Organigram Holdings Inc.

My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone Organigram Holding Inc.' 's fourth quarter full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. We ask you to limit yourself to one question and one follow-up question. You may recue if you have further questions. As a reminder, this conference call is being recorded and replay will be available on Organigram's website. At this time, I would like to introduce Amy Schwamm, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Joining me today are Organigram's Chief Executive Officer, Greg Engel, Chief Financial Officer, Derek West, and our Chief Strategy Officer, Paolo De Luca. Before we begin, I would like to remind you that today's call will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's press release regarding various factors, assumptions and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS measures, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS and our approach in calculating these measures may differ from that of other issuers and so may not be directly comparable. Please see today's earnings report for more information about these measures. I will now hand the call over to Greg.

Thanks, Amy. Good morning and thank you for joining us today. This morning we reported our fourth quarter and full year fiscal 2020 results for the period ended August 31st. For the full year, gross revenue was $103.4 million and we grew net revenue, which excludes excise taxes to approximately $87 million. We are also very pleased to report positive adjusted EBITDA for the second year in a row. Most of our discussion today will be centered on our Q4 results as the first three quarters of the year have been addressed in past calls. Since we last spoke with you in July, our product portfolio has changed quite dramatically as we said it would. We've launched 40 new SKUs, including some novel products across a number of categories and segments, and there's still more to come. At the same time, this is all being against a backdrop of meaningful growth for the Canadian adult rec market. It's been exciting to do this as we continue to plant the seeds for long-term growth and challenges presented by the global pandemic. Our Q4 2020 net revenue grew 25% from the prior year period and 13% from Q3 2020. We had higher flower sales in Q4 2020 as the large format value segment continued to grow and our expanded offerings in this segment resonated well with consumers. And of course, REC 2.0 sales contributed to our growth as a year ago the products were not yet legal. Lastly, we were extremely pleased to make our first shipment to Israel under our supply agreement with CanDoc, a leading Israeli medical cannabis producer. To date, this is Organigram's largest international deal and we're CanDoc's exclusive supplier of indoor-grown cannabis. As you may know, the Israeli Ministry of Health recently amended its quality standards for imported medical cannabis. Very encouragingly, we recently identified a plan to comply with these updated standards and believe that we can continue to supply the product into the Israeli market once it is successfully implemented. Q4 2020 gross revenue increased 32% versus the net revenue increase of 25% from the same period last year. Gross revenue better reflects the magnitude of sales volume shipments, especially since dried flower represents the largest category in cannabis by far. As average selling prices per gram had decreased in the industry, the percentage of excise tax of the gross sale price has increased significantly. Therefore, to achieve the same level of net revenue, more dried flower has to be sold as compared to last year. As we guided with last quarter's results, we did not expect significant growth in our adult use rec sales in Q4 due to the timing of our launches as part of a broad portfolio revitalization. Introducing 40 new SKUs since July has been extremely busy, particularly as the industry began growing at an accelerated pace. Coupling this with the fact that we had a leaner workforce, which not only reduced cultivation levels, but also processing and packaging capacity, these factors contributed to certain launch delays and missed purchase order fulfillments in late Q4 and to some degree in Q1 too. In some ways, a number of our products were a victim of their own success, with better than expected initial sales such that we had stock outs. Shred was one example. We are valuing our processes and supply chain, including the benefit of gradually scaling up staffing to improve order fulfillment rates and realize more sales opportunities. We are progressing well through our portfolio revitalization with up to 18 new SKUs expected in Q2 fiscal 2021 and remain committed to offering innovative products, We conduct proprietary consumer research to help us identify the attributes that cannabis consumers want most, and we're very encouraged by the initial reaction we're getting and early signs of success for many of our new products. I will take a moment to recap some of the more notable ones. Across REC 1.0 and 2.0, dried flower remains the largest category in the Canadian adult use REC market, and we believe it will continue to dominate based on what we've seen in more mature markets in the U.S., There has been significant growth in the dried flower large format value segment, and competition has intensified. With the onset of the pandemic, value products in large format were increasingly the focus of consumers, as many of them either were forced to or preferred to order online or take advantage of curbside pickup or delivery. Our first value offering in a large format, originally entitled Trailer Park Buds, which is now simply known as Buds, launched in fiscal Q3, and we believe it doesn't just compete on price alone. It offers product that is indoor grown, whole dried flower, and strain specific. Our value segment strategy also includes dried flower offerings that were launched in larger format sizes of 7 gram and 15 gram under the Trailblazer brand. In mid-September, we expanded our value portfolio with the launch of Shred. This product continues to perform well for us, and we are seeing retail stores sell out where it is carried. It really resonates with consumers that it is high-quality, high-potency dried flower that is pre-shredded for convenience at our Granogram's most affordable price currently offered on a per gram basis, and it is made from whole flower. High-potency THC continues to be a key attribute for consumers as well as cultivar diversity. In early August, we launched three new THC strains under the Edison Cannabis Company brand. The General, or under its street name Grapefruit GG4, Chemdog, and a limited time offering Samurai Spy or its cultivar named Ninja Fruit. Going forward, we will consider using street generic names for many dried flower products to the extent we believe they will resonate even better with consumers. We are making investments in new genetics and improved cultivation process to increase THC potency and will introduce new strains into the highly important dried flower and pre-rolls category. In addition to REC 1.0, we plan to expand our REC 2.0 offerings. which we think will become a larger relative category, more in line with mature U.S. legal markets. At the end of July, we launched Trailblazer Snacks, our cannabis-infused chocolate bar in mint and mocha flavors. With 10 milligrams of THC in every bar, each of the five sections of the bar are filled separately, which allows for a higher accuracy of infusion and microdosing. Treblazer Snacks is our value segment chocolate offering and our second product type in the chocolate category after launching Edison Bites in four SKUs earlier this year. In time for the holidays, we also announced the launch of a fifth Edison Bite chocolate in the seasonal gingerbread flavor for a limited time. These only came to market recently, but initial sales have been amongst the top sellers in their subcategories. In addition to the gingerbread bites, we've also offered another limited time only seasonal product, Trailblazer Kushma Sticks, an affordable 0.5 gram pre-roll in a festive green box that is a perfect basket add-on or stocking stuffer just in time for the holiday season. Turning to our vape portfolio, we offer products for the value mainstream and premium segments of the market already with the Trailblazer Torch Cartridges, Edison Plus Feather Disposable Pens, and Pax Era Cartridges. Before the end of fiscal Q2, we expect to launch Trailblazer 510 torch vape cartridges in a 1 gram format. This will extend our lineup to a suite of trial size at 0.5 gram and full size 1 gram cartridges for the 510 vaporizer. Lastly, branding out our Rec 2.0 portfolio is our reticin remix dissolvable powder. This product just landed in some provincial retail stores, so we don't have an initial sales read yet, but recent data in Colorado, for example, show cannabinoid-infused powders have quickly risen in popularity, comprising 55% of the state's beverage market. In fact, 46% of cannabis consumers reported enjoying cannabinoid-infused beverages multiple times a day, according to headset data. In Canada, estimates suggest that the cannabis adult-use beverage market is a $467 million opportunity, as it is expected to increase by 15-fold its current market size over the next five years as per the Brightfield Group. We also conducted a survey recently which indicated a large majority of consumers would prefer to add cannabis to their drink rather than consume a pre-mixed cannabinoid-infused beverage. With traditional edibles, beverages, and ingestible oil-based extracts, the body spends significant time breaking down fat-soluble cannabinoid particles before they can be absorbed and before effects are felt. Our R&D team developed a proprietary nanomulsification technology that generates nanodroplets which are very small and uniform for Edison Remix. We believe Remix provides enhanced bioavailability, both improved speed of absorption and improved total absorption compared to traditional edibles and beverages, potentially allowing for a more reliable and controlled experience. The nanomulsion technology is also anticipated to have increased stability to temperature variations mechanical disturbance, salinity, pH, and sweeteners. The powder formulation also offers the discretion, portability, and shelf life expected of a dried powder formulation. Before I pass the call over to Derek, I do want to highlight a couple of recent achievements that occurred subsequent to quarter end. First, as announced in October, we invested an additional $2.5 million in Hyacinth Biological Zinc, a cannabinoid biosynthesis company. Additional investment was tied to a successful completion of a milestone linked to the first commercial sale of CBDA. CBDA is a natural precursor to the naturally occurring form of CBD, which is converted to CBD in processing. The product was manufactured through the enzymatic conversion of a protein produced from genetically modified yeast, which is the process of biosynthesis. The additional investment brings our total investment in the biotech company to $7.5 million. representing a potential ownership interest of up to 46.5% on a fully diluted basis. We believe the biosynthesis process has some definite advantage over traditional cultivation, particularly as it relates to the feasible production of minor and rare cannabinoids, and as an alternative path to producing pure major cannabinoids, so we are very excited to watch this space evolve and Heisen's progress in it. Also post-quarter end, we raised approximately $69 million in gross proceeds from an underwritten public offering, including the exercise of the overall option. We opportunistically took advantage of financing with strong institutional support that became available. We believe that deleveraging our balance sheet puts us in a more agile position as the sector continues to see both growth as well as capital markets volatility. This raise substantially strengthened our balance sheet, which Derek will describe further. So I'll pass the call over to him now and then come back to wrap before we take your questions.

Thank you, Greg. I will start with our financial position. As Greg just mentioned, we recently closed an underwritten public offering of approximately 37.4 million units, including exercising the over allotment option at a price of $1.85 per unit. We expect to use the net proceeds for working capital and other general corporate purposes with the majority of it being used to pay down our term loan balance. The latter was agreed as part of an amendment and restatement of our credit facility, which we just completed on Friday and is now available on CDAR. On December 1st, tomorrow, we will use the proceeds from the offering to repay $55 million on our term loan to reduce the balance to $60 million from its current $115 million. After this term loan repayment is completed on December 1st and excluding the $8 million restricted investment on a pro forma basis, we would have $80 million in cash and short-term investments and $60 million in long-term debt. Turning to our results for Q4, gross revenue increased 32% to $25.4 million from $19.2 million in the same prior year period. Net revenue grew 25% to $20.4 million from $16.3 million in the same prior year period. As Greg mentioned, higher flower sales, international sales, and REC 2.0 revenue were among the largest contributors to this increase. We also recorded a lower sales provision for returns and price adjustments of $2.2 million than as compared to $3.7 million in Q4 2019's comparison period. Q4 2020 cost of sales was $29 million, which increased from $15.5 million in the same prior year quarter, primarily due to higher sales volumes and a non-cash inventory provision of $11.1 million for excess and unsaleable inventory. Of the $11.1 million, $8.3 million related to excess trim and concentrate, and $2.8 million consisted of adjustments to net realizable value. As we indicated with last quarter's results, we expect a negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs to persist as we plan to produce below full capacity for the foreseeable future. In Q4, these negative non-cash adjustments amount to $3.5 million. Q4 2020's adjusted gross margin increased to $16.2 million from 1.5 million in Q4 2019 on higher sales and a lower sales provision for returns and pricing adjustments. The IFRS gross margin for Q4 2020 was negative 28.8 million compared to a negative gross margin of 11.1 million in the prior year period. The variance was largely related to higher non-cash provision and negative fair value changes to bioassets and inventories during Q4 2020. We continue to expect some production inefficiencies to persist, which will impact gross margins while we launch new products and optimize production. Our portfolio revamp is ongoing, and we expect to gain efficiencies when the product launch schedule normalizes. 10.8 million decreased 22% from Q4 2019's amount of 13.9 million and the current quarter's SG&A as a percentage of net revenue was 53% compared to 85% for Q4 2019. The Q4 2020 SG&A reflected our reduced spending during the ongoing COVID-19 pandemic and it was largely in line with the current year's Q3 SG&A of 10.3 million. As a percent of net revenues, the Q4 SG&A of 53% was a decline from Q3's 57% of net revenues. As in the past, management continues to closely monitor discretionary and below the gross margin expenditures. Q4 2020's adjusted EBITDA was a negative 2.7 million This improved versus the negative adjusted EBITDA of $7.2 million for Q4 2019. This improvement was largely due to the current reporting period's improved adjusted gross margin. We recorded a net loss of $38.6 million or $0.199 per share on a diluted basis during Q4 2020, as compared to a net loss of 22.5 million or 14.4 cents per share in the same prior year period, primarily due to greater negative gross margin in Q4 2020. Q4 2020's net cash used in operating activities of 10.1 million was a decrease from the 15.7 million used during Q4 2019. This reduced cash outflow was largely due to the prior period's increase to working capital assets as we had scaled operations ahead of REC 2.0 legalization. That concludes my formal remarks. I will now turn the call back over to Greg.

Thanks, Derek. And I just want to clarify one comment Derek had made. So the adjusted gross margin was $6.2 million. So I just wanted to clarify that. So looking ahead, we remain positive on the prospects for the industry in Organigram. The annualized run rate of the Canadian adult use rec market was estimated to be a record $3.1 billion based on the most recent data available from Stats Canada for September 2020. This is an increase of approximately 109% from September 2019. There are a number of factors creating tailwinds to industry growth. A large factor is the much anticipated increase in the number of retail stores in Canada. Since July, the store count in the provinces grew by 33%, driven by Ontario's cannabis retail stores growing 140%. And Ontario is now on pace to add up to 40 stores per month and sits close to 250 stores right now. So you can see that there is material growth still expected. The legalization of REC 2.0 is another big tailwind. Product forms in these categories are still being rolled out with new SKUs bringing enthusiasm to the legal markets. Consumers are very much still in the exploratory stage and willing to experiment as a broader selection and new product forms, such as our remixed powder beverage, are made available. Outside of Canada, we continue to serve international markets, including Israel and Australia, via export permits and look to expand sales channels internationally over time. I don't think I can end my remarks without acknowledging the recent significant political changes in the U.S. and the valid initiatives for both medical and adult rec cannabis use. They suggest the potential move to federally legalized THC may have stronger momentum, yet the outcome and timing remain difficult to predict. As we continue to monitor and develop a potential U.S. THC strategy, we look to evaluate CBD entry opportunities in the U.S., which we've been doing for quite some time. Our view is that it is better to measure twice and cut once and to continue to be selective on our opportunities we actively consider. We are focused on disciplined capital allocations. Fiscal 2020 was nothing short of an eventful year for us and the industry. We entered the vapes and edibles market with a broad and innovative suite of products and continue to launch new products. We signed our largest international deal to date with CanDoc in Israel. We invested additional funds into our biotech partner Hyacinth as they made notable progress in cannabinoid biosynthesis work. Significant expansion CapEx related to our facility is behind us. We strengthened our balance sheet recently for greater financial flexibility and the ability to act on potential opportunities, always with a view to enhancing shareholder value. Our strong culture of cost management and prudent discretionary spending helped us report positive adjusted EBITDA for the second year in a row on the back of strong revenue growth. And we have a backdrop of accelerated industry growth as retail stores expand in Canada's largest rec market. In closing, We're excited about our products, our partnerships, and the year ahead. We are working tirelessly at enhancing our agility and execution to capture more market share and top-line growth. And as always, we are working to pursue profitable growth in an effort to generate attractive return on investment for shareholders. That ends my prepared remarks. Operator, if you could go ahead and open up the line for questions.

Okay, at this time, if anybody has a question, please press star 1 on your telephone keypad. Again, we ask that you have one question and one follow-up, and then you can get back in the queue. Your first question comes from Aaron Cherry from Alliance Global. Your line is open.

Hi, good morning, and thanks for the questions. So first one for me, strictly on the vape segment, it looks like quarter-over-quarter revenues did come down a little bit. So I just wanted to know if you could kind of talk about the change you're seeing there. Obviously, it's been a pretty competitive category. So is there any further color in terms of the drivers and what may be impacting you guys, maybe some pricing pressure and the competition there in the market and kind of how you see that evolving for you guys? Thanks.

Yeah, thanks, Aaron, for the question. Yeah, so we, I mean, certainly we're one of the companies that offered a fulsome vape portfolio. So having, you know, a premium mainstream and a value offering, we have seen more competition come into the marketplace. And with that, you know, we have had to take some pricing adjustments as well. You know, I think, you know, again, as we've seen with dried flower, consumers are looking at times to try new products. So that has put, but I mean, certainly we're very excited about, You know, certainly our 510 cartridges continue to form very, very well. And we're excited about the upcoming launch of our 1 gram in this next quarter, which we believe has an ability to, you know, really have an impact on the market because of the success we've seen of 1 grams in U.S. state markets.

Okay, great. Great. Thanks, Zach. And then just a second one for me before I pass it on. You know, you spoke about, you know, the increased brick and mortar that we've been going to see in Canada, 30%, you know, since July. So we'd just like to get some commentary in terms of, you know, how you think that comes into your plan to more fully utilize your cultivation space, especially if you start to see, you know, 40 stores, you know, per month in Ontario, like you just mentioned. And then just like, you know, any color we might be able to get in terms of, you know, the first quarter and now that we're, you know, pretty well through it in terms of how that might have come through the top line in terms of seeing the benefit of the increased brick and mortar there. Thank you.

Yeah, I think so. First of all, on the kind of expansion of the rec space, I mean, one of the things for us, and I alluded to this in the call, is that we are looking at starting to increase our cultivation and production. We've got space that's not being fully utilized at this point, and certainly as the market demand is growing and increasing, we are you know right in the midst right now of looking at plans to start to scale back up so that would involve potentially bringing in some additional staff back in for both you know cultivation and downstream processing and it was one of the impacts certainly that impacted us in in q4 was You know, we were juggling between, you know, one area and another area in terms of packaging. So, you know, you hit the nail on the head in terms of we've got the capacity, so now is the time to start to bring that on. As far as Q1, you know, I guess the comments I would make is we are still in the midst of, you know, the portfolio revitalization, and we've got new SKUs coming to market. We have had, you know, as I said in the call, You know, we've had still some stock outs and certainly some lost sales opportunities in the near term. But, you know, again, we are excited to bring those new products into market, not only the ones we brought in Q1, but also into Q2. So beyond that, I wouldn't give any kind of guidance on Q1 at this point.

Great. Thanks. I'll jump back in the queue.

And your next question comes from David Cadeco from ATB Capital Markets. Your line is open.

Hi, good morning. Thanks for taking my question, and congrats on the quarter. I just wanted to go into your international component of revenue for a second and tie that back to flour as well in Canada. So in reading through some of your financial statements, we're looking at revenues in Israel, we think, just north of $3 million. So the remainder would be mostly 1.0 products in Canada and mostly flour, we think, as you've indicated in your prepared remarks and press release. So I'm just wondering, moving forward, how important and significant internationally is Israel in particular going to be for you? I get that you have the exclusive supply agreement with CANDOC. That said, Israel is a relatively, as you know, Greg, and others, a small market, lots of competition, etc. So just trying to understand how important should we be, how should we be thinking about Israel moving forward as an overall line item from a revenue perspective? Thanks.

Yeah, thanks, Dave, for your question. Yeah, so I think, you know, a couple of things I would say on Israel. So, again, just to clarify, we're the exclusive supplier of indoor flowers. So, you know, that's the product line that we provide to them. You know, there has been some research. changes in Israel in terms of their medical cannabis systems so we're working to ensure that you know we're in a position to continue to supply and we've identified an appropriate path for that you know we've had great success of the product and you know that we have sold in there and certainly one of the strains is already sold out and so you know we see Israel as a market that you know will continue to grow while there is a lot of competition We also struck this deal with CanDoc as a possible path for them to work to process product in the future because of their certification and to be able to sell into other European markets. So the agreement is twofold. It's to focus on the Israeli market, but it's also for potential access to the European market via CanDoc as a partner. So I think there's two ways to look at it from that perspective. And now the other point, just to your first part of your question, yeah, I mean, flour continues to be a very important part of our market, which is why we've invested in new genetics, and we've been spending a lot of time on bringing new genetics and new offerings to the market, higher THC products, a broader variety, as we've seen consistently where consumers, more like a craft beer type market, where cannabis consumers are looking to try different and new products on an ongoing basis. So we can't

continue to invest in that area thanks for that color very helpful and uh my second question i want to go back to hyacinth for a second and if i heard you correctly greg you'd mentioned cbda um it's one of the precursor uh cannabinoids there i'm just wondering does this mean you're going to start uh leveraging that cannabinoid first in some of your uh 2.0 products or is it cbd and whichever cannabinoid it is i guess my overall question for for on the issue of biologic or sorry is an um biosynthesis is which 2.0 products do you think are most amenable right off the get-go for biosynthetically derived cannabinoids? Thanks.

Yeah, it's a great question, David. I mean, so, you know, really excited. Again, it's important to note that Hyacinth, that this was the first, you know, as far as we're aware of and they're aware of, the first successful commercial sale, production and sale of any cannabinoid produced through biosynthesis. And, you know, they had a potential purchaser buyer that was interested in CBDA. So that was the product they ended up producing. You know, right now their focus in discussions with Hyacinth is, you know, they have 23 cannabinoids in their portfolio. Nineteen of those are minor cannabinoids. I think each using an equally positioned. And I think, you know, I've mentioned this on previous calls. Where we're really excited about in the future, I think there's two paths for biosynthesis. One is producing a pure major cannabinoid for potential use in products, and not only products that we would potentially produce, but possible partners that Hyacinth could partner with. you know, in other industries. But I think more importantly is the minor cannabinoids. And certainly there's a number of them that we are looking at that, you know, and I'll give an example of THCV, for example, where THCV, you know, has similar effects to THC, but does not necessarily induce an appetite in the same manner, at least from anecdotal reports. So I think there's a lot of opportunities for some of these minor cannabinoids in the adult rec market.

Okay, thanks for that and congrats on the quarter. I'll hop back in the queue.

And your next question will come from Andrew Partheno from Stiefel GMP. Your line is open.

Thanks for taking my questions. Maybe if we could discuss the new SKUs that you guys have rolled out and the ones that are expected to come. Could you provide any kind of metrics on how well those SKUs have performed. I know you mentioned that some of them sold extremely well and have had stockouts, but wondering if you could give it a little bit more color. And, you know, how should we think about that? Should we, going forward, should we kind of be expecting that this had maybe started off with relatively lower volumes, and this will continue to wrap up, or was this more of a step change for you?

Yeah, and thanks for the question, Andrew. I think the way to look at it in the same way in the past where we've brought a few new SKUs in, right? So we bring the offerings to market. So in this place, we had three very specific dried flower SKUs, for example. We look to see what market response is. We're planning for increased production around the SKUs, but certainly when we see a great response like in the past with our limelight, we double down or quadruple down on production of that strain, right? Really good response. So, and there's no question, you know, that that's been the case here. And, you know, one of the challenges when you're bringing, you know, new flower products in particular and even new SKUs to market is, There is a time lag to get listings in different provinces, as you know, so what impact you're seeing from the market. So getting that feedback is variable, but certainly that is our plan, right? So bring those new SKUs in. The ones that have performed well will continue to increase production on them, and the ones that didn't perform as well will reduce cultivation on them and pivot to other items. So in addition to the three recent launches of new strains, we've got additional strains coming up in Q2 and into Q3. But yeah, I think it's important to continue to supply. There's that base of products like our limelight, for example, is our top selling product. flower product and continues to be, which has been great. But again, I think there's opportunities for some of these new strains, in particular the ones that are unique and or high THC, to really position themselves well in the marketplace.

Thanks for that additional color. And maybe going on a similar topic, it's just on your Phase 5 expansion, wondering if you could give any updates on that, and kind of what needs to happen in order to get some of your hydrocarbon extraction up and running and products on the shelves?

Yeah, you know, the area is fully licensed, and certainly our expanded CO2 extraction is up and running in that space now. We are still working through the commissioning process on the hydrocarbon extraction, so I can't give a definitive target, but our team is working hard to – you know, to look to bring those products to market. But again, it is dependent upon commissioning, which, as you can imagine, there have been some challenges with, you know, throughout the last nine months with COVID to getting through commission. We've been successful in the past with commissioning new equipment, for example, in remix and bringing in new offerings in chocolate. It just takes sometimes longer than originally anticipated because you're, you know, you're dealing with some of the challenges related to COVID and travel and trying to do things remotely.

Thanks for that additional color. I'll get back in the queue.

And your next question will come from Adam Buckham from Scotiabank. Your line is open.

Good morning. Thanks for taking my questions. So I just wanted to start with maybe talking about production output versus demand. So there was some commentary around missed opportunities when it came to POs in the queue and also how you might be looking to increase staff to help resolve these issues. When we think about the bottleneck, is it on the packaging side or was fiscal Q3's decrease in output a partial driver of this? And then maybe more broadly, when we think about the current output of roughly 44,000 kgs per year, is that aligned to where you think near-term demand is or do you see the need to increase output further?

Yeah, it's a great question, Adam. So I would say it certainly has been – it's a combination of both in terms of cultivation and the levels of cultivation. And the one thing to keep in mind as well is that when you're planning cultivation, you're planning 20 to 18 weeks out from when the product actually is available. So some of those near-term benefits PO misses were just the alignment on the strains and which product was available as we see a continually dynamically shifting market. So again, it's important for us to get consumer feedback and be able to quickly make sure that we're bringing the right product to market. And so the bottleneck has been a combination of cultivation, but also staffing, certainly on a packaging and processing side. One of the positives we have seen, if you can say there are any positives related to COVID-19, is that we have gotten more efficient. We are able to do more with fewer people. We've improved processes quite dramatically because we've had to focus on how do we operate in a leaner environment and in a safe environment for our employees, which is really important. So I think, you know, ramping back up to some degree is important. And, you know, at the same time, you're always going to have some overage of product in terms of production. I mean, you know, one advantage we did have and do have is that we had some sufficient production. working capital to go through in the quarter. But at the same time, it's not always the, you know, in terms of inventory, it's not always the strains that are in high demand. And I mean, that's always the challenge to balance. So I think, you know, when we talk about, well, ramping back up, we're talking about, you know, slowly over time, looking to kind of bring some of the facility back online.

Okay, that's great, Keller. And secondly, I just wanted to touch on the commentary on Israel. Are you able to give any color on expected timing of the remediation plans? And were you able to get some shipments out in fiscal Q1, or did that change your regulation pushes out into fiscal Q2?

Yeah, so, I mean, I can confirm we did not have a shipment in Q1 into Israel. But, you know, we can't necessarily give a timing target here. I mean, certainly we're confident and so is CanDoc in working with the Israeli government that we, you know, we have an appropriate path and a solution going forward. So, you know, we expect and hope to be able to do that within Q2. But again, it is contingent upon, you know, the Israeli government as well as working with some inspectors as well to do things remotely. So that's going to take some time, but certainly hopefully we can work through that.

Okay, great. Thanks.

And your next question will come from Graham Crandler from 8 Capital. Your line is open.

Hi, good morning, and thank you for taking my questions. Maybe as a follow-up to what was just being discussed there with respect to the international market and taking the previous comments with respect to some of the staffing levels and other efficiencies that you're looking to increase throughout fiscal 2021, to me that sounds like it looks like Q2 might be the real inflection point that we should be looking at in terms of the new SKUs launching, whether it's the 40 that have been launched, the other 18 you're looking to launch in Q1, and then a potential restart of international shipment starting in that Q2. Is my thinking correct there? I'd appreciate some further commentary with respect to the cadence of potential revenue growth. Thank you very much.

Yeah, Graham, thanks for the question. I mean, what I would comment on, so first of all, just to clarify, the 40 SKU launches since July were Q4 and Q1, and then Q2 will have an additional 18. So yes, there is additional growth that we're expecting. For example, the Trailblazer One gram vape cart that I mentioned to come in Q2. So I think, again, we are optimistic about the growth coming in the near term. Again, we historically don't give guidance in terms of revenue, but I think as we're seeing the impact of new technologies, of the new SKU launches and continue to see new product launches even our remix for example you know in market we're only in a few provinces right now so we expect in Q2 to get you know an offering in the provinces where they will accept it and have accepted it so you know it's not full distribution as of yet because as I said earlier there are lead times so Yeah, I mean, I guess the key comment I would make is, you know, we're on the right path, and we continue to bring new products to market, and it's just a matter of, you know, market acceptance and getting those products into market in a timely fashion, which, you know, again, we've done, and I believe our team has done a great job in challenging times in doing so.

Okay, understood. I appreciate the color there. Then just as a follow-up, with respect to the gross margin, it was $11 million. of inventory that was written off or impaired this quarter impacting that gross margin. I was just wondering if you could provide some more details on what sorts of products were included within that $11 million charge. And, you know, at this point, does the company feel comfortable in terms of where its inventory position is sitting in terms of how things are costed within there, that it's through the bulk of these charges? Thank you.

Yeah, it's a great question, Graham. Maybe I'll turn it over to Derek to answer that question.

Yeah, thank you, Greg. Yes, for the fourth quarter, there was 11.1 million in overall provisions around inventory, including adjustments for net realizable value. Of that 11.1 million, 8.3 million is pretty much contained to extract materials in terms of the concentrates and the trim. So that was the bulk of it. And historically, the company had built up a certain quantum in regards to these categories. But I can say at this time, we stopped harvesting the trim and the prior adjustments to the carrying value of the trim was a significant contributor. As I look at the balance sheet, our inventory and bioassets now have declined 37% than as compared to a year ago and 28% compared to our Q3 2020. And this has reduced our exposure to future valuation adjustments that would negatively impact our future gross margins. In the interim, it's just It's unreasonable to expect that there's not going to be some ongoing non-cash adjustments for excess aged inventory and net realizable value adjustments due to the combination of price compression in the market combined with the ongoing changes to consumer preferences. Having said that, we do feel that over the last few quarters we've had a heightened review of these matters, and with the provisions now taken, we are comfortable with the carrying values that are on the balance sheet at this time.

Okay, understood. Appreciate the call. Thank you very much.

And your next question will come from Rupesh Parikh from Oppenheimer. Your line is open.

Good morning. Thanks for taking my question. I also want to follow up on gross margins. So near term, is it fair to think about the 30% level as maybe a base to build off of? And then longer term, just thinking about how you guys are thinking about the longer term scaling of gross margins from here.

Yeah, maybe Rupesh, thanks for the question. I'll maybe let Derek answer that one as well.

Yeah, for fiscal year 20, our adjusted gross margin was 33%, but as you correctly note, the Q4 period that we've just filed had an adjusted gross margin of 30%. This has had the impact of significant price reductions in the market that has occurred over the current fiscal year. and also includes a certain level of production inefficiencies. But to some extent, we do believe that it should somewhat persist as we continue to launch 2.0 products and continue on the learning curve to optimize production. But the Q4 30% margin does reflect where it was with regards to the pricing in the market and our production levels. And so at this time, it's a fair indicator.

Okay, great. Any comments or any just longer-term scaling of gross margins from here as you look forward?

Yeah. I would say that we've stayed away from providing any guides to a long-term target for gross margins, just as a consequence of this too dynamic of an industry with increasing competition uncertainty, especially related to the duration and impact of the pandemic. And again, we do believe we do have the potential to optimize our production and efficiencies as we work through the learning curve, particularly related to 2.0 products and improving the packaging cost that Greg was talking about earlier. And as we move to larger format offerings on the 28-gram or the three-pack pre-rolls. But it's difficult. It's a very ever-changing dynamic market. And so that's the most we could provide for guidance at this point.

Okay, great. Thank you.

And your next question will come from John Zampero from CIBC. Your line is open.

Hey, thanks. Good morning. I want to stick with that same topic of gross margin over the next few quarters, and maybe we can simplify it a bit. But particularly as it relates to new SKUs and SHRED in particular, those seem like that's quite popular. I'm trying to get a sense of the impact of those. And maybe the way we can frame this is if there's no further pricing compression Is it fair to say that the cost optimization efforts you put in so far and the higher volumes you're expecting and the new SKUs you're launching, that in a similar environment in terms of pricing, that you see margin growth?

Again, maybe Derek will answer that question here.

Well, I guess as the question is framed, sure, if there's no changes in the pricing in the market as we increase our volumes, just inherently when you increase your volumes, you do absorb the fixed overhead amounts and have less of the unabsorbed fixed overheads from not operating at capacity, along with improving the efficiency at the facility. So under that parameter, yes, margins would move up under that scenario.

Okay, thanks. And then my follow-up is on Ontario. Greg, you mentioned your optimism about this province just because of the store growth, which I think is fair. Can you talk about your performance in Ontario relative to other provinces, whether it was in Q4 or in Q1, and even without giving specific numbers, just trying to get a sense of if you think you're adequately participating in the industry growth in the province. Thanks.

Yeah, it's a great question, John. I think, you know, Ontario we see is probably the most competitive market across the country. And, you know, we certainly see more SKUs listed in Ontario than any other province. And so I think, you know, because of the size of the market, it is the one where we've seen the most significant stockouts, which, you know, on one hand, you can look at and say is, you know, is good news in terms of, you know, there's product in demand. But it has impacted us in terms of market share and revenue because of the size of the market growth. I mean, we knew the market was going to grow, but certainly the rate, again, if you think about the timelines in the cannabis space, the rate of growth. kept moving up at a faster rate than anticipated. And, you know, with kind of a 16-week, you know, 20 to 16-week planning cycle for certain product types, you know, being able to adjust. You know, on the other hand, it's good news. You know, again, that market growth, I think, is strong and will continue. And even, you know, even with COVID and some of the restrictions put in place in the Toronto and Peel regions, you know, I think we'll continue to see good growth. I know on the construction side and the licensing side, they expect that to continue at the same pace. So, but, you know, we were impacted, I would say, in Ontario a little more than other provinces with stockouts and, you know, because of success. As you said, Shred, for example, which was alluded to earlier, I mean, You know, it was one of the highest demand products through the OCS website and through many stores that carried it in the first few weeks of launch. And so certainly for us to continue to supply that as we were bringing it into other provinces, you know, that was higher than expected demand for us. So, again, you know, you get demand. strong growth and then you're in a position where you're not able to resupply the market quickly. But again, we're adjusting accordingly and actively in a position to continue to supply that on an ongoing basis and have it available, which I think is critical.

Okay, that's helpful. Thank you very much.

And your next question comes from Matt Bottomley from Kennecourt, Genoa. Your line is open.

Yeah, thank you very much. Good morning, everyone. Just wanted to expand a bit further on John's prior question there. It was sort of framed around Ontario. But when you look at the overall market growth, certainly at the retail level, and you've mentioned this in your outlook, you know, excuse the one month of September, it looks like it's about a $3 billion market. Do you have any color on dynamics of how much LPs as a whole are sort of losing their market share to the provincial buyers if pricing at the retail level aren't coming down at the same degree? I imagine more of the economics might be going to the the provinces and some of the wholly owned retailers, if there's a dynamic there to explore. And then if you can give any color on, you know, the product skews and formats that you're focused on, maybe the edible side and the beverage side or the powder beverage side. You know, I know it's very nascent right now, but, you know, where you think you rank in the overall Canadian landscape as those obviously have longer-term growth profiles than what we're seeing in dried flowers.

Yeah, I mean, thanks for the question, Matt. I think when you look at the market, I mean, certainly, and I'll look back over the last six months or 12 months even, for example, when pricing reductions come into place and those predominantly are shared with the province so you're you know it's not just the company taking a pricing reduction um you know it's shared so in many aspects some of the strategies are done jointly with provinces to move product or to react to competition so i think there is some sharing that happens even on that side of things um you know i think we're seeing uh you know an evolving landscape. I mean, we keep hearing discussions about how some of the systems may change in the foreseeable future. I mean, we know, for example, New Brunswick is looking at going to a private tender for their program. There's some discussions about Alberta shifting some of their models. So I think it's an evolving landscape and one that you've got to be flexible to work with. You know, I think for us, one of the things that's been really positive is we've seen some consolidation on the retail side. And so certainly, you know, the partnerships and the companies where there has been consolidation are partners that we have strong ongoing relationships historically with. So, you know, that's a positive. And those are, you know, national presences in Canada. both cases with the consolidation that's happened. So that's a positive for us. I think to get to the second part of your question, when you look at the, you know, expanded offerings, I think, you know, in the near term, you know, again, getting out in the VAPE portfolio, getting out a one gram is important. You know, we've seen a competitor just launch last week and, you know, we need to get that product out of market in this quarter. We had plans to do so, but again, sometimes those are impacted by COVID and some of the equipment supplies and things like that. But, you know, and Remix, we're focused on getting national distribution. We're looking at how do we increase the production levels on it. And I think it's, you know, when you go to the future and if you look ahead to calendar year 2021, you know, it is going to be important to have an ability to produce products At some point, live resin, whole plant extract, bait pens, we know they have a very strong position in a market like California, which is why we've invested in hydrocarbon extraction equipment ourselves. Again, I can't give a timeline on when we plan to launch those, but you always have to be looking ahead with these investments. new forms as to kind of where the market's going and in some cases the U.S. state data can give you a good indication and others you have to do your own market research which we do quite a bit of as well so we are excited to even in the near term I mean we've put out a couple seasonal offerings that's been in partnership with a couple of provinces our kushma sticks and gingerbread bites I think you know again those are just seasonal but you know so far good response on those as well.

Appreciate that. And then just a quick follow-up. Maybe overall, just sort of a management risk assessment or maybe a higher-level view on as this market continues to expand. So that $3.1 billion number, I think it's very encouraging. But when you look at the LP landscape overall, it's not really dominated by profitability at this point. You know, where do you see, you know, the opportunities to really lock in, whether it's margin or things that are more specific to Organigram, you know, strategies and core competencies? When, you know, we see a lot of price monetization in dry flour, is this a risk that the vape pen category, you know, given the high competition, could see a similar dynamic in the next year here? And as the market gets closer and closer to what I think the overall headline number in terms of market size might be close to $10 billion, and we'll see where that falls, where do you assess the risk of subsequent product categories potentially being commoditized as the overall macro that the industry continues to grow pretty healthily?

Yeah, I think, look, it's a great question. And I think to some degree, we've already seen, you know, the pricing changes happen in the vape market, right? We, you know, early on, there was limited competition. Then as more products came into market, we saw, you know, we saw pricing. And again, as I mentioned, we did share some of that pricing reductions that we took with, you know, with the provincial partners and our private retailer. But I mean, really with the provincial partners on the distribution side. You know, I think what's important, though, is for companies like Organigram is, you know, you are improving your efficiency, right? So as the pricing compression has happened, you know, in flour and you go to larger volume SKUs, you know, certainly your packaging costs go down pretty dramatically. And I think on 2.0 products, it's the same. As you're producing more of the product, you're producing it more frequently, you know, you're doing it more efficiently and more effectively. So, you know, while you're getting some price pressure, you're But I think it's, you know, we've talked about this all along. I mean, when we spoke about as a company, you know, part of our focus is to bring quality differentiated products. And even, you know, for example, our Trailblazer Snacks chocolate bar, which... which participates in the value category, arguably is one of the best tasting and differentiated chocolates in the market. I mean, it's a five-piece bar, 42 grams. Each piece is filled kind of independently, so it does allow consumers some flexibility in terms of dosing. It's not just one big bar where you may not have a homogeneous kind of distribution of cannabinoids in it. But, again, I think it's important to continue to focus on the new products and not just, you know, new flower offerings for that consumer that's always looking for something new and unique, and also the differentiated products you can bring to market, like Remix and the quality of our chocolates.

Great. Appreciate all that. Thanks, all.

And your next question will come from Rahul Sarugasar from Raymond James. Your line is open.

Hey, Greg and Derek and Amy. This is Mike on for a whole today. There's a couple of questions from me. So I know we talked a lot about production and how we can enhance efficiencies going forward. Wondering if, and I'm looking at your yield per plant figures year over year, and they seem to have gone down from, you know, about 150 grams per plant to around 100 at the end of this year. Is this a problem that you can resolve with staffing and how important do you see the sort of the yield per plant issue as it flows into the rest of your business?

Yeah, I mean, maybe I'll start off and answer that, Michael, and then if Derek has anything to add. I mean, so certainly two things to keep in mind. So is on a per plant basis, we stopped keeping trim byproduct a couple quarters ago, right? We had sufficient extract inventory and sufficient extractable material so that's a roughly 30 percent production drop in in kind of yield per plant right so if you look at from that factor and then we've been focused on increasing thc um with some experimentation on different um you know different techniques different styles also different strains um you know some of the strains as you know certainly you've been to our facility some strains um you know, have higher yield per plant, others have a lower yield per plant, and it's finding that balance on a THC and yield basis, right, where you're still cultivating. I think, you know, I think as, again, the The focus for us has to be, you know, I mean, when we speak about increasing staffing at all, I mean, we're talking modest increase in staffing, right? Just bringing, you know, a limited number of people, you know, back into the facility and increasing our staffing. But I think, you know, I wouldn't say that's going to have an impact on yield and plant care per se. It's more about the genetics who we choose to grow. And I think that's the most important one. So hopefully that answers your question.

Yeah, that's really helpful. And just staying on the topic of staffing, I mean, in New Brunswick recently, you've seen some enhanced COVID-related restrictions. It left the Atlantic bubble recently. Are you seeing sort of the recent uptick in cases in New Brunswick specifically affecting your operations or maybe your capacity to restaff even modestly?

uh no it's a great question i mean so certainly we have worked closely with the government and actually we actually had a you know a spot inspection last week where you know public health work safe and rcmp came in and they've been visiting sites across the province to ensure kind of safety protocols are in place in a safe workplace for employees and they were satisfied with everything they saw on site so So I think what, you know, yes, we have seen an increase in the province, but I think for us, you know, we've been focused since the early days of COVID to make sure that we could and do have a safe workplace for employees. And I think, you know, our employees appreciate that. And it's been a big part of what we do. So to date, it has not had an impact on our facility and our operations. You know, again, I think the greater impact of COVID sometimes is more, you know, equipment and or getting third party contractors in to, you know, to do work on equipment and things like that, which has been a challenge.

Gotcha. That's terrific. And if I could just put one more in there. If we could, you know, we focus closely on biosynthesis and hyacinth specifically. And your, you know, your recent investment and their recent announcement of the recent CDA is a big deal in this space. How do you see partnering with Hyacinth as a potential route into the United States, given that biomanufacturing through contract research or contract manufacturers can happen almost anywhere?

Yeah, it's interesting, and Michael, I'm not sure if you've spoken to Kevin or not, but actually this first production and sale was actually completed in the U.S., so they were working with a contract site there. They transferred over their yeast strains and enzymes to do an optimization process. So, yeah, I think the big difference with biosynthesis versus cannabis plant production is You know, it doesn't have to be country specific. And certainly there's lots of opportunities for, you know, for Hyacinth to operate either in any jurisdiction where it's legal and or to operate in jurisdictions and do product transfers, right, of pure cannabinoids and certainly ones that don't have the same control conditions. mechanisms on them as others at this point or in the future ones that there's been changes so i think i think that is a big part of their strategy right now so all right that's really helpful thank you very much and your next question comes from douglas mim from rbc capital markets your line is open yeah uh good morning just a couple quick questions um number one greg

You're really close to the industry, and I'm just wondering what your thoughts are on M&A right now and what you see unfolding in Canada, but also north and south of the border with respect to the Canadian market.

Yeah, I mean, we are, you know, we have seen some consolidation now in the retail space, and I think we expect that to consider potentially, Doug. But I think, you know, when we look at the space, you know, and I've said this publicly before, I mean, we are continuously approached by banks and or companies directly where companies are looking to be acquired or have a strategic investment into them. And I think one of the challenges is always when you evaluate those companies is, looking at what's their differentiator, what's their innovation, what's their kind of brand. I mean, if you have all three of those and or a couple of those that can be quite unique, then certainly something to evaluate. So I think that's the challenge, to be frank, in the space is there are many companies that don't really have that differentiation. So I think it's one of the things we focus on when we assess people is we're What is the differentiation? How do you supplement? I mean, certainly there's public, you know, public company synergies that could happen in any activity. But I think the more important things along with that are, you know, how did the two companies combine and what are the synergies, you know, in terms of the market opportunity. So north and south of the border, I think, you know, that's still very much dependent upon, you know, what happens next. in the U.S. And I think, you know, if the Republicans control the Senate, you know, with these two upcoming runoff elections in, you know, in Georgia, that sets one tone. If the Democrats were able to garner both those seats, that might send another direction. So, you know, we'll see what happens.

Okay. And then just, I did want to continue on with the U.S. market. And you said you are doing some work about how that could unfold and how you're going to move as a result of that. Can you elaborate on what the company might be thinking? We've seen other companies move into the market, and I'm just wondering, given your relationship with the company in Colorado, how you're thinking about it.

Yeah, I mean, look, we continue to monitor the U.S. And certainly, you know, one of our key staff is on a board out of the U.S. in the industry. And I think, you know, we've certainly been a big part of our focus, even on the GR side, is to kind of keep our finger on the pulse of what's happening there. You know, I think when you look at the market as a Canadian company that's dual listed, you know, in the near term, our focus is, you know, are there CBD opportunities? And I think that would potentially be a way to enter the market. and in the marketplace in a legal fashion. But we do follow THC as well. I think part of our focus as well has been very much about creating innovative products. So for example, our remix, we've had a number of inbound licensing contacts from companies on both the CBD and the THC side for that technology and innovation. And certainly at this point, we haven't concluded or gone final with any one. If we were to do so, we would only do it with a CBD company at this point due to the legal implications related to THC revenue. But I think as a company, we are continuing to follow in focus, and we have looked at CBD opportunities. We're just not at the point that we found something that made sense to us. Perfect. Thanks very much.

Thank you, everyone. This will bring us to the end of our Q&A session today. I would like to thank everyone for joining our conference call today. This will conclude our conference call. You may now disconnect.