in the wholesale market, would love to just hear your commentary on? And if you think this is sustainable or -- should we still think about these as a sort of opportunistic lumpy sales?

Yeah. It's a good question. I mean, it's hard to predict longer term. We -- if we looked a year ago where we were in wholesale, not just in terms of volume in the second quarter of last year, but in pricing, that's dropped off a third of what it was. So, that was probably non-predictable a year ago. So, to sit here now and say what it would look like long-term, it's unknown. I mean, part about wholesale conduit is extractors. We have good relationships with those folks and hopefully that continues on. But I think at some point other -- we're working with other LPs and let's face it in our produce business. We've worked with competitors for years. We've have good relationships with competitors. We supply competitors. And to a degree I think that we'll get some traction going forward. So, I don't necessarily see it growing exponentially, but I think it's going to come back from where it was in the fourth quarter. That was pretty non-existent.

Okay. That's good color. And then, last one from me. I just wanted to touch on the 2.0 products. We've seen kind of -- some hit and miss results in the market. They seem to be doing better than oils or soft gels, for example. Just kind of wondering what your guys' takeaway has been, see competitors in the market. And then if you can -- what kinds of product mix do you think is reasonable going forward? Should we think of it sort of as like 75% flower for you guys and 25% 2.0 products, or is that kind of off the market? Just any color would be helpful.

Yeah. I mean, flower rules. And if you look even in the U.S. I mean, the major markets, California, Colorado, I mean, flower still rules. And I think it will for a long, long time. I think, the management team, the leadership, Mandesh, he has a real clear understanding of seeing what's working with others before we jump in. And so, we've taken a very prudent approach to what products we're going to launch them 2.0 and vapes as an example, yes, is one. And see how that goes. And as I said in my remarks, once we enter a particular segment, we want to work at as best we can, make sure our price point is right. We can make money doing it and try to take a commanding lead. And I think, that's on horizon and that in a way, own probably not much more in the foreseeable short term, so we make sure we can deliver those benefits and excel there. But I think when you look at the other markets, confectionary and beverage, they're still very small markets. And they still have to be proven out, see what the consumer preferences are going forward. So, we're going to be prudent before we jump into those. But as I said, flower -- and we still have a ways to go and trying to dominate and build our market share there. And we're very focused on that priority.

Rahul Sarugaser with Raymond James. Your line is open.

Morning, Mike and Steve. Thanks so much for taking my questions and congrats again on your EBITDA streak it's definitely commended. So, I guess, my first question is a bit more of a macro question. We're sort of -- we're seeing the market as a whole growing and in terms of dollar amount. But that said, of course, now we're also seeing incumbents and including yourselves, with relatively flat revenue quarter-to-quarter. So, are you able to comment on this dynamic? What do you think is driving it? And do you think that it's something that will adjust over time as the market matures?

I definitely think it will. I mean, the second quarter was a crazy quarter. I mean, it's almost like we're forgetting the impact of the pandemic and in consumer's minds, and March and April, that was just 60 days ago, 90 days ago. So, if you remember when we reported and the other LPs reported, it was a very unstable time, was hard to predict. We weren't sure if the infrastructure rollouts by the provinces like on Ontario would slow. People were staying at home. So, it's really hard to look at what's happening there. So, I think when -- we're already into the third quarter, and I could tell you in the third quarter, we're seeing you much more stabilization, and we're seeing growth. So, I don't think the second quarter is probably indicative of where the market is going. And that's why I'm really pleased with it, because we went through that and we got through it in a very strong way. And I think, we've actually said that we see a growth in the third and fourth quarter continuing, not just because of the launch of our new products and new strains, but increasing market share and further penetrating and cannibalizing illicit trade.

Yeah. Great.

On a macro level I think I feel very optimistic.

Thanks. That's really helpful. And then just one follow-up question. You got to fight Quebec as the next vanguard, province to penetrate, we recognize that Hexo has a "preferred supplier" position in the market whether artificial or not. How do you plan on dealing with that particular dynamic in Quebec as you penetrate?

Well, that's classified. I mean, let's just see what the results are going forward, Rahul.

Okay. Great. And then just very quickly, I'll just squeeze in a quick question about international. So, obviously, there is dust and grow and then the deal in Asia, how do you see your broader international strategy rolling out and committing capital to this sort of outside long-term opportunity?

Yeah. Well, that's -- the key is long-term. I mean, you could break these segments out. People can say, well, the CBD market, we thought we would have a lot great traction today from December 18 upon, decriminalization, but, of course monthly rents the FDA thrown in there and said, we're taking a prudent approach. But we're very committed. And we see that as a huge -- very exciting market that we definitely want to be a major force in whether we build it, buy it or work with partners in that market. But we want to stay a little bit on the sidelines. So, there's clarity from the FDA. We just think it's prudent right now. So, that said, there's -- we've always said if, and when, on legalization of high THC decriminalization of cannabis in the U.S. obviously many folks are talking about it, even the tax opportunities for the government, the local municipalities are resonating, elections coming up. So it's anybody's guess what happens. But the opportunity is massive and comparing it to Canada, it's just so massive. And we're ready to go. I mean, I would be honest with you that every day that I -- I don't really focus too much on the Canadian market, because Pure Sunfarms is doing their job and penetrating and doing well. But I look at the U.S. opportunities, and I wonder now how long before anyone not in that marketplace will not have the same opportunities as those who can compete in the U.S. market where we can today. However, that being said, having such a large footprint and what we consider the best growing region, or one of the best growing regions, Texas, where we are in Southwest Texas is probably the equivalent of what BC is to Canada in terms of growing conditions. So, we have that footprint that. We can pivot instantly. And maybe we'll go that along. Maybe we'll do it in partnership with others down the road, but that's a massive opportunity. But in the meantime, which is not going to rest on our law. So, we're looking at opportunities internationally -- and I'll tell you about the DutchCanGrow, so exciting about that is it just shows a movement of a specific European nation that has been very, very myopic on legalization of cannabis for decades, starting to show the trends of loosening up on the old mentality that cannabis cannot be legalized. And that's exciting for us, because that's one of many countries in the EU, and that's why we're excited to be there. But these opportunities also very long term. We're not looking at adding a positive cash flow in the short term. But -- so the decisions we make today are a combination of what we think can be a short term benefit, medium term and long term. We want to be at all three levels, because the opportunity is massive over the next decade. And we're pursuing that.

Great. Thanks very much for taking my questions. That’s all for me today.

Thank you.

Doug Cooper with Beacon Securities. Your line is open.

Hi. Good morning guys. Mike, just on the value pack you said it was 80%. I think, Steve, you said it was 80% of revenue in the quarter. How big do you think the category can be in total percentage of the market?

Large format?

Yeah.

All right. I think under the current-- I mean, again, like we saw in tomato business, we've seen that -- we've seen a movement towards the lower price product. So, I think for the foreseeable future the large format for dried flower will be the predominant SKU in the marketplace.

Yeah. If we even look at our numbers like March when we just started to launch it, that small format was greater than 50%. And we were at about 40% on large, that jumped to 60% April, 76% in May, 86% in June. So, in the second quarter, it really went from almost non-existent in the first quarter to 78% as compared, and small being 20%. So, I think that can give you an indication now when we launched new SKUs, it may change. But I think a 70%, 30%, 60%, 40%, 80%, 20% is clearly possible.

So, the large value pack priced at -- I think when you break it down 350 a gram for retailer -- for a retail price, price point seemed to be great for the consumer. Would you put that same price point in a smaller package? Is that part of the new SKUs are coming in with?

Not necessarily. I think we have to be attractive there as well, but maybe not to the extent of the large format.

Your packaging cost now as handling cost, and then smaller formatting, it's substantially higher than it is on a large format. So, you can't do that in the same value that you can in a large format. That's the beauty of the large format to the consumer, right?

Yeah. So, when you really look at where we are -- maybe because of the -- a number of reasons, but in June at 86% large format versus small, that really drove the margin down. But still north of 30% which I think it’s pretty incredible. So as we introduced more products and our volume goes up, even if the large format remains a very large percentage with increasing sales, we feel very confident and our gross margins will increase, even if we maintain that low margin -- low aggressive pricing rather on the large format. Doug, going to retail in BC at the black market price of $99 per ounce, that was the focus of the Pure Sunfarms management team. They wanted to go-to-market at the black market price.

You touched on that gross margin, you think potentially can move higher as you progress throughout the year and then next year. Steve, can you just talk to us about the accounting for 2.0 products considering, I think you've said in the past that in one sense, trim is garbage -- and from an accounting perspective. So, what would be the -- how does the accounting work on that product line?

Well, for us -- again, as I said, the cost per gram is a non-industry standard. So, I know you and others are trying to track that metric. And I asked the question, well, does that include trim or not in the denominator of production? We do not -- Pure Sunfarms does not include trim, because ultimately we're in the business of growing flower and using the flower, but trim is used -- utilized in cannabis 2.0 product being vape pens, et cetera. Obviously, the cannabinoid content of trim is the same as it is with a number one flower. So, for Pure Sunfarms, I can't speak to anyone else. So Pure Sunfarms cannabis 2.0 will be helpful in our gross margin, because we value the trim as zero on our accounting books.

Okay.

So, that'll improve the margin of cannabis 2.0. So that input -- the percentage of trim in the cannabis 2.0 product is zero cost.

Yeah. And also, Doug, I want to add to something. I have some numbers. Just looking at where we're headed in a sort of July is, we had a large format with 80% of the volume in Q2 it's sort of dropped to 60% in July and even down to 45%, 50% initially in August. So, it's going to be interesting to see if a big driver of that was also tied to the pandemic as well. And we'll get some more color on that over the next quarter or two to see how it averages out. So, I think, it's still too early to say specifically what that split will be.

Okay. And then just two more quick ones for me. The $12.9 million of net sales in the quarter. How much was that was Ontario?

We don't -- we -- one, I don't have that information. Two, I wouldn't give it to you if I have it anyway.

Okay. And CapEx requirements for the second half, given you pulling back, I guess, some D3 just give an update where you are in D2, obviously that's …

Yeah. I mean …

… what's the CapEx?

No. There's no real CapEx requirements for the rest of this year. Delta 2 has had most of the investment in there. It may only need a few million dollars to kick it off. And we're starting to look at longer term projections of capacity requirements into the third quarter next year, where we feel we may start turning Delta 2 on as well. But we're going to produce what we can sell and maintain out inventory levels at the level we want. You've seen a lot of companies, I think, just producing, producing, producing can't sell for whatever reason taking write-downs, and we're just going to manage that process. But as far as CapEx goes, we're in good shape.

Sorry. My final one -- just -- you just mentioned it as well, just ask the question we've seen that a lot of inventory write-downs at other LPs. Pure Sunfarms inventory stood at US$36 million at the end of the quarter. Any comments or comfort around that inventory level?

We're comfortable then to a level. Obviously, we kept it for recoverability. So, we've gone through that exercise, so very, very confident with the inventory that we have. This is a consumer goods industry at the end of the day. So, as new SKUs launch, it is -- could impact in the future, down the road on our inventory valuation. And that said, the beauty of cannabis is you can extract. So, if you have a strain that hasn't been as successful -- or is negatively impacted by a new strain that we've launched and the reason large format is down to some extent in July and August, as a percentage of Pure Sunfarms sales because they have launched new strains. That's the beauty of that. And they have taken a strain back in Ontario that didn't perform as well and was negatively impacted by the strong performance of other SKUs. If you can take it back and extract it and use the cannabinoid content in cannabis 2.0. So, getting to Mike's point, managing your production and manage for what you can sell and use and utilize in the near term is the way to avoid inventory write-off, down the road.

Yeah. And we also feel like comfortable going forward with an inventory level of about 15 to 20 tons. So, because as we rollout new products, we have that. So, just on Steve's point, we're comfortable where we're at, for sure.

Okay. Great. Thank you.

That's why we mentioned in the call, by the way, we did curtail some of our production at the beginning of the summer just to be able to catch up, and that's just managing the process. That has nothing to do with COVID or the pandemic, that's just managing the expectations.

Perfect. Thanks, guys.

Our final question comes from the line of Scott Fortune with ROTH Capital Partners. Your line is open.

Hey, guys. This is Nick stepping in for Scott. Most of my questions have already been answered. But I just wanted some color on the CBD branding side of things the longer term. Are you guys thinking about building your CBD grant plan -- brand -- sorry -- globally in the U.S. ahead of any sort of FDA movement? You mentioned being on hold here, but any color in terms of brand strategy would be helpful. Thanks.

Yeah. I mean, it's a --- we just don't want to take any risks there. But we have a program. We're looking at products that are not being scrutinized by the FDA and deciding if we want to develop. We're still sitting on very viable, high quality biomass. So -- and we're looking at other opportunities with other companies. So, I think, I can't say, Scott, at this point, we're going to move forth because we just want to be clear with what the FDA guidelines are going to be. And we felt a little more confident in recent weeks. Hopefully after the election, things get focused on it. And -- so really looking at 2021 to sort of get back on course.

Great. That's it for me. Thanks guys.

Thanks, Nick.

Okay. I just want to thank everybody for joining us today. I hope we provided clarity. I personally am very, very excited about where we stand today and what we've demonstrated. Now I -- we're clear that our foundation for our business model is solid, and we can build upon that going forward and then start to look at other opportunities, both domestically and internationally. So, we're excited. We look forward to reporting the next quarter, and we want to thank everyone for participating today. And look forward to speaking to you again.

This concludes the Village Farms International's second quarter 2020 financial results call. Thank you for your participation. You may now disconnect.