Standing by. Welcome to the Goodfood second quarter 2019 financial results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. As a courtesy to others, we ask that each participant limit themselves to one question, and if necessary, one follow-up question. Instructions will be provided at that time for you to queue up for questions. Please note that questions will be taken from financial analysts only. If anyone has any difficulties hearing the conference, please press star followed by zero for the operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, April 4, 2019, at 8:00 A.M. Eastern Daylight Time. I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood Chief Executive Officer. Mr. Ferrari, you may proceed.
[Non-English content]. Good morning, everyone, and welcome to this call for Goodfood Market Corp to present our financial results for the second quarter of fiscal 2019, ended February 28, 2019. I'm Jonathan Ferrari, the Chief Executive Officer of Goodfood. I'm pleased to be joined on the call today by Philippe Adam, our Chief Financial Officer, and by Neil Cuggy, Goodfood's President and Chief Operating Officer. Prior to moving on, I'd like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations, and intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. As such, I would ask participants to take a moment to read the disclaimer on forward-looking statements on the first slide of the presentation before we begin. Slide 2 outlines our corporate highlights for the second quarter of fiscal 2019.
Q2 2019 proved to be an excellent quarter. We achieved record results on a number of key metrics. As shown, strong growth continued during the quarter. We achieved year-over-year subscriber growth of 161%, resulting in a subscriber base of 159,000 at February 28, 2019. The rate of subscriber additions in our core geographic markets continued to increase following the record levels achieved in Q1. This momentum resulted from strong growth in Western Canada and the launch of new meal plans and was further enhanced by continuous growth in eastern regions, as well as market-leading brand recognition across Canada. Gross merchandise sales also increased significantly, increasing by 25% over the first quarter and 147% year-over-year to reach CAD 46.5 million.
The strong growth momentum of the second quarter, driven by net subscriber additions, new meal plans, and meal solutions, allowed us to exceed the CAD 200 million mark in gross merchandise sales run rate for the first time ever. Our gross margin and adjusted gross margin also improved significantly year-over-year. The company's adjusted gross margin improved by 600 basis points to 37.8%, another record, largely due to our increasing scale and investments in operational efficiencies. Recall that our strategy is to continue to invest in growth. While this delays profitability in the short term, we believe it maximizes shareholder value in the longer term. We recognize that we have a tremendous opportunity to build our market position and benefit increasingly from economies of scale. In the first six months of fiscal 2019, we generated CAD 1.4 million in cash flow from operations.
During that same period, we invested CAD 3.4 million in capital expenditures, primarily to fund the Eastern Canada facility expansion and investments in automation. Finally, on February 22nd, we completed a public offering and issued common shares for gross proceeds of CAD 21.1 million. This equity issuance represents the largest offering since the company went public. The initiative increased capital raised on public markets to more than CAD 50 million. As a result, we finished the quarter with a strong cash position of CAD 46.3 million. Slide three shows Goodfood's strong and accelerating growth quarter-over-quarter for the past seven quarters. By the close of the second quarter of 2019, as I mentioned a moment ago, our active subscriber base grew to 159,000. The growth represented an addition of 33,000 net new subscribers, more than doubling the number of new subscribers from the corresponding period of last year.
Quarterly revenue has also grown sharply since Q4 2017. Revenue increased to a record CAD 36.6 million for the quarter, more than double the revenue for the corresponding period in 2018 and 24% higher than in the first quarter. This increase has resulted in revenue exceeding CAD 110 million for the last 12 months, surpassing the CAD 100 million mark for the very first time. Growth is extremely robust, not only for Goodfood but the industry as a whole. We are still in the very early days of building our direct-to-consumer meal solutions in Canada, and we believe that during the next few years, the industry can reach the CAD 9 billion mark in Canada alone. In fact, our current customer base represents approximately 1% of the 15 million Canadian households.
With the direct-to-consumer home meal solutions industry still in its infancy, there are enormous amounts of opportunities available, not only to gain market share, but also to continue to gain a strong competitive advantage. Turning to slide four, our gross merchandise sales increased 25% to a record CAD 46.5 million for the second quarter compared to Q1 2019, and on a last 12 month basis, reached CAD 135.6 million. The GMS run rates surpassed the CAD 200 million mark and reached CAD 222 million at the end of the second quarter, an all-time high, more than doubling gross merchandise sales achieved at the end of fiscal 2018. As a reminder, gross merchandise sales reflect the total value of merchandise sold by the company before taking into account incentives and credits. Turning to slide five, we are continuing to focus on growth and on improving member experience.
Our objective is to expand our product categories to capture further growth opportunities. Since the beginning of the year, we have been actively working towards adding additional meal options as well as meals with different levels of engagement, from ready to cook to ready to eat. A few weeks ago, we launched our breakfast smoothies across Canada, our first product line in our breakfast solutions. In the first six months, we developed 10 flavors and are in the process of further development. It is still early days, but we already see encouraging signs of success despite limited marketing investments. In order to grow our breakfast product line, we recently secured the lease of a new 20,000 sq ft facility in Montreal, which will be used exclusively for our breakfast meal solutions and will add approximately CAD 100 million of production capacity.
Our Clean 15 meal plan has exceeded expectations and continues to increase in popularity. We're seeing a rising adoption and order rate from our members. This new plan was featured during the quarter on CTV News, Global TV, the National Post, and The Globe and Mail. Our partnership with Canadian gold medal mogul skier Mikaël Kingsbury has given the plan a compelling profile. We're also in our pilot testing stage for our ready-to-eat meal solutions in Eastern Canada. In early February, we launched the first version of our mobile app on the App Store and Google Play Store. Thousands of our members are already using it on a regular basis, and we anticipate a continuing growth curve. I will turn now to capacity expansion and production efficiency. Our Eastern Canadian facility expansion is progressing well.
We have in fact started operations in a large part of the new space. The project is on track for completion, under budget, and ahead of schedule by the end of Q3. As a reminder, the expansion will double our production and sales capacity in Eastern Canada and will allow us to better serve the needs of our fast-growing member base as we continue to add new meal solutions and expand our product offering. In terms of dollars, the sales capacity will increase from about CAD 200 million to approximately CAD 400 million once completed. In Western Canada, our results continue to be above expectations. We're now the number one choice for Canadians' home meal solutions in both Alberta and British Columbia. Subscriber growth is strong, and we are seeing increasing order rates from our members.
As a result, we have decided to expand our Calgary facility with a doubling of the refrigerated section. The expansion should be completed by the end of fiscal 2019 and will add increased sales capacity from roughly CAD 100 million- CAD 200 million. We're making good progress on our plan to build a world-class automation ecosystem in all of our facilities. Currently, our Eastern Canada facility is approximately 50% automated, while we have only just begun the investment in the automation of our Western Canada facility and breakfast facility. The automation ecosystem will further Goodfood's position as the lowest cost supplier in the home meal solutions industry and allow us to provide our members with more value than anyone else while delivering industry-leading margins to our shareholders. I will turn the presentation over to Philippe.
Thank you, Jonathan. Good morning, everyone. Please turn to slide six. I will now present the key financial highlights for Q2 2019. Goodfood continues to turn out strong triple-digit growth in active subscribers, revenue, and gross profit on a year-over-year basis. We grew our active subscriber base to 159,000 at the end of February 2019, an increase of 161% from February 2018. Revenue growth was up over CAD 36 million at the close of Q2 2019, an increase of 133% from the corresponding period in 2018, while gross profit increased 171% to CAD 7.5 million. Slide seven compares our gross margin and adjusted gross margin. As you can see, our gross margin continues to improve and increase by 290 basis points compared to Q2 2018. Our adjusted gross margin reached a record 37.8%, an increase of 600 basis points over the same quarter in 2018.
These improvements reflect continued efficiencies generated in our Eastern and Western Canada operations, as well as the progress we've made on labor, shipping, and packaging costs from economies of scale and increased buying power. Our margin improvements were mitigated by the harsh winter conditions we've experienced. Those conditions presented challenges on logistics and shipping, and we also incurred additional labor costs related to the holiday season. With that, I'd like to move on to slide eight and focus on Goodfood's quarter-over-quarter results. During Q2 2019, Goodfood added 33,000 net new subscribers, an increase of 26% from November 30th, 2018. Our revenue grew sharply by 24% in the last quarter, to CAD 36.6 million from the CAD 29.6 million of revenue in Q1 2019. As Jonathan mentioned, our revenue over the last 12 months exceeded CAD 110 million.
We generated gross merchandise sales of CAD 46.5 million in the second quarter, an increase of nearly 25% from the CAD 37.1 million in GMS recorded in Q1 2019. These results were excellent, despite a significant seasonal slowdown in December in terms of order rates and additional new subscribers due to the holiday season. The next slide shows our Adjusted EBITDA margin, which decreased slightly to -15%, from -14.4% in Q2 2018. Net loss for the second quarter of fiscal 2019 was CAD 6.6 million, compared to CAD 2.4 million in Q2 of 2018. The decrease in Adjusted EBITDA margin and the increase in net loss were a result of higher selling, general, and administrative expenses and depreciation, partially offset by higher gross profit.
It is important to note that although we've invested in our automation ecosystem in the quarter, these investments are not yet reflected in our results, as a big portion of the expenses represents deposits on equipment not yet received. A portion of the equipment should be installed and operational during Q3, after which we should start to see the benefits in our margins over time. As we mentioned previously, we are successfully executing our strategy, which delays short-term earnings in order to invest in market share leadership, scale, and density. We believe that these investments will maximize longer-term shareholder value by allowing us to deliver greater value to our members than anyone else, while attaining high returns on invested capital. Turning to slide 10 for liquidity and capital resources.
In Q2 2019, we used CAD 0.4 million in cash flow from operating activities as the company continued to invest in its growth and the launch of other meal solutions. However, for the first six months of the year, cash provided by operating activities amounted to positive CAD 1.4 million. We also invested CAD 2.8 million in capital expenditures, primarily related to continued investments in our automation ecosystem and capacity expansion.
In addition, we completed a public offering for gross proceeds of about CAD 21 million. As a result, our cash position increased to CAD 46.3 million at the end of the second quarter. Recall that we also secured a CAD 13.5 million non-dilutive debt financing toward the end of the first quarter, of which CAD 5 million is still undrawn. In Q3 2018, we raised CAD 10 million in gross proceeds from a public offering of 4 million common shares.
The latest equity issuance represents the largest offering since the company went public and brings the capital raised on public markets to more than CAD 50 million. As such, we are in a very solid financial position to continue to execute on our business plan. Turning to slide 11, I'd like to make a few comments on a typical seasonality of our business, which should help in providing a better understanding of both the market we are serving and our performance within it. Generally speaking, our first quarter is the strongest with the critical back-to-school period. The second quarter is typically strong, with January and February being traditionally stronger than in months. However, second-quarter sales are affected by a slowdown in December due to the holiday season.
The third quarter is somewhat strong, but it is normally impacted by spring breaks in March across Canada and the start of nice weather in May. Finally, our fourth quarter is slow, given vacation time and nicer weather, which changes and influences consumer behavior. As such, Q4 is characterized by lower order rates, lower marketing expenses, and less new active subscriber additions. We are now entering the second half of the year, which is typically slower than the first half. Please keep this in mind for modeling purposes. That wraps up our financial highlights for the second quarter of 2019 and concludes our prepared remarks for today. We thank you all for joining us on this call.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please limit yourself to one primary question and, if necessary, one follow-up question. Your first question comes from Martin Landry of GMP Securities. Your line is open.
Hi. Good morning, guys.
Morning.
The first question I have is on your new breakfast facility. You're saying it's going to be a 20,000 sq ft facility, it's going to be a new facility, not in your existing space. I'm wondering, was there a possibility for you to execute your breakfast solutions in the existing facility you had in Montréal? What's the thinking to shift all of that in a separate dedicated facility?
Yeah, hey, Martin, this is Neil. I'll take that one. Up until now, and for, a t least a couple more months, we're going to be continuing to produce in the same facility. We actually produce everything in our Ville Saint-Laurent facility and ship that across the country currently. In order to really let the program flourish and grow, we wanted to build it out in a separate production space, it'll also allow us to invest in automation. Some of the automation that we've identified for our breakfast program is pretty substantial in size, we didn't want that to eat into the dinner side of the business in terms of capacity.
Okay. In terms of break-even points and stuff like that for your breakfast offering, at what percentage of your capacity utilization can you reach a break-even point?
Hey, Martin. It's Philippe. We don't provide any guidance on break-even point on breakfast.
The only thing I'll add, Martin, is it's a relatively low OpEx for this facility. You can do the rough math in terms of rental rates and size. Because it's being currently sold as an add-on subscription to our base subscription, it's pretty accretive from an EBITDA basis.
Okay. Just to wrap up in terms of your capacity, you said that now Calgary's going to be able to support roughly CAD 200 million in revenues. Your existing Montréal facility, I think it's around CAD 400 million, and then your new breakfast footprint will be CAD 100 million. That would amount to all your facilities this fall being able to support close to CAD 700 million in revenue. Is that correct?
Yeah, exactly. Just to clarify on the breakfast, in order to hit that CAD 100 million, there's a little bit of automation required to maximize the square footage utilization. We found a space that was refrigerated. We're going to put a little bit of CapEx into it, invest in automation, that should bring us up, probably in early fiscal 2020, up to that CAD 700 million total.
Okay. All right. Thank you.
Your next question comes from Frederic Tremblay of Desjardins Capital. Your line is open.
Thank you. Good morning. Jonathan, on the last conference call, you indicated that the business had grown more quickly than you were planning, in part because of the unit economics were more favorable than expected in Q1. Q2 was another strong quarter of growth. Can you comment on what you saw in terms of those unit economics in Q2 and customer acquisition cost trends, and perhaps how that's evolving so far in Q3?
I would say this quarter came in approximately within our expectations. What we saw in December was definitely a slowdown in terms of net new signups and orders. Of course, when your order rate decline, it takes a little bit longer for the payback to happen on a new customer, so as expected for the customer signing up in December. January was incredibly strong. I would say most of the growth that happened during the quarter happened in January, which created a significant demand on the operations. February came in pretty much in line with what we were expecting. If I can characterize, we had a stronger than expected January, and December was slow as expected. The unit economics were in line with what we were expecting for the period.
Okay. On the breakfast smoothies, based on what you've seen in the testing phase and so far since the full launch, can you help us understand or how should we think about the potential impact of that product category on your average box size? Do you have a range in mind or some sort of indication of what the impact of that add-on product could be on your average order size?
We would expect that there would definitely be a positive impact. One thing we should mention is, despite the fact that the breakfast smoothies will be produced in a separate facility as a kind of the beginning of fiscal 2020, we can still benefit from the economies of scale in terms of delivery density from the add-on product. Right now, we're seeing our customers interacting with our breakfast product in two ways. It's sometimes being added on to an existing dinner order. We're also seeing people who might skip a week of dinner and order a box of smoothies. I think the best way to think about the impact of this breakfast product on the overall economics of Goodfood is looking at revenue per subscriber per quarter, as well as gross margin per subscriber per quarter.
We would expect to see an increase in those metrics as we move forward with increasing the penetration and the opt-in rate for our smoothies. The last thing I'll add is, of course, the reason why we're preparing to build out CAD 100 million of capacity for this new product in our portfolio is that we are very happy with the economics that we're seeing, the opt-in rates, the margin profiles, and we believe that the return on investment is going to be very high in this space.
Okay. Last question from me, just on the ready-to-eat testing. As of the last update, you were testing different formats, different price points. Any updates on the progress on those fronts?
We're still in the phase of what we would call product development. We're not currently looking to scale the product offering, currently. We're not building out capacity internally right now. We're working with external suppliers still to develop this product. We are currently building out our framework with active feedback from our customers, to define really what makes a delicious, nutritious, amazing, ready-to-eat experience. We're narrowing in to the level of detail, for example, of the cooking time of different ingredients within the dish, and how the dish needs to perform after being reheated in a microwave or in an oven. Without going into too much more detail, we're really in the product development phase right now. We have some encouraging feedback from our customers in terms of the progress that we've made to date.
When we feel that we have a really good sense of the margin profile, the rating, or the Net Promoter Score that we get from this new product line, we will start moving towards scaling the product line. When we hit that stage, it will be because we're really comfortable with where we're at in the product development, and we're ready to press on the gas.
Thank you.
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Bob Gibson of PI Financial. Your line is open.
Good morning. Let's continue on the prepared meals section. What's your thinking as far as once, you're ready to step on the gas, would you need a brand-new facility in Montréal, maybe another one in Western Canada? What's your thoughts?
Yeah. Hey, Bob, this is Neil. We are a little early to make that call in terms of scale and in-house versus external. What we've seen is a good interaction with the current supplier base that we're using. As Jonathan just mentioned, still some perfecting to do into the kind of obsessive details that we like to get into. Right now, I'd say it's a little early to make the call, but eventually, as we start to think about building this into hundreds of millions of dollars of revenue, there will be a combination of internal facilities and external facilities, most likely.
Okay. If I could just jump in with a second question. In terms of admin personnel, are you pretty much full up, or how should I think about this?
Well, as you can imagine, when we're adding over CAD 100 million of revenue in six months, we're always playing a little bit of catch up. We do have quite a bit of operational leverage in our G&A, but we'll be continuing to add top-level talent across the business. I don't know, Philippe, if you have any additional modeling comments for us?
Yes, Bob. It's Philippe. Especially as we launch new product and new division, we'll continue to staff up the G&A piece and support the growth.
Okay, great. Thank you so much.
There are no further questions at this time. I will now return the call to our presenters.
Thank you all for joining us today for Goodfood's Q2 2019 financial results conference call. [Non-English content].