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spk07: Good morning. My name is Jack and I will be your operator today. At this time, I would like to welcome everyone to the Organigram Holdings Inc. Second Quarter Fiscal 2021 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 that you please 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 a replay will be available on Organigram's website. At this time, I would like to introduce Amy Schwab, Vice President of Investor Relations.
spk03: Thank you, Jack. 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 those actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS financial measures, including adjusted EBITDA and adjusted gross margins. These measures do not have any standardized reading under IFRS and our approach to calculating these measures may differ from that of other issuers. And so these measures 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.
spk02: Thanks, Amy. Good morning and thank you for joining us today. Here we are over a year into this pandemic, and despite challenging times currently, there's a light at the end of this tunnel as vaccines start to be administered across the country and worldwide. And we couldn't be more excited about the prospects for the cannabis industry in Organigram. Before going into more detail, I want to take a moment to thank our employees for their commitment and dedication to the company over the last 12 months, which have been challenging for all of us. This morning we reported our second quarter fiscal 2021 results for the period ended February 28, 2021. As we expected and indicated in our last quarter's disclosure, Q2 continued to be a transition period while we were ramping up operations and hiring the requisite staff such that operations are anticipated to be better supported in Q3. Our Q2 results were also further impacted by production disruptions on two occasions related to COVID-19, as well as market dynamics due to COVID-19 restrictions. As we continue to be laser focused on execution in a very competitive Canadian market, our team has been busy with some significant recent developments, which we believe have meaningfully strengthened Organigram's near and long-term competitive potential. We position the company for more near-term revenue growth with the acquisition of the Edibles and Infusions Corporation and believe our collaboration with BAT will be transformational over time. I will spend a moment on these two transactions before I comment more on the quarter. A hallmark of OrganiGrant has been our focus on R&D and innovation. Our efforts and intentions have been and continue to be about delivering innovative, differentiated products with the most consumer appeal. We were one of the first two cannabis companies to invest in biosynthesis, and we believe this technology has the potential to change the cannabis landscape. Another example is our in-house R&D team's development of a proprietary nanomulsification technology to allow for faster absorption of cannabinoids when compared to traditional edibles. It is our view that the cannabis industry is still in the nascent stages of product development, and a continued investment in innovation in R&D is necessary to secure a long-term competitive advantage. EAT, a leading consumer goods business with innovative product platforms, an impressive dedication to R&D, and deep consumer insight, chose to collaborate with us after extensive discussions, workshops, and in-depth due diligence. The Center of Excellence, or COE, is being established at our Moncton facility. At the COE, we will work on developing the next generation of cannabis products, IP and and technologies and can now also draw upon our R&D capabilities and licensed facility in Winnipeg to augment and diversify our product development efforts. Both Organigram and BAT are contributing scientists, researchers, and product developers to the COE. Initially, the focus will be on CBD products. Both companies have access to certain of each other's intellectual property and, subject to certain limitations, have the right to independently globally commercialize the products, technologies, and IP created by the Center of Excellence. Through the COE and BAT's representation on our Board of Directors, we intend to leverage BAT's expertise for our wider operations. There's a steering committee to supervise and govern the COE activities with an equal number of senior members from both companies. And we also anticipate benefiting from two BAT nominees to Organigram's Board of Directors. At closing, we welcome Mr. Jan Hepper to our board, and the other nominee is expected to be appointed in the near term. Mr. Hepper, who is a group category director at BAT, has over 23 years of diverse management, strategic leadership, and M&A experience at global companies, including Procter & Gamble, Danone, and most recently Lifestyles Healthcare. Not only is this collaboration with BAT going to accelerate and strengthen our research and product development activities, is also expected to be instrumental in establishing the foundation for our U.S. and international strategy. As part of the transaction, BAT invested approximately $221 million Canadian US for a 19.9% equity interest. With a significant capital injection, Organigram is well positioned to expand into the U.S. and other international markets at the right time and subject to applicable law. Under the Product Development Collaboration Agreement, we will be granted a worldwide, royalty-free, sub-licensable perpetual license to exploit IP developed under the collaboration. This license, which is non-exclusive outside of Canada and sold in Canada, will also enhance Organigram's ability to enter markets outside of Canada, including through sub-licensing arrangements with established operators. Approximately $30 million of VAT's investment is being reserved for our portion of funding obligations under a mutually agreed initial budget for the COE costs will be funded equally by Organigram and BAT. Now turning to our most recent transaction allowance last week. We acquired the Edibles and Infusions Corporation, or EIC for short, a software manufacturer with other specialized confectionery capabilities and backed by leadership from a company with 100 years of confectionery operations. The EIC management team also has experience in supplying confectionery products to over 20,000 locations throughout North America. James Fletcher, CEO of Cavalier Candies, joins Organigram as president of EIC. James has deep CPG and confectionery expertise and experience and a proven track record of delivering to some of the world's biggest retailers such as Costco and Walmart. The acquisition positions us for more near-term revenue growth from the largest edible category, soft chews or gummies, and diversifies our R&D and manufacturing capabilities with an operational footprint in Western Canada. EIC currently holds a standard processing license, is in the process of obtaining its sales license. Until it receives its sales license, it can manufacture products in bulk for further processing, review, and sale by us or other third-party license producers for white label opportunities. Importantly, the acquisition also strengthens our R&D capabilities with its research laboratory and research license. EIC constructed and leases a purpose-built, highly automated, 51,000 square foot manufacturing facility in Winnipeg, Manitoba, with state-of-the-art equipment designed to produce highly customizable, precise, and scalable cannabis-infused products, including edibles. We now have two facilities dedicated to REC 2.0 products, both designed under EU GMP standards. We believe that a strong presence in both Cannabis 1.0 and 2.0 markets is crucial to sustain a significant share of the Canadian market. While Cannabis 1.0 dried flower, fruit rolls and oils still accounts for more than 70% of the overall Canadian market. 2.0 sales growth is outpacing the overall market as new product formats are launched and consumer preferences evolve. For example, edibles currently represent about 4% of the Canadian rec market compared to 12 to 15% in US markets. In fact, we note that in Colorado, which is the most mature US market, edibles account for about 17% of the total cannabis sales. To date in Canada, edibles are one of the fastest growing segments of REC 2.0 products. We now have specialized capabilities in the two largest edible subcategories, gummies and chocolates. The largest subcategory is gummies or soft chews. With our acquisition of EIC, we can enter this market quickly, backed by proven confectionery experience. EIC equipment is designed to produce craft and large-scale nutraceutical-grade products cannabis edibles, including pectin, gelatin, and sugar-free gummies, coffee and caramel with novel capabilities such as infusion, striping, and the possibility of using fruit purees. Chocolates are the second most popular edible category, and our Moncton facility houses our world-class chocolate production and packaging line. Concentrates are another subcategory of REC 2.0 that has seen meaningful growth and appear to have a lot of upside when you look at the popularity of these products in the U.S., We have plans for in-house hydrocarbon extraction for the production of concentrates and other unique products. Currently, we expect to begin commissioning of this equipment in Q4 fiscal 2021. In the interim, we've continued to revitalize our product portfolio with 63 new SKUs launched since July 2020 and up to 31 more SKUs still to come in Q3 fiscal 2021. Ontario's SKU rationalization mandate has not negatively impacted us to date. As a result of us revamping our portfolio, we were able to trade up some of our slower-moving older products and were ready to replace them with new listings. We'll take a moment now to highlight some of our new key listings and launches. As we discussed during last quarter's earnings call, we are very focused on revamping our higher-margin Edison portfolio. After launching three new Edison Indica strains in late December 2020, we introduced these strains, Black Cherry Punch, ICC, and Slurucane, in three packs of half-gram pre-rolls. We expect to launch more high THC strains under the Edison brand in Q3 2021. Edison was among the most searched brands on the Ontario Cannabis Store website in November 2020, as well as January and February of this year. Also, in late March, we introduced a new brand called Indy, one of Canada's only cannabis brands dedicated exclusively to Indica cultivars. Skyway Kush is the first strain in the company's indie portfolio and currently offers THC in the range of 20% to 23%. In the popular value segment, we leveraged our successful Shred brand by launching jar joints, a convenient jar of 14 half-gram pre-rolls of Shred's Tropic Thunder. Shred has been the number one most searched brand on the OCS website for the last five consecutive months. In terms of REC 2.0 products, we introduced milk chocolate trailblazer snack bars, third flavor to be added to the initial launches of mint and mocha flavors. We also plan to launch further Edison Bite truffle products in the next few quarters after the success of our seasonal gingerbread offering last fall. We look forward to improving revenue from our vape portfolio with the launch of two new products with higher THC concentrations. These include an Edison Plus Feather disposable vape pen at a very competitive price point as well as a new 1 gram Edison cartridge for the 510 vaporizer. Both products will be based on our popular limelight strain. These two additions will add to our portfolio, which already includes the value segment offering of Trailblazer Sparks, Flicker, and Glow 510 thread torch cartridges in 1.5 gram and 1 gram formats, and the premium Edison Plus Pax aerodistillate cartridges. With last quarter's results, we indicate that we were scaling operations. We've made good progress hiring more staff and ranting cultivation, which we expect will improve demand fulfillment and drive higher net revenue in Q3 as compared to Q2. We do caution that net revenue could be negatively impacted should we identify any positive COVID-19 cases in the future and need to take similar measures to Q2. We essentially shut down the Moncton facility on two occasions in Q2, sending employees home to isolate. as well ontario announced its third state of emergency last week shuttering cannabis retail stores to foot traffic and limiting purchases to online shopping and local online shopping click and collect and local delivery which could also impact q3 revenue beyond q3 we're targeting for sales of soft shoes in fiscal q4 2021 subject to certain progress including but not limited to the receipt and commissioning of certain equipment the completion of QA documentation, the hiring of requisite staff, and obtaining listings for provincial boards. Also, we expect to resume shipments to CanDoc in Israel in the near term. We're seeking good agricultural practice certification from the Control Union Medical Cannabis Standard to comply with Israel's updated standards for imported cannabis. Subject to successful completion of a required inspection, likely to be conducted remotely, We anticipate being certified as early as the end of our fiscal third quarter. Shipments to CanDoc are expected to resume in fiscal Q4 2021, contingent upon regulatory approval from Health Canada, including obtaining an export permit and availability of the desired product mix. In terms of gross margins, we see the potential for significant upside here. We have identified a number of opportunities to improve levels over time. We expect to gain economies of scale and efficiencies as we as we continue to scale up cultivation. There's potential for greater contribution from higher-margin products and formats, including new strains under the Edison and Indy brands, international sales to CanDoc, as well as from multi-pack pre-rolls and one-gram vapes, which attract higher margins than singles and half-gram vapes. We also continue to invest in automation to drive cost efficiencies and reduce our reliance on manual labor. For example, our new pre-roll machine has been up and running since March, consistently churning out 25 to 30 pre-rolls per minute over time with the potential for further improvement. Over the last week alone, we've seen it consistently churning out 40 pre-rolls per minute. And finally, we are looking at more cost-efficient packaging as part of our packaging task force mandate. I'll now pass the call over to Derek to go through the financials in more detail before I wrap it up.
spk11: Thanks, Greg. As I usually do, I will start with our financial position. Last week, we repaid our entire term loan balance of $58.5 million, such that no amounts are owing under our credit agreement, and at the present time, we intend to terminate the credit agreement and discharge to the related security. The term loan repayment amounts to $2.7 million in annual interest savings. In terms of balance sheet liquidity, the company currently has $232 million in cash and short-term investments. Q2 2021 net cash used in operating activities of 10.4 million was similar to the 10.9 million used in Q2 2020. The current quarter had a lower gross margin, but this was offset by nominal changes to working capital as compared to the cash outlay in the comparative period, which was largely due to scaling operations just ahead of Ref 2.0 launches. Turning to our results for Q2, net revenue declined to $14.6 million from $23.2 million in the prior year quarter. This change was primarily due to a decrease in wholesale revenue and a lower average net selling price impacting all product lines. It should also be noted that the higher wholesale revenues in the prior year's quarter were opportunistic in nature and largely consisted of sales to a single licensed producer. Net revenue from the REC market decreased from Q2 2020 to do lower volumes as a result of the prior year quarters being the first quarter for REC 2.0 sales and a lower average selling price as well as higher proportion of value products being sold in the current quarter. As Greg mentioned, Q2 2021 net revenue was also impacted by temporary shutdowns of the facility and isolation of certain staff after the identification of positive COVID-19 cases. In total, we were unable to fulfill approximately $7 million of demand for our products in Q2 2021 due to various production and processing constraints. As we have heard from other LPs recently, many of the provinces have been reducing their inventory levels to free up working capital. Alberta is one such example. This also had an impact on net revenue during the quarter. Q2 2021 cost of sales increased to $31.1 million from $15.8 million in Q2 2020, primarily due to the current quarter's higher inventory provisions a higher cost of production and a charge related to unabsorbed fixed overhead as a result of lower production volumes in Q2 of 2021. As we expected and indicated in our Q1 2021 disclosure, this charge declined sequentially from last quarter and is expected to decline further in Q3 2021 as we continue to ramp operations. We harvested 5,028 kilos of cannabis during the quarter compared to 5,023 kilos in Q1 2021. During Q1, we were using 40% of our growing rooms on average, and during Q2, this was increased to an on average of 54%. As of the date of our MDA, we're currently using 69% of our grow rooms. Also encouragingly, during the quarter, we achieved higher plant yields and a meaningful sequential decrease in the cultivation cost per gram. As a result of optimizing the density of plants per room and decreasing the time spent in vegetation, the average yield per plant increased. This lower cultivation cost during a quarter lowers the cost of inventory compared to earlier quarters such that when this inventory is sold, this will positively impact gross margins. Note that the overall level of Q3 adjusted gross margins compared to Q2 will also depend on other factors, including but not limited to product category and brand sales mix. Adjusted gross margin decreased to a negative 0.7 million compared to a positive Q2 2020 gross margin of 8.4 million. largely due to lower net revenue as described above and value segment offerings comprising a larger proportion of total revenue in Q2 2021. Negative IFRS gross margin of $17.2 million declined from a positive gross margin of $11.3 million, largely due to lower net revenue and higher cost of sales, as just described, as well as net non-cash fair value changes to biological assets and inventory sold and other charges in Q2 2021 versus positive changes in the prior year's quarter. Q2 2021 ST&A including non-cash share-based compensation, decreased to 11.1 million from 14 million in Q2 2020, largely due to higher professional and consultant fees in the prior year's quarter related to project-specific work, including the launch of REC 2.0 products. Q3 2021 SG&A is expected to be higher than Q2 2021, largely due to an increase in staffing related to the EIC and BAT transactions. The net loss of 66.4 million or negative 29 cents per share on a diluted basis during the quarter compared to a net loss of 6.8 million or negative 4 cents per share in the prior year quarter is primarily due to the current period's negative change of 37.7 million in the fair value of the derivative warrant liabilities and the negative gross margin. That concludes my remarks, so I'll pass the call back to Greg.
spk02: Thanks, Derek. After a 13% decline from 2020 to February 2021, rec retail sales have rebounded in March. According to High Fire data, a widely used digital retail platform that tracks and estimates national retail sales. March recreational sales reached an all-time high of $305 million, implying an annualized run rate of $3.7 billion. Retail stores continue to open with Ontario driving the growth and targeting 1,000 stores open in the province by the end of the summer. Since July, the store count in the provinces grew by 87% to just over 1,790 stores currently, driven by Ontario growing 468% to nearly 580 stores. In mid-February, Ontario announced it is authorizing 20 to 30 stores per week or up to 120 per month. Longer term, the Brightfield Group estimates Canadian adult rec sales closer to $8 billion by 2026. Other analysts have estimated as high as $10 billion by that timeframe. This is expected to be driven by retail store footprint expansion and the introduction of new product formats. And there is room for more upside depending on regulatory amendments, starting with the mandatory review of the Cannabis Act, which starts in October of this year. In closing, we are laser-focused on operational execution to drive top-line growth and greater economies of scale and cost efficiencies. Our team is benefiting from increased staffing and expects to leverage the experienced leadership, technical capabilities, and resources obtained via the recent BAT and EIC transactions. And of course, we are investing in the future of innovative cannabis products for the long-term competitive advantage in the industry. We are doing all this against a backdrop of solid industry growth and one of the strongest balance sheets in the company's history. So that concludes my prepared remarks. Operator, if you'd I'd like to go ahead and open up the line for questions. Thank you.
spk07: If you'd like to ask a question, please press star 1. We ask that you please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. Our first question comes from the line of Andrew Parthenou with Stiefel. Your line is open.
spk00: Hi, thanks for taking my question. Maybe just to start off with, you know, you have a strong balance sheet. You guys recently announced the acquisition of EIC and strengthening your edibles offering. You know, do you see any more white space in Canada? You know, if not, could you also provide a little bit of color on your international expansion strategy? Just trying to get a sense of, you know, what are your focus and priorities on deploying this cash?
spk02: Yeah, Andrew, thanks. I'll take the question. So, I mean, certainly, you know, as you saw and mentioned, our EIC acquisition was really about entering a category with a kind of, you know, an entry point with a proven operator that has potential to really, you know, scale up and prove the proven ability to produce very high quality products and get those to market, you know, in the near term. I think when we look at other white space for us as an organization, I mentioned earlier in the call, we're not playing in and participating in some of the concentrates areas or some of the more advanced products. So certainly our hydrocarbon extraction equipment, which has been delayed in terms of getting it fully operational due to some of the certification processes, but we do expect in Q4 to have that hydrocarbon extraction equipment up and running and being able to begin production of those products. So again, that's a category we're not playing in today. I think we as a company are very focused on continuing to drive and improve the quality of our flour in the facility. And as you can see from the recent launches, and if you look at the reviews online, there is improvements there. You know, we still are contemplating how do we play in the ultra premium area, which is an area that we're not participating in, but we certainly are seeing, you know, the strength of our flower production and the new cultivars we're bringing to market continue to improve and drive kind of responses there. So that may be one area we continue to look at is, you know, how do we continue to expand into that area? I think on the international front, I mean, you know, we've been vocal before and open about the fact that, you know, we continue to look at primarily the CBD market in the near term, because that is a more larger, more addressable market, even with our collaboration and product development collaboration with bat the initial focus on products is on cbd based products because it's a larger global addressable market whether or not that's in the us or in europe or elsewhere um you know with with thc markets i mean we've been exporting to australia for a few years now fears a few years now and we you know are working towards um you know recertification to be able to export into australia which also has the potential to serve as an entry point through CanDoc in Australia into other markets. So, you know, I think as we kind of work through that process, it will give us an opportunity for continued and growth in the international sales market, potentially with that certification.
spk00: Thanks for that additional color. And maybe just switching gears and talking about, you know, your outlook, you guys already mentioned, you know, you know next quarter revenue should be up versus uh versus this quarter um you know absent any kind of covid risks uh you know further shutdowns of your facility and things like that is it possible to give any kind of um indication as of as of magnitude of what you could expect um maybe you know tying into the recent ski launches uh you know and more ski launches that you guys are planning to do in in the quarter you know should we be thinking about you know q3 returning to q1 levels or potentially q4 levels um you know any kind of further color would be very useful
spk02: I guess I'll answer that by saying, I mean, you know, as you said, Andrew, we do expect revenue to be higher in Q3 over Q2. You know, and there are a number of risk factors, which you outlined some of them, certainly COVID-related and or even, you know, the state of emergency we've seen in Ontario and the impact that could have. And we could see that roll into other provinces. You know, I think we're not in a position to give, you know, guidance on what that quarter is going to look like fulsomely. But I think, you know, the key things for us is, as you said, you know, great response to our new genetics that we've seen. You know, we've got 31 new SKUs launching before the end of this quarter. You know, we have seen the market growth kind of bouncing back up, you know, in March based on the HIFR data. And I think you know, we've ramped up operations. I think our biggest challenge, you know, in Q2 was a combination of, you know, not enough supply or not enough processing capacity to respond to the, you know, the response from the market. So we did leave significant revenue on the table, as Derek outlined. So, you know, ramping up production and ramping up, you know, processing staff and our packaging ability is one of the key aspects for us. And I think I mentioned this slightly, we are focused on operational efficiency. So some of the key things that are really improving for us is our packaging costs on a per unit basis for many of the products have gone down. I mentioned on our previous earnings call, for example, that with the automation and pre-roll equipment that we have, we went down from 20, 22 operators to five staff kind of running that line. you know, with a consistent, constant, you know, output and things like that will help margin overall, but it also improves the top line because you're able to significantly increase the product availability for that market segment, which allowed us again to launch the, you know, the 14 joint jar of joints under the Shred brand, which has been extremely well received.
spk00: Thanks for taking my questions. I'll get back in the queue.
spk07: Your next question comes from the line of David Kedeckle with ATB Capital Markets. Your line is open.
spk12: Well, hi. Good morning. Thanks for taking my questions. I just want to go back, Greg and team, for a second with the $7 million in unfulfilled demand just due to the COVID closures. I'm just wondering if you could provide us any color with respect to what that demand was for. For example, was it 1.0 products, 2.0 products? And if 2.0, what product segment was that in? And also, what measures do you think you can take so as to prevent something like this again, especially given we're already a month and a half into Q3? Thanks.
spk02: Yeah, I mean, I can... I mean, it was predominantly 1.0 products in terms of, you know, so again, it was a combination of, you know, reduced staffing and or the shutdowns because, you know, it wasn't just the, you know, the shutdown of the facility for a couple days. In both instances, there were significant staff that had to self-isolate for up to 14 days, right? So, but it was predominantly 1.0 products. There were some 2.0 products in the demand there. You know, I think for us, I would say, you know, we have put very strong and stringent measures in place. And I think one of the key aspects of, you know, one of the cases, for example, was identified by us in our screening, right? And then, you know, where's that individual to be tested and went and got tested and was pretty asymptomatic. And I think, you know, again, we're we're working closely with the provincial government in New Brunswick and our facility and collaborate and you know we immediately took it upon ourselves to do a thorough deep clean in the facility and you know testament to our staff to you know wasn't just you know cleaning sanitation staff that were part of that we had you know levels of management and a lot of volunteers you know helping out with that that people said you know let's get this done as quickly as possible so that we get reopened um so preventing that you know going forward we we we are very confident in our um you know in our own activities um you know we certainly have no reason to believe nor does the province have any reason to believe these case were linked to the facility they just happen to be individuals that work there and more than likely contracted COVID out in out in the marketplace
spk12: Okay, thanks. That's very helpful. Thanks again for the color. Moving along here as well, I think, Greg, you mentioned in your prepared remarks with your early investment into Hyacinth, the biosynthesis play here. I'm just wondering, especially with the investment now from BAT, are you able to provide any sort of general color with respect to what products or category of products you expect biosynthesis to play in for Organigram? and any indication of timing when that can occur, especially just given to Derek's remarks with net selling price going down even further this quarter. Thank you. Yeah, David, it's a good question.
spk02: I know you spent a lot of time about this. I think when we look at that market potential and the segmentation, I mean, you have to look at it two ways, as we've outlined before. There's major cannabinoid production and doing that at large scale for CBD or THC or different versions of those two major cannabinoids. You know, I think that as well as the potential for minor cannabinoids as a key driver in our investment, you know, when certainly it was one of the reasons that BAT, one of the many reasons that BAT was excited and interested in, you know, this collaboration agreement was that, you know, we're one of only two cannabis companies to really be at the forefront of investing there. And I think, you know, when we look at the novel minor cannabinoids, I think that is the one where you know, future products where you can bring those novel cannabinoids, you know, into product mixes for both, you know, medical and recreational use, I think is going to be the exciting part. So, you know, and again, when we talked about the collaboration and under the COE, you know a big part of that collaboration is product development and then making sure that those products are tested at a very high level and to a high standard and i think that's going to be important so yeah i mean you'd have to speak to hyacinth direction directly to get in you know an indication of kind of their timing and plans but we're certainly out you know optimistic in the future that we'll see both um you know potential for major cannabinoids but more importantly minor cannabinoids that could be utilized in some of these products
spk12: Okay, that's very helpful. Congrats again on the quarter. I'll hop back in with you.
spk07: Thanks. Your next question comes from the line of Tim Chen with BMO. Your line is open.
spk04: Good morning. Thanks for the question. First is I wanted to go back to on the production side. So, you know, Greg, you've talked about this a number of quarters ago where the company has been doing a pivot to change what you've been growing so it's more in line with consumer demand. So I'm just wondering first where the company is at with respect to climbing up the learning curve of these new strengths because You know, we're sort of continuing to see inventory provisions. I think there was last quarter, and now there's additional this quarter. So I just want to understand, like, is that a result of you're still going up the learning curve of these new strains? And, you know, will these write-downs continue?
spk02: Thanks, Tammy, for the question. I'll start off and then maybe turn to Derek to answer part of the question. So, you know, the majority of the inventory provisions were related to, you know, when you think on a product side, were related to, you know, extract and or extractable material, right? We've got sufficient inventory of extract that carries this out for a significant amount of time going forward based on that demand on 2.0 products at this point. Although, again, with hydrocarbon, we'll produce uniquely new products in the future. And there were certainly packaging and even some vape hardware that was part of those provisions. So certainly always including provisions is discounts that are taken with the provincial boards if something's a slow-moving SKU. And one of the things I outlined in our prepared remarks was that we've been very know very active in working with the provincial boards to ensure we don't get into return situation um you know looking to a you know reduce this skew average selling price if it's not moving or and then more importantly for us um transition and flip that skew to a newer product so And the last element of it is the, you know, there is some R&D work that happens. So certainly, you know, as part of the growing process, you're going, you know, to get to three star strains or five star strains, you're producing, you know, 15 or 20. So you do have some losses. That's not a significant number. But, you know, I think very optimistic with what we're seeing and very good numbers in terms of A, what we're seeing from a production capacity perspective. You know, as Derek indicated, when you look at where we were two quarters ago, you know, we were only producing kind of on average in about 40% of our rooms. We're now, you know, at 67%. So we've increased production capacity significantly. And we are seeing, no question, you know, better yields, better THC numbers coming out. So we expect to see good progress. Derek, I don't know if you want to add any color to that.
spk11: I guess the only thing I would add to what Greg has outlined would be that when we look at our overall carrying value of inventory, we have to take a look at each document and forecast out and utilize the latest pricing in the marketplace as well, and that considers inventory. the markets pivot more towards value from mainstream pricing. And when you apply some of that lowered pricing against the existing carrying value of the inventories that are valued at fair value, it does end up with a non-cash carrying value adjustment that's required. And that's also embedded into the numbers that negatively impacted the quarter, which would be the only item in addition to what Greg has already outlined.
spk04: OK, thanks. And my follow-up is I'm wondering if you could talk a bit about your different brands in flour, primarily between Edison and Shred. Are you seeing over the last little bit and now, are you seeing more velocity, more demand on the value side for your Shred products, or are you seeing some more relative velocity and more traction on some of the more mass premium products like your Edison brand? Thank you.
spk02: Yeah, Tim, it's a good question. I think, so certainly, you know, one of our challenges, I mean, you know, Shred has been an extremely successful launch for us, as I indicated, you know, number one searched product or brand on the OCS website for five months in a row. So the demand is there. We have not been able to fulfill the demand for it because of the demand being so much higher than, We had expected, although again, we did launch the shred jar of joints as a way to kind of supplement that as well. So it's, you know, certainly demand is very high there. I don't know what the cap on the demand is because we're not, we have not been able to consistently supply that historically. On Edison, that is where we're continuing to improve and increase our product mix with the three new indicators I mentioned earlier and getting new products to market. We've got another three new products coming in the future. coming up in the quarter in terms of new strains. And I think we are seeing, again, when you get the product out in market, there is good demand. So for example, one of our strains in that mix is Black Cherry Punch. There's a few other companies that have Black Cherry Punches, but our Edison Black Cherry Punch outsells them from the data that I've seen. So So there is strong demand there. And I think, you know, by launching recently Indy, which is an Indica-focused brand, it diversifies our brand portfolio a little bit in terms of, you know, specifically saying going forward this is going to be kind of an Indica brand. And, you know, I think, again, our challenge has been it's been – you know, an inability to fulfill in part because of the production levels, you know, and what we were growing because, as you know, it takes, you know, it takes 12 to 16 weeks to have the growth cycle and then, you know, another month to get product processed and out the door. So when you make a decision to pivot, you know, it doesn't have an immediate impact. So, again, we are seeing continued demand. And as I outlined, I mean, you know, a big part of those mis-POs was simply, you know, not having either the product or the ability to process it. But, I mean, we've made big changes in our facility on operational efficiency to really, you know, improve our packaging throughput, you know, where we are continuing to add. you know in automation on some of the areas with you know with minimal investments to to improving lines got it thank you your next question comes from the line of john vamparo with cibc your line is open
spk13: Thanks. Good morning. I wanted to ask about the recent EIC deal and just would like to get a sense of what you think the reason is that edibles in the category is larger than it is currently. And assuming that part of the reason is regulatory restrictions on potency or quantity, however you want to describe it, is there any reason you would expect Health Canada to liberalize regulations on edibles as part of the upcoming mandatory review?
spk02: Yeah, John, it's a good question. I think, you know, initially or for certainly part of the, you know, since 2.0 has been launched, it feels like, you know, part of the, you know, the lower revenue versus a comparative state data. But that's caught up. I mean, certainly there is a good supply and a good mix of products. I think, again, still like any category, there's a different quality of products there and consumers make choice over time. And it's one of the reasons we're very excited about EIC is we're confident in the quality of the product they're going to produce and be able to produce it at a very low cost based on the equipment they have and the proven history of manufacturing. But to your point, how do we, you know, if U.S. state data is 12% to 15% and Canadian data is just over 4%, how do we improve that? I think, you know, one of the key drivers has to be, you know, this change to get away from the 10 milligram maximum per package. You know, I think in the marketplace, you know, one of the important things is going to be as well is, you know, better differentiation between the products, right? Many of the products that we've seen to date are very similar, you know, in terms of the quality and the experience for consumers has to, you know, has to continue evolve. And, you know, if you go into a Canadian retail store versus, you know, a U.S. dispensary, the diversity of products is extremely different there. So I think it is a combination of the packaging limitation. I think it's a combination of, you know, the kind of limited scope of some of the products. Many of them are kind of Me Too type products. And again, our investment in IC is one where we believe it has potential to produce some very differentiated products based on the type of proven confectionery products. You know, we've already seen test runs with the equipment to understand what the equipment can do and produce. And it's a pretty diverse range of products. So we're excited about it.
spk13: Okay, that's helpful. Thanks. And then my second question is on the margin side, and I'd just like to better understand the expectations for margin expansion. And certainly, increased utilization seems like a positive driver, but if we think about shred being a bigger proportion, your flower revenues, and you're leaning more into 2.0, that category hasn't been the margin driver. Some of the industry thought it would be. It probably means more startup costs in the near term. So should we interpret the commentary on improved margins to be more likely as a longer term development rather than something we'll see over the next 12 months? Yeah, John, maybe I'll get Derek to answer that question.
spk11: Yeah, I would say generally that margins is a, you know, we expect to see gradual improvements over time with a long-term look. One of the things that did occur during the quarter is that we have lowered our production costs in terms of the dollar per gram to create the flour, and flour is still the largest product category. And most of those costs would then be into our inventory. And so as we sell it during Q3. That would, you know, as it relates to that component, by decreasing our current run rate of production cost, we would achieve a level of savings. But, you know, I would note that the amount of our margin will be dependent on product categories and brand sales mix. And we are focused on continuing to ensure that we can place as much product as we can into higher margin areas. And while we're also focused on improving our cost and efficiencies at the facility so that we can continue to achieve lower cost per unit metrics that we achieve in Q2.
spk07: Thank you very much. Your next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.
spk05: Hi, good morning. This is actually Madeline Stone on for Rupesh. Thanks for taking our question. So just first, with some of the industry headwinds out there, so how long do you currently see some of these COVID-19-related industry headwinds lasting?
spk02: Yeah, Madeline, it's a tough question to answer. I mean, certainly, you know, Canada is in the midst of a third wave right now, and certainly we're seeing you know, Ontario, Quebec, Alberta, BC, Manitoba, in particular, being hit hard, and then we're seeing kind of, you know, stay-at-home orders and restrictions. So, you know, on one hand, though, we did see during the previous shutdown, I mean, cannabis is a You know, cannabis stores have been allowed to remain open for, you know, curbside pickup and local delivery, you know, click and collect type. And certainly, you know, it did blunt, we believe, some of the sales and maybe shifted more sales to the online purchases as well. But without that in-store experience, some consumers, you know, may have reduced their purchasing habits. You know, at this point, as far as we know, for example, in Ontario, there's still more than three weeks to go in that existing stay-at-home order. You know, I think this is more of a larger question. I mean, Canada is accelerating its vaccination programs. and was far behind many other parts of the world, but more recently is in a catch-up. So as that starts to improve, we would expect at some point this summer things to start to return to some level of normalcy. But the focus right now is just on blunting or reducing the current third wave that is hitting many parts of Canada.
spk05: Okay. Great. That's helpful. And then just switching gears to the EIC acquisition, so how should we think about the near-term revenue opportunity for the business? And then just anything else you can share for longer-term margin dynamics of the acquisition, such as accretion or anything like that? That would be great.
spk02: Yeah, I mean, certainly, you know, we look at, you know, EIC, it has two levels of manufacturing equipment. You know, one is more craft focused, and another is large scale production capacity. And again, part of our rationale for, you know, this acquisition is that we see that versus what we've seen in the market to date with, you know, soft chews in particular, but other categories in confection that, you know, the amount of throughput and the automation that's there, you You know, it's very high so that, you know, definitely the ability to produce product at a low cost. So I think certainly you're going to see some unique and interesting products come out of EIC, you know, hopefully in our Q4 this year. You know, again, that is dependent upon licensing and commissioning of equipment and everything. But certainly, you know, we do expect them. to be strong in terms of what their cost of goods is going to be relative to the competition. The thing you can't control is the market dynamic in terms of where pricing is. So we're excited about EIC. It's why we made the investment. We certainly think that they're going to be able to do things that the majority of other companies cannot do from a costing basis and a consistency basis. So that should definitely be a big contributor to how that product contribution looks like.
spk05: Okay, great. That's helpful. Thanks so much. I'll pass it along.
spk07: Your next question comes from the line of Aaron Gray with Alliance Global Partners. Your line is open.
spk06: Good morning and thanks for the question. So quickly on me, just given the drop in the average price per gram and the higher mix from Shred that that was attributable to, I just want to know if you had any kind of goal in terms of the mixed value of your portfolio and what you expect it to be kind of going forward, whether or not you look for that to be more in line with the industry, below the industry, because you did speak to demand for Shred still remaining very high. So just curious as to how that plays into your own cultivation plans and think about flowers that are coming out in the next few months because you've also mentioned kind of the desire for more high THC Edison products to be coming out too. Thanks.
spk02: Yeah, I mean, our goal, Aaron, and thanks for the question, is very much to continue to drive more, you know, higher THC product, higher, you know, differentiated product in terms of, you know, new and interesting strains or kind of star strains that have had good response in the marketplace. And You know, Shred was really created as a way, you know, there was a white space there, certainly in terms of the marketplace where, you know, we had seen some blends in the past, but they weren't curated. And we look at Shred being kind of curated where unique mix of a couple of two strains to get up with a favorite flavor profile. And again, the demand is very, very high and strong. Ultimately, our production, you know, is shifting more and more to the higher THC and higher margin products with Edison, as Derek alluded to earlier. And I think, you know, it's important for us because, you know, there is strong market demand there. There is strong demand not only in Canada, but, you know, internationally and even B2B in Canada because, you know, we've seen it recently, for example, you know, with the announced acquisition of of, you know, Supreme by Canopy, where, you know, Canopy in the past has shuttered, you know, numerous facilities. So they're not, you know, my assumption certainly is the purchase wasn't based on cultivation capacity. It was based on improved, higher quality product in terms of, you know, how product is perceived. And I think we have the you know, we have the advantage with our Moncton facility and the way it's designed to continue to kind of drive and improve the quality of what we're producing. You know, whereas as we've seen, at least in this one case where companies had to go out and do an acquisition to backfill some of their own production capacity.
spk06: Okay, great. Thanks. That's helpful. And the second one for me is just on The expected return of shipments to CanDoc, I think, is expected in the fourth quarter of the fiscal year. I just want to get your take on kind of how to expect sales for that. They're actually still expected to be lumpy on a quarter-to-quarter basis. But how should we kind of look at the growth of those sales internationally to Israel? Thanks.
spk02: Yeah, Aaron, it's still tough to predict. I mean, certainly of the initial shipment that we made to Israel, two of the three strains stalled out within a matter of weeks very quickly, so a very good response, and they were ready to purchase, you know, certainly make additional purchases pretty quickly after those first shipments went out. But understanding there's a process with, you know, import permits from Israel and export permits being issued by Health Canada, but, you know, the demand is there, and certainly... You know, first of all, getting through with CU-MCS, the GAP certification process so that we're able to begin importing to Israel again. And then, you know, again, getting through the process, you know, for every shipment because you do have to kind of go through with each shipment. But, you know, we certainly expect to return, you know, at this point by the end of Q4 to shipping, again, based on product availability. to shipping there. And it's going to depend on, you know, the market response has been very strong to our products in Israel. And I think, you know, CanDoc is very excited to get our products back in inventory. We're not the only supplier, but we are the only indoor supplier for them. And they've certainly noted that that's a big differential in quality in the market in terms of the consumer response.
spk06: Okay, great. Thanks.
spk07: Your next question comes from Lionel Graham. Can you with 8 Capital. Your line is open.
spk08: Hi, good morning and thank you for taking my question. Craig, I wanted to follow up on your comments earlier about M&A and there's been a number of your competitors turning to M&A to drive growth and consolidate market share. I'm wondering if that's been a strategic consideration for Organigram, clearly as it's a very difficult landscape to drive incremental share and adult use, you know, impacted by both the competitor and provincial level. There's a lot of initiatives going on to rebalance the product portfolio and cater to consumer needs, but I'm wondering if the general consolidation of that market share is something where you see an opportunity to consolidate some share in the adult use market there. Thank you very much.
spk02: Yeah, Graham, you know, I think when we look at the marketplace, you know, again, it's been key for us is, you know, again, as I've talked about on the call and previously is, you know, continue to improve our quality and hitting, you know, the product specs and getting the product out the door that the market demand is there. I think, you know, one of the things we've done and to look to expand, you know, with the recent launch of Indy is to expand our own brands in-house so that, you know, we can target a different consumer with that. You know, I think certainly we are always, you know, open to looking at M&A. And when we look at targets for ourselves, I mean, as you saw with the IC, you know, we focus on two things. One is, is there kind of innovation in technology or something unique that comes with it? Or, you know, secondly, as in any consumer packaged goods area, you know, you know, if, you know, acquiring brands, which we've seen, you know, Canopy do with both their acquisitions recently has been more of a brand play, you know, and I think that's something you need to be open to. Are there strong brands out there? I think, you know, Seven Acres, you know, is a relatively strong brand. So that was an acquisition that made sense, but there's not a lot of them out there, which is the challenge, right? When you look at consolidation targets, I mean, You know, there's a couple that could be of interest, but at this time, you know, they're not necessarily interested in discussion. So I think it's something you need to always be evaluating because, you know, if you can expand through innovation technology or acquire brands that really resonate with consumers, those are the two key things that, you know, we focus on.
spk08: Okay, I understood. Appreciate the color there. Then as a follow-up, based on your comments on brand and and creating the products that that consumer wants. When we think about the CBD market, which is going to be the focus of initial product launches with the BAP deal, that's a highly competitive market where there's thousands of brands and regulations can make it difficult to get tier one shelf space when looking at the market on a global scale. So I'm wondering if the strategic plan to launch products in that market has any expectation of some sort of regulatory reform Or is this something that you think presents a bit of a challenge in the near term and it's more of a longer-term opportunity there? Thank you.
spk02: yeah graham it's a great question i think both ourselves and vat i mean our perspective and the reason and i've stated it repeatedly the reason you know we're investing um you know heavily in this center of excellence on the product development is that we believe there aren't going to be new standards right you know for example if you look at the us market today um very limited regulations on cbd right there are limitations on what you can source the product from so it has to be hemp with thc less than 0.03 And there are limitations on health claims that you can't make. And the FDA has gone after people for making health claims. But beyond that, there's very little or no restrictions or oversight. We do expect there to be a regulatory regime on CBD products in the future. And I think it's important that when you're developing CBD products, that you develop them to a rigor that the current products are not developed to, right? And I think that's one of the key aspects. from an investment in that marketplace is, you know, CBD is metabolized in the liver. So it's not without, you know, potential effects. And so I think it's important that, you know, through this collaboration and the way we operate that we, our goal is to set new standards, right, and be at a level above. And I think that's where there's a you know, a competitive advantage that, you know, we will have with the products that are developed through this collaboration is that they're going to go through more rigor and at a higher standard that competitors can meet and then It's not if, but when stricter regulations come into place, these products meet the standards that are required, and it could put other companies and this very wide range of products around market today into a difficult situation. And that carries over to Canada when we expect new regulations are going to happen here. In Europe, there is movement towards some changes as well. So I think it's important when you think globally in terms of the CBD market about setting the standard and being a leader there. Understood.
spk08: Appreciate the color. Thank you very much.
spk07: Our next question comes from the line of Rahul Talgazer with Raymond James. Your line is open.
spk01: Morning, Greg, Derek, Amy. Thanks so much for taking our questions. So I'd like to focus on the VAT partnership. Given Organigram's strength in the edible segment of the market and the company now doubling down on the segment with the acquisition of the IC, I guess there's a bit of asymmetry with VAT, which is probably fair to assume it's more innovation-focused. I wanted to ask whether the IP sharing deal would potentially benefit both sides, the edible and the inhalable format.
spk02: Yeah, so again, we did disclose in our announcement that the focus of the product types is both on vapor and oral, and oral is a pretty broad category. It's not just, it could be, and again, I'm not in a position to disclose all the products specifically, but you think of oral consumption, whether that's an edible or a tincture, or it's an oral mucosal, oral buccal form. So there is a pretty comprehensive list of potential products there so um both parties including you know we did contribute intellectual property um into uh you know into this uh as well so it is a it's a kind of a a pretty broad product development um agreement uh terrific thanks very much and so um you know further to the bat uh and their and their channel will there be any opportunity for organic to leverage
spk01: VAT distribution, particularly with massive international channels as you begin to broaden your footprint outside of Canada. Also, given the other partnerships that we see in the space do leverage the distribution networks of their partners.
spk02: Yeah, so at this point, the collaboration does not contemplate that necessarily. Each party is... Both ourselves and BAT have an ability to commercialize and launch all of or any of the products that are developed through the collaboration under our own brands in any markets. They can be even sub-licensed to some degree with some restrictions in those markets. So, you know, at this point, that's not what the collaboration is focused on. It's really focused on the product development side of things. Trevor, thanks very much.
spk01: We'll get back to you.
spk07: Thanks, Rob. Your next question comes from the line of Douglas Meyer with RBC Capital Markets. Your line is open.
spk10: Morning, Greg. Just a quick question with respect to this strategy, going more up market, better streams and those sorts of things. And we're hearing the same thing from almost every single company out there. Can you tell us how you're going to be able to differentiate yourself and if you think there's going to be any pricing pressure as people all start to move in that direction? And it's not so much that... This market's going to change overnight, but it seems that within the next quarter or two, people are going to have multiple streams available in this marketplace.
spk02: Yeah, Doug, you know, it's a good question. And again, I would point to the Canopy acquisition of Supreme, right, where, you know, companies are focusing on it. They're looking to do it, but they may not, with their in-house capabilities, be able to do it. I mean, you know, if we look at, you know, some of our peers who have closed facilities, the reason they've closed those facilities is they were not, you know, either cost efficient or more importantly, they weren't capable of producing kind of products in that range. Right. So, so I think that's an advantage, you know, of our facility. And again, a key part of, And it's not just the facility, it's the staff and the people we have overseeing things, but it's also been the genetic acquisition, right? I mean, getting access with once, you know, the nursery programs were open, these licenses allowed us to really obtain a very deep bank of genetics and also bring back some of the genetics we had in our own reserve. to market and work on the conditions for them. So while a lot of companies might be indicating they're moving in that direction, we have not seen that from some companies as of yet. And I think, again, we're certainly optimistic based on the data we're seeing right now in the products we're growing and what's coming off harvest that we have moved products up into those categories. So You know, people are talking about it, but I'm not sure everyone's able to execute on it. Okay.
spk10: That's fine. And then with respect to that $7 million, maybe you answered this already, but what was the breakdown? Was it primarily shred or what did you miss out specifically on?
spk02: Yeah, we wouldn't give a full breakdown on it, but, I mean, certainly, you know, you can imagine that value products, because they have made up a significant portion of our revenue, was a significant part of it. But it was also demand for Edison strains and new products and some of our 2.0 products as well. So it was a mix and demand. Certainly, again, as I said, it was a combination of what product was available, but also the processing and packaging capacity with some of the impacts we had from COVID staffing reductions. All right. Thanks. Great. Thanks, Doug.
spk07: Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Your line is open.
spk09: Good morning, all. I just wanted to go back to that $7 million that Doug was just talking about. With respect to, I guess, relationships with the provinces and the ability to carve out additional market share in these various SKUs, are there any near-term implications for not being able to fill certain orders? As I know, there's a very strict fulfillment policy that many of the provinces, particularly Ontario, have. So just any colour on how that may or may not impact relationships with these buyers?
spk02: Yeah, so I think, you know, first of all, I'd start off and answer the question, Matt, that, you know, we and our sales team have very strong relationships with the provincial boards. And I think when we talk about, you know, missed opportunities here, you know, certainly and what you're alluding to is, you know, Ontario and Alberta in particular that have and Ontario is implementing very strict kind of guidelines in terms of listings is, you know, um you know you've got to manage that relationship and manage against future so you know the way that it works in a couple provinces is um you know you kind of get a rolling po within a window and you have to fulfill within the timeline so when we talked about missing it um you know part of it Part of that miss happened in the quarter. Part of it would have rolled into the next quarter. Right. So, you know, it's not necessarily. But again, it was issued and it was we could have fulfilled it in the quarter if we'd had the product available at that time. So I think, you know, we're not. concerned at this point. I think we've done an excellent job, our sales team, of transitioning out slower selling SKUs for new listings and new SKUs. And I think that's critical. But again, as you say, it's going to be even more important going forward with the fulfillment demands that you focus on what your core listing are and make sure that you're hitting those numbers, right? So it is a shift for the industry. It's a shift for the company. And, you know, To be honest, it may have a detrimental effect across the industry on some of the other provinces as people are rushing to fulfill Ontario because of penalties that are there. Not that other provinces don't also have commitment levels, but just one thing in general trend in the industry to be cognizant of.
spk09: Great, that's helpful. And then just one more question for me on sort of market share and just tying back to some of your comments you mentioned that the, I guess, pool of brands to be purchased like Supreme or like some of the ones we've seen isn't as deep where there'd be sort of mass M&A expected in the near term just for brands. So if you kind of look at where your market share is today and how much growth is left, in the sector, which is still quite a bit, but we are, like you said, I think $3 billion plus on a run rate. What's the best way, in your view, to gain that incremental share, if not through M&A? Obviously, you guys are focused a lot on the edibles and chews, and maybe that's an undersized proportion of the market today versus where it is at maturity, but just any color that X M&A, how market share can be gained, in your view, in the coming months and quarters?
spk02: Yeah, I think it depends down to three key things, Matt. One is, you know, continue to focus on improving the quality and the product offerings that you have, right, just in terms of what the consumer demand is. I mean, you can spend five minutes on Reddit and see what the comments people are making on product reviews, and they're consistently, regardless if it's flour or a pre-roll or an edible, it's about quality. So companies, you know, and we're very much focused on improving that quality. i think the second is diversifying your own in-house brands as i said recently we launched you know indie um and you know we have a select target group of consumers that that product's targeted for um you know shred was a new launch for us and i think as you continue to look at how do you diversify and really do more targeted segmentation for consumers and and so far you know again with those product launches we've seen good response and so that's another way to grow organically And I think the third is still, and I've mentioned this a few times, is just innovation, bringing new innovative products. We're very excited about the EIC acquisition in terms of some of the products and the product quality we can bring to the market because, as I said, what you see today in the soft shoes, for example, is the majority of the products are quite similar, and we're excited about bringing innovation. you know, some unique and innovative products to market through EIC and then the more midterm, you know, products through the collaboration with BAT, and that's going to be important as the market evolves.
spk07: Great. Thank you, Greg. There are no further questions at this time. Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.
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